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  80R3798 ATP-F
 
  By: Chisum H.B. No. 734
 
 
 
   
 
 
A BILL TO BE ENTITLED
AN ACT
relating to contingent payment clauses in certain construction
contracts.
       BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
       SECTION 1.  Subchapter D, Chapter 35, Business & Commerce
Code, is amended by adding Section 35.521 to read as follows:
       Sec. 35.521.  AGREEMENT FOR PAYMENT OF CONSTRUCTION
SUBCONTRACTOR.  (a)  In this section:
             (1)  "Contingent payee" means a party to a contract
with a contingent payment clause, other than an architect or
engineer, whose receipt of payment is conditioned on the contingent
payor's receipt of payment from another person.
             (2)  "Contingent payment clause" means a provision in a
contract for construction management, or for the construction of
improvements to real property or the furnishing of materials for
the construction, that provides that the contingent payor's receipt
of payment from another is a condition precedent to the obligation
of the contingent payor to make payment to the contingent payee for
work performed or materials furnished.
             (3)  "Contingent payor" means a party to a contract
with a contingent payment clause that conditions payment by the
party on the receipt of payment from another person.
             (4)  "Improvement" includes new construction,
remodeling, or repair.
             (5)  "Obligor" means the person obligated to make
payment to the contingent payor for an improvement.
             (6)  "Primary obligor" means the owner of the real
property to be improved or repaired under the contract, or the
contracting authority if the contract is for a public project.  A
primary obligor may be an obligor.
       (b)  A contingent payor or its surety may not enforce a
contingent payment clause to the extent that the obligor's
nonpayment to the contingent payor is the result of the contractual
obligations of the contingent payor not being met, unless the
nonpayment is the result of the contingent payee's failure to meet
the contingent payee's contractual requirements.
       (c)  Except as provided by Subsection (f), a contingent payor
or its surety may not enforce a contingent payment clause as to work
performed or materials delivered after the contingent payor
receives written notice from the contingent payee objecting to the
further enforceability of the contingent payment clause as provided
by this section and the notice becomes effective as provided by
Subsection (d). The contingent payee may send written notice only
after the 45th day after the date the contingent payee submits a
written request for payment to the contingent payor that is in a
form substantially in accordance with the contingent payee's
contract requirements for the contents of a regular progress
payment request or an invoice.
       (d)  For purposes of Subsection (c), the written notice
becomes effective on the latest of:
             (1)  the 10th day after the date the contingent payor
receives the notice;
             (2)  the eighth day after the date interest begins to
accrue against the obligor under:
                   (A)  Section 28.004, Property Code, under a
contract for a private project governed by Chapter 28, Property
Code; or
                   (B)  31 U.S.C. Section 3903(a)(6), under a
contract for a public project governed by 40 U.S.C. Section 3131; or
             (3)  the 11th day after the date interest begins to
accrue against the obligor under Section 2251.025, Government Code,
under a contract for a public project governed by Chapter 2251,
Government Code.
       (e)  A notice given by a contingent payee under Subsection
(c) does not prevent enforcement of a contingent payment clause if:
             (1)  the obligor has a dispute under Chapter 28,
Property Code, Chapter 2251, Government Code, or 31 U.S.C. Chapter
39 as a result of the contingent payee's failure to meet the
contingent payee's contractual requirements; and
             (2)  the contingent payor gives notice in writing to
the contingent payee that the written notice given under Subsection
(c) does not prevent enforcement of the contingent payment clause
under this subsection and the contingent payee receives the notice
under this subdivision not later than the later of:
                   (A)  the fifth day before the date the written
notice from the contingent payee under Subsection (c) becomes
effective under Subsection (d); or
                   (B)  the fifth day after the date the contingent
payor receives the written notice from the contingent payee under
Subsection (c).
       (f)  A written notice given by a contingent payee under
Subsection (c) does not prevent the enforcement of a contingent
payment clause to the extent that the funds are not collectible as a
result of a primary obligor's successful assertion of a defense of
sovereign immunity, if the contingent payor has exhausted all of
its rights and remedies under its contract with the primary obligor
and under Chapter 2251, Government Code. This subsection does not:
             (1)  create or validate a defense of sovereign
immunity; or
             (2)  extend to a primary obligor a defense or right that
did not exist before the effective date of this section.
       (g)  On receipt of payment by the contingent payee of the
unpaid indebtedness giving rise to the written notice provided by
the contingent payee under Subsection (c), the contingent payment
clause is reinstated as to work performed or materials furnished
after the receipt of the payment, subject to the provisions of this
section.
       (h)  A contingent payor or its surety may not enforce a
contingent payment clause if, under Section 53.026, Property Code,
the contingent payee is considered to be in direct contractual
relationship with the obligor.
       (i)  A contingent payment clause may not be used as a basis
for invalidation of the enforceability or perfection of a
mechanic's lien under Chapter 53, Property Code.
       (j)  A contingent payor or its surety may not enforce a
contingent payment clause if the enforcement would be
unconscionable. The party asserting that a contingent payment
clause is unconscionable has the burden of proving that the clause
