What payment timing does Delaware force into a construction contract, and which payment clauses are void?
Every construction contract awarded by an owner must include a clause obliging the owner to pay the contractor for satisfactory performance within 30 days of the end of the billing period, plus an interest-penalty clause for late payment; every construction contract awarded by a contractor must oblige the contractor to pay each subcontractor and supplier within 30 days out of amounts paid to the contractor, again with an interest penalty. The owner must pay strictly in accordance with the contract; where the contract has no provision governing when invoices may be submitted, the owner must pay all undisputed amounts within 30 days after the end of the billing period or delivery of the invoice, whichever is later, and where subcontractor payment terms are not specified, a general, prime or subcontractor must pay its subcontractors, suppliers and materialmen undisputed amounts within 15 days after receiving each payment for their work. The chapter's own definitions frame it around building construction, and inclusively: under § 3501(2) 'Contractor' includes, but is not limited to, an architect, engineer, real estate broker or agent, subcontractor or other person who contracts to furnish labour and/or materials in connection with the erection, construction, completion, alteration or repair of any building or additions to it, or who sells land and premises on which it undertakes to build. A list of clauses is void as against public policy under § 3507(e), including one making the contractor assume the risk of the owner's nonpayment, one requiring a contractor to wait for payment to the prime before commencing litigation or arbitration, and one requiring a contractor-subcontractor dispute to be governed by another state's law or litigated, arbitrated or mediated outside Delaware (§ 3507(e)(5)). Retainage is preserved, but withholding requires written notice within 7 days.
The trap
Delaware voids the pay-if-paid bargain from both ends: § 3507(e)(1) forbids a clause stating that the contractor assumes the risk of the owner's nonpayment, (e)(4) forbids a clause saying the contractor relies on the owner's credit rather than the prime's or a bonding company's, and (e)(2) forbids making the right to sue or arbitrate wait until the prime is paid. The exclusions are § 3507(f)'s and by its words limit only that section ('This section shall not apply to'); § 3506's 30-day payment and interest-penalty clause requirements carry no exclusion subsection of their own. The asymmetry runs the other way too: § 3508(d)(4) and § 3509(c)-(d) go further than § 3507(f), so the 7-day dispute procedure and the mandatory fee award can be displaced by a contract that specifies a different procedure, while § 3507(e)'s void terms cannot. § 3507 does not apply to public works awarded under Chapter 69 of Title 29, to the erection of six or fewer residential units under simultaneous construction or the alteration or repair of a single residential unit, or to material purchases by someone working on their own property.
14 authorities
- statute6 Del. C. § 3506enactment date not established
The words that state the rule
(b) Each construction contract awarded by a contractor shall include: (1) A payment clause which obligates the contractor to pay the subcontractor and each supplier for satisfactory performance under the subcontract within 30 days out of such amounts as are paid to the contractor; and (2) An interest penalty clause which obligates the contractor to pay the subcontractor and each supplier an interest penalty on amounts due in the case of each payment not made in accordance with the payment clause included in the contract pursuant to paragraph (b)(1) of this section.
- statute6 Del. C. § 3507enactment date not established
The words that state the rule
(e) It shall be against public policy and shall be void and unenforceable for any provision of a construction contract or subcontract agreement to: (1) State that a contractor assumes the risk of nonpayment of the owner; (2) Require a contractor to waive any statutory or other right to commence litigation or arbitration until payment is made to the general or prime contractor; (3) Make subject to payment by the owner the obligation of a contractor and its surety under any payment or performance bond to make any payment to a claimant under such bond; (4) State that a contractor relies on the credit of the owner and not on the credit of the general or prime contractor or of a bonding company; or (5) Require a dispute or claim between the contractor and subcontractor to be governed or subject to the laws of a state other than Delaware or require litigation, arbitration, mediation or other dispute resolution processes to occur in a state other than Delaware.
- statute6 Del. C. § 3501enactment date not established
The words that state the rule
(2) “Contractor” includes, but is not limited to, an architect, engineer, real estate broker or agent, subcontractor or other person, who enters into any contract with another person to furnish labor and/or materials in connection with the erection, construction, completion, alteration or repair of any building or for additions to a building, by such contractor, or for the sale to such other person of any lands and premises, whether owned by such contractor or another, upon which such contractor undertakes to erect, construct, complete, alter or repair any building or addition to a building.
- statute6 Del. C. § 3506enactment date not established
The words that state the rule
(a) Each construction contract awarded by an owner shall include: (1) A payment clause which obligates the owner to pay the contractor for satisfactory performance under the contract within 30 days of the end of the billing period; (2) An interest penalty clause which obligates the owner to pay the contractor an interest penalty on amounts due in the case of each payment not made in accordance with the payment clause included in the contract pursuant to paragraph (a)(1) of this section; (3) The clause required by this subsection shall not be construed to impair the right of the owner to include in its contracts provisions which permit the owner to retain a specified percentage of each progress payment otherwise due to a contractor for satisfactory performance under the contract without incurring any obligation to incur an interest penalty, in accordance with the terms and conditions agreed to by the parties to the contract. In such a case, the owner must provide written notice to contractor as to why payment is being withheld within 7 days of the date required for payment to the contractor.
