Tennessee
Prompt Payment Statute

Getting informed about prompt payment laws is important. An examination of the Tennessee prompt payment statute, the rules, laws, and regulations related to payment timing, is important to know your rights and responsibilities as a party on a construction project. Tennessee's specific laws can be found in: Tenn. Code §§ 66-34-101 - 66-34-703, and 12-4-701 - 12-4-707, and are reproduced below.

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Prompt Payment Statute on Private Projects

This chapter shall be known and may be cited as the “Prompt Pay Act of 1991.”

As used in this chapter, unless the context or subject matter indicates another meaning, the words and phrases defined in § 66-11-101 have the same meaning as set out in that section and are incorporated in this chapter by reference.

(a)  All construction contracts on any project in this state, both public and private, may provide for the withholding of retainage; provided, however, that the retainage amount may not exceed five percent (5%) of the amount of the contract.

(b)  The owner, whether public or private, shall release and pay all retainages for work completed pursuant to the terms of any contract to the prime contractor within ninety (90) days after completion of the work or within ninety (90) days after substantial completion of the project for work completed, whichever occurs first. As used in this subsection (b), work completed shall be construed to mean the completion of the scope of the work and all terms and conditions covered by the contract under which the retainage is being held. The prime contractor shall pay all retainages due any subcontractor within ten (10) days after receipt of the retainages from the owner. Any subcontractor receiving the retainage from the prime contractor shall pay to any subsubcontractor or material supplier all retainages due the subsubcontractor or material supplier within ten (10) days after receipt of the retainages.

(c)  Any default in the making of the payments shall be subject to those remedies provided in this part.

(d)  In the event that an owner or prime contractor withholds retainage that is for the use and benefit of the prime contractor or its subcontractors pursuant to § 66-34-104(a) and (b), neither the prime contractor nor any of its subcontractors shall be required to deposit additional retained funds into an escrow account in accordance with § 66-34-104(a) and (b).

(e)  (1)  It is an offense for a person, firm or corporation to fail to comply with subsection (a) or (b) or § 66-34-104(a).

(2)  (A)  A violation of this subsection (e) is a Class A misdemeanor, subject to a fine only of three thousand dollars ($3,000).

(B)  Each day a person, firm or corporation fails to comply with subsection (a) or (b) or § 66-34-104(a) is a separate violation of this subsection (e).

(C)  Until the violation of this subsection (e) is remediated by compliance, the punishment for each violation shall be consecutive to all other such violations.

(a)  Whenever, in any contract for the improvement of real property, a certain amount or percentage of the contract price is retained, that retained amount shall be deposited in a separate, interest bearing, escrow account with a third party.

(b)  As of the time of the deposit of the retained funds, the funds shall become the sole and separate property of the prime contractor or remote contractor to whom they are owed, subject to the rights of the person withholding the retainage in the event the prime contractor or remote contractor otherwise entitled to the funds defaults on or does not complete its contract.

(c)  Upon satisfactory completion of the contract, to be evidenced by a written release by the owner or prime contractor owing the retainage, all funds accumulated in the escrow account together with all interest on the account shall be paid immediately to the prime contractor or remote contractor to whom the funds and interest are owed.

(d)  In the event the owner or prime contractor, as applicable, fails or refuses to execute the release provided for in subsection (c), then the prime contractor or remote contractor, as applicable, may seek any remedy in a court of proper jurisdiction and the person holding the fund as escrow agent shall bear no liability for the nonpayment of the fund to the prime contractor or remote contractor; provided, however, that all claims, demands, disputes, controversies, and differences that may arise between the owner, prime contractor or prime contractors, and remote contractor or remote contractors regarding the funds may be, upon written agreement of all parties concerned, settled by arbitration conducted pursuant to the Tennessee Uniform Arbitration Act, compiled in title 4, chapter 5, part 3, or the Federal Arbitration Act, 9 U.S.C. § 1, et seq., as may be applicable.

(e)  In contracts to which the state or any department, board or agency of the state, including the University of Tennessee, is a party, interest shall be paid on the retained amounts at the same rate interest is paid on the funds of local governments participating in the local government investment pool established pursuant to § 9-4-704, for the contract period.

(f)  The provisions of this section shall be applicable to the state, any department, board or agency of the state, including the University of Tennessee, and all counties and municipalities and all departments, boards or agencies of the counties and municipalities, including all school and education boards, and any other subdivision of the state.

(g)  This section shall be applicable to all prime contracts and all subcontracts thereunder for the improvement of real property when the contract amount of such prime contract is five hundred thousand dollars ($500,000) or greater, notwithstanding the amount of such subcontracts.