is unconscionable.
       (k)  The enforcement of a contingent payment clause is not
unconscionable if the contingent payor:
             (1)  proves that the contingent payor has exercised
diligence in ascertaining and communicating in writing to the
contingent payee, before the contract in which the contingent
payment clause has been asserted becomes enforceable against the
contingent payee, the financial viability of the primary obligor
and the existence of adequate financial arrangements to pay for the
improvements; and
             (2)  has done the following:
                   (A)  made reasonable efforts to collect the amount
owed to the contingent payor; or
                   (B)  made or offered to make, at a reasonable
time, an assignment by the contingent payor to the contingent payee
of a cause of action against the obligor for the amounts owed to the
contingent payee by the contingent payor and offered reasonable
cooperation to the contingent payee's collection efforts, if the
assigned cause of action is not subject to defenses caused by the
contingent payor's action or failure to act.
       (l)  A cause of action brought on an assignment made under
Subsection (k)(2)(B) is enforceable by a contingent payee against
an obligor or a primary obligor.
       (m)  A contingent payor is considered to have exercised
diligence for purposes of Subsection (k)(1) under a contract for a
private project governed by Chapter 53, Property Code, if the
contingent payee receives in writing from the contingent payor:
             (1)  the name, address, and business telephone number
of the primary obligor;
             (2)  a description, legally sufficient for
identification, of the property on which the improvements are being
constructed;
             (3)  the name and address of the surety on any payment
bond provided under Subchapter I, Chapter 53, Property Code, to
which any notice of claim should be sent;
             (4)  if a loan has been obtained for the construction of
improvements:
                   (A)  a statement, furnished by the primary obligor
and supported by reasonable and credible evidence from all
applicable lenders, of the amount of the loan;
                   (B)  a summary of the terms of the loan;
                   (C)  a statement of whether there is foreseeable
default of the primary obligor; and
                   (D)  the name, address, and business telephone
number of the borrowers and lenders; and
             (5)  a statement, furnished by the primary obligor and
supported by reasonable and credible evidence from all applicable
banks or other depository institutions, of the amount, source, and
location of funds available to pay the balance of the contract
amount if there is no loan or the loan is not sufficient to pay for
all of the construction of the improvements.
       (n)  A contingent payor is considered to have exercised
diligence for purposes of Subsection (k)(1) under a contract for a
public project governed by Chapter 2253, Government Code, if the
contingent payee receives in writing from the contingent payor:
             (1)  the name, address, and primary business telephone
number of the primary obligor;
             (2)  the name and address of the surety on the payment
bond provided to the primary obligor to which any notice of claim
should be sent; and
             (3)  a statement from the primary obligor that funds
are available and have been authorized for the full contract amount
for the construction of the improvements.
       (o)  A contingent payor is considered to have exercised
diligence for purposes of Subsection (k)(1) under a contract for a
public project governed by 40 U.S.C. Section 3131 if the contingent
payee receives in writing from the contingent payor:
             (1)  the name, address, and primary business telephone
number of the primary obligor;
             (2)  the name and address of the surety on the payment
bond provided to the primary obligor; and
             (3)  the name of the contracting officer, if known at
the time of the execution of the contract.
       (p)  A primary obligor shall furnish the information
described by Subsection (m) or (n), as applicable, to the
contingent payor not later than the 30th day after the date the
primary obligor receives a written request for the information. If
the primary obligor fails to provide the information under the
written request, the contingent payor, the contingent payee, and
their sureties are relieved of the obligation to initiate or
continue performance of the construction contracts of the
contingent payor and contingent payee.
       (q)  The assertion of a contingent payment clause is an
affirmative defense to a civil action for payment under a contract.
       (r)  This section does not affect a provision that affects
the timing of a payment in a contract for construction management or
for the construction of improvements to real property if the
payment is to be made within a reasonable period.
       (s)  A person may not waive this section by contract or other
means. A purported waiver of this section is void.
       (t)  An obligor or a primary obligor may not prohibit a
contingent payor from allocating risk by means of a contingent
payment clause.
       (u)  This section does not apply to a contract that is solely
for:
             (1)  design services;
             (2)  the construction or maintenance of a road,
highway, street, bridge, utility, water supply project, water
plant, wastewater plant, water and wastewater distribution or
conveyance facility, wharf, dock, airport runway or taxiway,
drainage project, or related type of project associated with civil
engineering construction; or
             (3)  improvements to or the construction of a structure
that is a:
                   (A)  detached single-family residence;
                   (B)  duplex;
                   (C)  triplex; or
                   (D)  quadruplex.
       SECTION 2.  Section 35.521, Business & Commerce Code, as
added by this Act, applies only to a contingent payment clause under
which payment is contingent on the receipt of payment under a
contract or other agreement entered into on or after September 1,
2007.
       SECTION 3.  This Act takes effect September 1, 2007.