- statute6 Del. C. § 3506enactment date not established
The words that state the rule
(d) The clauses required by subsection (b) of this section shall not be construed to impair the right of the contractor to include in its subcontracts provisions which permit the contractor to retain a specified percentage of each progress payment otherwise due to a subcontractor and each supplier for satisfactory performance under the subcontract without incurring any obligation to incur an interest penalty, in accordance with the terms and conditions agreed to by the parties to the contract. In such a case, the contractor must provide written notice to the subcontractor or supplier as to why payment is being withheld within 7 days of the date required for payment to the subcontractor or supplier.
- statute6 Del. C. § 3507enactment date not established
The words that state the rule
(a) The owner shall pay the contractor strictly in accordance with the terms of the contract. (b) If the terms of the contract do not contain a term governing payment, the contractor shall be entitled to submit an invoice to the owner for payments at the end of the billing period for: (1) Work already commenced but not fully completed and/or, (2) Materials already supplied, if the agreed upon work is completed at the end of such billing period.
- statute6 Del. C. § 3507enactment date not established
The words that state the rule
(c) If the contract between the owner and a contractor, or between contractors, does not contain a provision governing when invoices may be submitted, a contractor shall be entitled to submit a final invoice for payment in full when the agreed-upon work is fully completed. The owner shall pay all undisputed amounts owed to the contractor within 30 days after the end of the billing period or 30 days after delivery of the invoice, whichever is later. This subsection shall not be construed to impair the right of an owner to include in a contract provisions that permit the owner to retain a specified percentage of each progress payment otherwise due to a contractor and each supplier for satisfactory performance under the contract.
- statute6 Del. C. § 3507enactment date not established
The words that state the rule
(d) If subcontractor payment terms are not specified in the contract between the owner and a general or prime contractor, or in the contract between the general or prime contractor and a subcontractor, or in the contract between the subcontractors, a general contractor, prime contractor or subcontractor shall pay all undisputed amounts owed to its subcontractors, suppliers and/or materialmen within 15 days after receipt by the general contractor, prime contractor or subcontractor of each payment received for work performed or materials supplied by its subcontractors, suppliers and/or materialmen. This subsection shall not be construed to impair the right of an owner or contractor to include in a subcontract provisions that permit the owner or contractor to retain a specified percentage of each progress payment otherwise due to a subcontractor and each supplier for satisfactory performance under the subcontract.
- statute6 Del. C. § 3507enactment date not established
The words that state the rule
(f) This section shall not apply to: (1) Public works contracts awarded under Chapter 69 of Title 29; (2) Contracts for the erection of 6 or fewer residential units which are under construction simultaneously, or for the alteration or repair of any single residential unit; or (3) Contracts for the purchase of materials by a person performing work on that person’s own real property.
- statute6 Del. C. § 3506enactment date not established
The words that state the rule
(c) The interest penalty shall apply to the period beginning on the day after the required date and ending on the date on which payment of that amount due is made and shall be computed at the legal rate in effect at the time the obligation to pay a late payment interest penalty accrues. Any amount of an interest penalty which remains unpaid at the end of any 30-day period shall be added to the principal amount of the debt and thereafter interest penalties shall accrue on such amount.
- statute6 Del. C. § 3506enactment date not established
The words that state the rule
(e) If it is determined by a court of competent jurisdiction that a payment withheld pursuant to paragraph (a)(3) or subsection (d) of this section was not withheld in good faith for reasonable cause, the court may award reasonable attorney’s fees to the prevailing party.
- statute6 Del. C. § 3508enactment date not established
The words that state the rule
(a) If an owner or contractor disputes any amounts stated in an invoice for payment, then: (1) The party disputing the invoice must notify the other party in writing within 7 days of the receipt of the disputed invoice; and (2) The party disputing the invoice must be specific as to those items within the invoice that are disputed. (b) If notice of dispute is not given within the time required by this section, then the invoice is deemed to be accepted as submitted.
- statute6 Del. C. § 3509enactment date not established
The words that state the rule
(a) Award of attorneys’ fees and arbitration costs. — If arbitration or litigation is commenced to recover payment due under § 3507 of this title and it is determined that the owner, contractor or subcontractor has failed to comply with the payment terms of § 3507 of this title, the arbitrator or court shall award damages due equal to the amount that is determined by the arbitrator or court to have been wrongfully withheld.
- statute6 Del. C. § 3501enactment date not established
The words that state the rule
(4) “Owner” means a person who has an interest in the lands or premises upon which a contractor has undertaken to erect, construct, complete, alter or repair any building or addition to a building.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.