(h)  Compliance with this section shall be mandatory, and may not be waived by contract.

Performance by a contractor in accordance with the provisions of a written contract with an owner for improvement of real property shall entitle such contractor to payment from the owner.

(a)  If a contractor has performed in accordance with the provisions of the contractor’s written contract with the owner, then the owner shall pay to the contractor the full amount earned by the contractor, less only those amounts withheld in accordance with the provisions of § 66-34-203. The payment shall be made in accordance with the schedule for payments established within the contract and within thirty (30) days after application for payment is timely submitted by the contractor to the owner, in accordance with the schedule.

(b)  Failure of an architect, engineer or other agent employed by the owner to review and approve an application for payment for work which has been performed in accordance with the contract shall not excuse the owner from making payment in accordance with this chapter. This section shall not require payment if an architect has certified that a contractor has not completed performance.

Nothing in this chapter shall prevent the owner from reasonably withholding payment or a portion of a payment to the contractor; provided, that such withholding is in accordance with the provisions of the written contract between the owner and the contractor. The owner may also withhold a reasonable amount of retainage as specified in the written contract between the owner and the contractor; provided, however, that the retainage amount may not exceed five percent (5%) of the amount of the contract.

When an owner:

(1)  Has received a use and/or occupancy permit for an improvement from a governmental agency lawfully issuing such permit;

(2)  Has received a certificate of substantial completion from an architect charged with supervision of the construction of an improvement; or

(3)  Begins to use or could have begun to use an improvement;

the owner shall, after any such event and pursuant to the terms of the written contract, pay to the contractor all retainage the owner may have withheld pursuant to the written contract, except any sum which the owner may reasonably withhold in accordance with provisions of the written contract between the owner and the contractor; provided, however, that the retainage must be paid within ninety (90) days after the date of the occurrence of an event included in subdivision (1), (2) or (3).

(a)  Any sums allocated by the owner or provided or committed to the owner by a third party which are intended to be used as payment for improvements made to real property by virtue of a written contract between the owner and the contractor shall be held by the owner or third party in trust for the benefit and use of the contractor and shall be subject to all legal and equitable remedies.

(b)  This section shall not apply to the state of Tennessee, including its departments, boards or commissions, or to any institution of higher education.

Performance by a subcontractor, materialman or furnisher in accordance with the provisions of such person’s written contract with a contractor for improvement of real property shall entitle such person to payment from the contractor.

(a)  If a subcontractor, materialman, or furnisher has performed in accordance with the provisions of the subcontractor, materialman, or furnisher’s  written contract with the contractor, then the contractor shall pay to the subcontractor, materialman or furnisher the full amount earned by the subcontractor, materialman or furnisher, subject only to any condition precedent for payment clause in the contract, and less only those amounts withheld in accordance with the provisions of § 66-34-303. The payment shall be made in accordance with the schedule for payments established within the contract and within thirty (30) days after application for payment is timely submitted by the subcontractor, materialman, or furnisher to the contractor, in accordance with the schedule.

(b)  The subcontractor, materialman, or furnisher shall also be paid its pro rata share of any interest provided for in § 66-34-601 that has been received by the contractor.

Nothing in this chapter shall prevent the contractor from reasonably withholding payment or a portion of payment to the subcontractor, materialman or furnisher; provided, that such withheld payment is in accordance with the provisions of the written contract between the contractor and the subcontractor, materialman or furnisher. The contractor may also withhold a reasonable amount of retainage as specified in the written contract between the contractor, subcontractor, materialman or furnisher; provided, however, that the retainage amount may not exceed five percent (5%) of the amount of the contract.

Any sums received by the contractor as payment for work, services, equipment and materials supplied by the subcontractor, materialman or furnisher for improvements to real property shall be held by the contractor in trust for the benefit and use of such subcontractor, materialman or furnisher and shall be subject to all legal and equitable remedies.

A subcontractor, materialman or furnisher contracting in writing with another subcontractor, materialman or furnisher for the improvement of real property shall make payment to such other subcontractor, materialman or furnisher in accordance with part 3 of this chapter.

An architect and/or engineer furnishing design or contract administration services to an owner, contractor, subcontractor, materialman or furnisher for the improvement of real property shall be entitled to payment in accordance with part 2 of this chapter, if the architect and/or engineer contracts in writing with the owner; or in accordance with part 3 of this chapter, if the architect and/or engineer contracts in writing with a contractor, subcontractor, materialman or furnisher.

