Below is a brief summary of two rulings issued by Ohio courts so far in 2022 that are of interest to the construction industry.
Fiscal Officer’s Failure to Certify That Funds Have Been Lawfully Appropriated Results In a Void Contract
A recent case issued by Ohio’s First District Court of Appeals (Hamilton County) in March reinforces the statutory requirement contained in R.C. 5705.41(D)(1) that, before public funds can be spent on a contract, the fiscal officer for the respective public entity must issue a certificate stating the funds necessary to satisfy the contract have been lawfully appropriated. See Duke Energy One, Inc. v. Cin. State Tech. & Cmty. Coll., 2022-Ohio-924 (Ct. App.). R.C 5704.41(D)(1) goes on to state that the failure to do so shall render the underlying contract void. This means that neither side can obtain the benefits of the agreement, and typically results in the private entity’s not being fully compensated.
In support of its decision, the Court noted earlier cases that held that a private entity entering into a commercial relationship with a government entity has a duty to ascertain whether the contract complies with applicable statutes. The court emphasized that when public funds are at stake, a private entity has little recourse should it fail to recognize the contract does not comply with the applicable statutory requirement, even though it conferred a benefit to the public entity.
This case represents a cautionary tale to both public authorities and private entities that enter into agreements involving public funds in violation of applicable statutes, such as R.C. 5705.41(D)(1). In particular, private entities, like the one in this case, will have no ability to recover and will therefore be left holding the bag after expending resources on an agreement that is later determined to be void.
Material Supplier’s Prompt Payment Claim Denied Because Its Invoices Were Not Included In Subcontractor’s Pay Application
In another recent case issued this past February, Ohio’s Eighth District Court of Appeals (Cuyahoga County) denied a material supplier’s prompt payment claim when it determined the material supplier had not submitted its invoice in time for the subcontractor to include them in its pay application. See Broadway Concrete Invs., L.L.C. v. Masonry Contracting Corp., 2022-Ohio-530 (Ct. App.).
At the trial court level, the material supplier was awarded both interest and legal fees under Ohio’s Prompt Payment Statute. The principal amount due was only $82,388.51, but Ohio’s Prompt Payment Statute entitled the material supplier to 18% interest (ultimately $21,230.86) and legal fees ($101,945.05). So the trial court’s award more than doubled the principal amount due, which reinforces how the exposure from a relatively modest payment dispute can significantly increase if there is a violation of Ohio’s Prompt Payment Statute.
But what the trial court gives, the appeals court can take away. A key fact in this case was that the subcontractor had submitted and received a $50,000 “pre-payment,” which seems to be more common these days to address supply chain issues. However, the material supplier did not submit its first invoice until months after the “prepayment” had been received by the subcontractor. The trial court determined that “prepayment” represented amounts attributable to the material supplier’s work and therefore triggered the ten (10)-day clock for the subcontractor to issue payment since it had already been paid. So under this analysis, payment was to be issued within ten (10) days of the material supplier’s invoice since the subcontractor had already been paid.
But on appeal, the court determined the ten (10)-day clock did not begin to run until the occurrence of two (2) separate events. This first is when the material supplier submits an invoice to the subcontractor in time for the subcontractor to include the invoice in its pay application upstream. The second is that the subcontractor then receives payment on that same application. So under this analysis, the ten (10)-day clock starts when the subcontractor received payment on a pay application that included the material supplier’s invoice. So in this case, the date of the “prepayment” was not relevant, even if it represented items being provided by the material supplier. Instead, it was when the subcontractor received payment only after receiving the material supplier’s invoice. Under this analysis, the appeals court held that the subcontractor had timely issued payments and that a violation of Ohio’s Prompt Payment Statute had not occurred.
For those looking to take advantage of Ohio’s Prompt Payment Statute, the lesson here is to timely get your invoices submitted upstream even if it will not be accepted. For those looking to defend themselves against a prompt payment claim, being able track lower tier invoices to the pay applications it submits upstream is critical to show when the ten (10)-day clock starts.