HBA-ATS H.B. 2271 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2271 By: Ritter Business & Industry 3/24/1999 Introduced BACKGROUND AND PURPOSE In the construction industry, it was once common for general contractors to assume the credit risk in connection with an owner's willingness and ability to pay for the construction. Due to changes within the industry, most general contractors are now unable to assume the credit risk themselves. To spread the risk, these contractors include provisions in their subcontractors' contracts that stipulate that their obligation to pay is contingent upon receipt of payment from the owner. Subcontractors are paid when and if the contractor is paid by the owner. Although these contingent payment clauses serve a legitimate purpose, there is a risk that a subcontractor will not receive payment in a dispute between a contractor and an owner. If that occurs, a subcontractor may be able to secure some form of payment by filing a mechanic's lien on the owner's property. However, that option is not available on a "bonded" private works project (a project in which the contractor has furnished and filed a statutory payment bond) because a payment bond discharges any mechanic's lien secured on the owner's property. A subcontractor must look solely to the payment bond (a bond that guarantees that the subcontractor will be paid by the contractor) for recovery. Because sureties traditionally are entitled to rely upon all defenses available to their principal (the general contractor) as to the debt owed to the bond obligee (the subcontractor), a surety may not be obligated to honor a subcontractor's claim for payment. H.B. 2271 provides that a contingent payment clause is valid and enforceable only if the clause is conspicuously stated in a written agreement signed by the subcontractor and payment is wrongfully withheld from the original contractor by the owner or from the prime contractor by a governmental entity. If a subcontractor's claim against the original contractor and the contractor's surety is unenforceable because of a valid, enforceable clause, a bond to pay a lien or claim does not relieve the owner and the owner's property from liability for the subcontractor's claim if the subcontractor has perfected a lien, in the context of a private sector project. In the context of a public sector project, if a subcontractor's claim against the prime contractor and the contractor's surety is unenforceable because of a valid, enforceable clause and the subcontractor provides the governmental entity with notice, the governmental entity is subject to the same liability as the prime contractor's surety would be if the claim had been perfected. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subchapter A, Chapter 53, Property Code, by adding Section 53.004, as follows: Sec. 53.004. CONTINGENT PAYMENT CLAUSE. Defines "contingent payment clause." Provides that a contingent payment clause (clause) is valid and enforceable only if the clause is conspicuously stated in a written agreement signed by the subcontractor and payment is wrongfully withheld from the original contractor by the owner. Authorizes a surety furnishing a bond under Subchapter I (Bond to Pay Liens or Claims) to assert its principal's defense to payment under a valid, enforceable clause. Provides that, if a subcontractor's claim against the original contractor and the contractor's surety is unenforceable because of a valid, enforceable clause, the bond furnished under Subchapter I does not relieve the owner and the owner's property from liability for the subcontractor's claim if the subcontractor has perfected a lien under Subchapter C (Procedure For Perfecting Lien). Authorizes a person to discharge the subcontractor's claim against the owner and the owner's property by filing a bond under Subchapter H (Bond to Indemnify Against Lien). Authorizes a subcontractor, if a subcontractor's claim against the original contractor is unenforceable because of a valid, enforceable contingent payment clause and no bond is furnished under Subchapter I, to perfect a lien by complying with Subchapter C. SECTION 2. Amends Subchapter C, Chapter 53, Property Code, by adding Section 53.059, as follows: Sec. 53.059. DERIVATIVE CLAIMANT: NOTICE OF CONTINGENT PAYMENT CLAUSE. Defines "contingent payment clause." Authorizes a claimant whose claim against the original contractor and the contractor's surety is unenforceable because of a valid and enforceable clause to file and give notice under this section. Provides that the notice authorized under this section is not required to perfect a lien, but if a claimant fails to provide the notice, the filing of a valid bond under Subchapter H discharges the claimant's mechanic's lien or affidavit claiming a mechanic's lien. Specifies with whom and by what date a claimant must file notice. Provides that a claimant is not required to file and serve notice under this section if the claimant has completed the delivery of materials and the performance of labor before the recording of the bond. Provides that the notice must be signed and acknowledged by the claimant or another person on the claimant's behalf. Enumerates what must be contained in the notice. Specifies to whom and by what date a claimant who files notice under this section must send a copy of the notice by registered or certified mail. SECTION 3. Amends Section 53.157, Property Code, to make a conforming change. SECTION 4. Amends Section 53.201(b), Property Code, to make a conforming change. SECTION 5. Amends Subchapter B, Chapter 2253, Government Code, by adding Section 2253.028, as follows: Sec. 2253.028. CONTINGENT PAYMENT CLAUSE. Defines "contingent payment clause." Provides that a clause is valid and enforceable only if the clause is conspicuously stated in a written agreement signed by the subcontractor and payment is wrongfully withheld from the prime contractor by the governmental entity. Authorizes a surety furnishing a bond under this subchapter to assert its principal's defense to payment under a valid, enforceable clause. Provides that, if a subcontractor's claim against the prime contractor and the contractor's surety is unenforceable because of a valid, enforceable clause and the subcontractor provides the governmental entity with the notice required under Subchapter C, the governmental entity is subject to the same liability as the prime contractor's surety would be if the claim had been perfected. SECTION 6. (a) Effective date: September 1, 1999. (b) Makes application of this Act prospective for an agreement containing a contingent payment clause, as that term is defined by Section 53.004, Property Code, and Section 2253.028, Government Code, that is entered into on or after September 1, 1999. SECTION 7. Emergency clause.