Any payment not made in accordance with this chapter shall accrue interest, from the date due until the date paid, at the rate of interest for delinquent payments provided in written contract or, if no interest rate is specified in a written contract, at the rate specified in § 47-14-121.

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(a)  (1)  A contractor who has not received payment from an owner, or a subcontractor, materialman or furnisher who has not received payment from a contractor or other subcontractor, materialman or furnisher, in accordance with the provisions of this chapter, shall notify the party failing to make payment of the provisions of this chapter and of the notifying party’s intent to seek relief provided for within this chapter.

(2)  The notification shall be made by registered or certified mail, return receipt requested.

(3)  If the notified party does not, within ten (10) calendar days after receipt of such notice, make payment or provide to the notifying party a response giving adequate legal reasons for failure of the notified party to make payment, the notifying party may, in addition to all other remedies available at law or in equity, sue for equitable relief, including injunctive relief, for continuing violations of this chapter, in the chancery court of the county in which the real property is located.

(4)  The failure to make the only payment due under the contract may be considered to be a continuing violation under this chapter.

(b)  Reasonable attorney’s fees may be awarded against the nonprevailing party; provided, that such nonprevailing party has acted in bad faith.

(c)  A bond in double the amount claimed or ordered to be paid shall be filed with good sureties to be approved by the clerk prior to the issuance of any injunctive relief.

Except as specifically noted, compliance with §§ 66-34-205, 66-34-304, and 66-34-602 may not be waived by contract and these sections are applicable to all private contracts and all construction contracts with this state, any department, board or agency thereof, including the University of Tennessee, all counties and municipalities and all departments, boards or agencies thereof, including all school and education boards, and any other subdivision of the state.

The provisions of this chapter shall not apply to contracts for the construction of, or home improvement to, any land or building, or that portion thereof which is used or designed to be used as a residence or dwelling place for one (1), two (2), three (3) or four (4) single family units.

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The provisions of this chapter, the “Prompt Pay Act of 1991,” as enacted by Acts 1991, chapter 45, do not apply to any bank, savings bank, savings and loan association, industrial loan and thrift company, other regulated financial institution or insurance company.

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Prompt Payment Statute on Public Projects

This part shall be known and may be cited as the “Prompt Pay Act of 1985.”

As used in this part, unless the context otherwise requires:

(1) “Acquire” means to derive a benefit from, whether by lease, grant, expenditure, or otherwise;

(2) “Agency” means any entity of the state government, as defined in § 4-5-102;

(3) “Business” means a business organization in any form, institution, association, profession, occupation or calling of any kind, whether or not conducted for profit;

(4) “Property” means anything of value, including, but not limited to, real estate, tangible and intangible personal property, contract rights, choses-in-action and other interests in or claims to wealth, admission or transportation tickets, captured or domestic animals, electric or other power and signatures which purport to create, maintain or extinguish any legal obligation; and

(5) “Service” means labor that does not include a tangible commodity. “Service” includes, but is not limited to: labor; professional advice; services provided by health care providers to medicaid recipients upon filing of a properly completed claim form; telephone, cable television and other utility service; accommodations in hotels, restaurants or elsewhere; admissions to exhibits and entertainments; the use of machines designed to be operated by coin or other thing of value; and the use of rented real or personal property.

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An agency which acquires property or services pursuant to a contract with a business shall pay for each complete delivered item of property or service in accordance with the provisions of the contract between the business and agency or, if no date or other provision for payment is specified by contract, within forty-five (45) days after receipt of the invoice covering the delivered items or services.

(a) Interest shall accrue and be charged on payments overdue under § 12-4-703 at one and one- half percent (11/2%) per month beginning on the day after payment is due.

(b) Interest which is unpaid at the end of each sixty-day period or at the end of any specified period provided by contract shall be added to the principal amount of the debt and shall thereafter accumulate interest.

An agency may not seek additional appropriations to pay interest which accrues as a result of its failure to make timely payments required by § 12-4-703.

This part is not applicable if an agency’s failure to pay timely interest required by § 12-4-704 is the result of a dispute between the agency and the business over the amount due or over compliance with the contract.

(a)  Upon payment by an agency, a business which has acquired under contract, property or services in connection with its contract with such agency from a subcontractor or supplier shall pay the subcontractor or supplier within thirty (30) days after receiving payment from the agency.

(b)  Interest at the rate of one and one-half percent (1½%) per month shall accrue and is due any subcontractor or supplier who is not paid within thirty (30) days after the business receives payment from the agency, unless otherwise provided by contract between the agency and the business, or by contract between the business and the subcontractor or supplier. Interest begins to accrue on the thirty-first day at the rate specified in this subsection.