This Construction Law Alert highlights some of the significant Tennessee state and federal decisions affecting the construction industry from the past year.

Holdback Payments Are Not Retainage

Tennessee’s Prompt Pay Act (PPA) requires all retainage withheld on construction projects to be deposited into a separate interest-bearing escrow account with a third party, and there are potentially harsh civil and criminal penalties for failing to do so. In Vic Davis Construction v. Lauren Engineers & Constructors, Inc., No. E2017-00844-COA-R3-CV, 2019 WL 1300935 (Tenn. Ct. App. March 20, 2019), a subcontractor alleged the contractor failed to comply with this requirement under a subcontract that called for a final payment of 5% for “Turn-over, As-Builts, Final Clean Up, Demobilize.” In arguing that this “holdback” payment constituted retainage that should have been escrowed, the subcontractor relied, in part, on the fact that Tennessee law limits retainage on construction projects to 5% of the contract amount. The court disagreed, finding that the contractor paid the subcontractor’s first 12 payment applications in full, and the contract explicitly stated that “invoices are not subject to retention.” Although the amount of the final payment likely exceeded the value of the as-builts, final clean up, and other items, the court held that the holdback did not constitute retainage.

Not Paying Retainage above Setoffs Constitutes Bad Faith

In the fallout from the late completion of the Nashville Centennial Sportsplex Indoor Fitness Expansion, the Tennessee Court of Appeals was again called on to consider the PPA. In E Sols. for Buildings, LLC v. Knestrick Contractor, Inc., No. M201802028COAR3CV, 2019 WL 5607473 (Tenn. Ct. App. Oct. 30, 2019), the project’s HVAC material supplier brought suit for nonpayment against the project’s HVAC subcontractor, general contractor, and owner.  Both the HVAC subcontractor and general contractor asserted multiple counterclaims and cross-claims. On appeal, the court found that the general contractor had violated the PPA by withholding more in liquidated damages from the HVAC subcontractor’s retainage than its claim to setoff and that such action constituted bad faith subjecting contractor to attorneys’ fees under the PPA.

Construction Changes on Publicly Funded Projects Could Give Rise to False Claims Liability

In Munson Hardisty, LLC v. Legacy Pointe Apartments, LLC, 359 F. Supp. 3d 546 (E.D. Tenn. 2019), the developer of an apartment complex in Knoxville obtained financing through HUD. During construction, disagreements arose between the developer and the project’s general contractor about payments including the developer’s attempts to refinance its HUD loans. As part of the dispute, the general contractor asserted claims under the federal False Claims Act (FCA) on the basis that the developer made changes to the project’s drawings and specification but did not obtain HUD’s approval as required under HUD’s loan agreements. The developer moved to dismiss the FCA claims, but the court denied the motion finding that the general contractor sufficiently alleged that the developer took actions to retaliate against it when the general contractor refused to cooperate or consent to the project’s refinancing due to the developer’s alleged false statements to HUD.

Whether Multiple Phase Project Has a Single Date Of Substantial Completion Is a Question of Fact

In Palazzo v. Harvey, 380 F. Supp. 3d 723 (M.D. Tenn. 2019), which involved the construction of an indoor horse arena and stable, the project’s designer and general contractor moved for summary judgment on the owner’s breach of contract and negligence claims asserting that the statute of limitations had expired. The designer and general contractor argued that despite there only being a single contract for their work, the arena and stable were two different projects with two different dates of substantial completion for the purposes of the statute of limitations. The court denied the motion finding that genuine issues of material fact existed about whether the parties understood that the work constituted one or more distinct projects. The court noted that Tenn. Code Ann. § 28-3-201 defines substantial completion but “does so in the context of being ‘in accordance with the contract documents,'” so the statutory language alone could not conclusively determine the substantial completion date.

Other Tennessee Construction Decisions of Note:

Maddox v. Olshan Foundation Repair & Waterproofing Co. of Nashville, L.P. (Tenn. Ct. App. Sept. 18, 2019) – A homeowner’s claims against a foundation repair company were not barred by the four-year statute of repose because the foundation repairs did not constitute an “improvement” to real property. The court upheld judgment for the homeowner.

Miolen v. Saffles, No. E2018-00849-COA-R3-CV, 2019 WL 1581494 (Tenn. Ct. App. April 12, 2019) – Trial court’s award of treble damages under the Tennessee Consumer Protection Act, Tenn. Code Ann. § 47-18-101, was not an abuse of discretion where the trial court found that defendant “misrepresent[ed] that [] walls had been engineered by a professional engineer, and by charging plaintiffs $10,000 in ‘engineering’ expenses that were not incurred by an engineer.”

H Group Construction, LLC v. City of Lafollette, No. E201800478COAR9CV, 2019 WL 354973 (Tenn. Ct. App. Jan. 28, 2019) – An unsuccessful bidder for municipal construction projects alleged that the City had engaged in unlawful restraint of trade and violated its competitive bidding ordinances. The court held that municipalities enjoy sovereign immunity against claims for restraint of trade and that the City’s bidding ordinances did not provide a private right of action for monetary damages. A writ of certiorari is the only method for asserting a violation of such ordinances.

SPE GO Holdings, Inc. v. W & O Constr., Inc., No. 18-5404, 2018 WL 6181645 (6th Cir. Nov. 27, 2018) – Affirming district court’s denial of defendant’s request for judgment as a matter of law (which would have nullified the jury verdict) and explaining that determination of whether someone was a third-party beneficiary to a contract was a fact question properly submitted to the jury; owner gave sufficient notice of breach and opportunity to cure under Tennessee law; and evidence was sufficient to support damages award under Tennessee law.

TWB Architects, Inc. v. Braxton, LLC, No. M2017-00423-SC-R11-CV, 2019 WL 3491467 (Tenn. July 22, 2019) – When a condominium developer failed to pay for his services, the project’s architect accepted a condominium unit in lieu of payment.  When the developer’s lender foreclosed on the architect’s condominium unit, a question of fact existed whether the architect’s claims against developer under the original architectural services agreement were eliminated.

Crouch Ry. Consulting, LLC v. LS Energy Fabrication, LLC, No. M201702540COAR3CV, 2019 WL 1949631 (Tenn. Ct. App. Apr. 30, 2019), appeal granted (Oct. 14, 2019) – A Texas company engaging a Tennessee engineering company to provide customized services, which were performed primarily in Tennessee, subjected the Texas company to jurisdiction in Tennessee.

If you have any questions about how these decisions will impact your company, please contact one of the authors or any member of the firm’s Construction Contracts & Litigation Practice Group.