Kentucky’s Fairness in Construction Act: Rights and Remedies

  • Aug 5, 2019

KY attorney Caleb HanesIn 2007, the Fairness in Construction Act (KFCA) revolutionized construction law in Kentucky. First, the KFCA voids some common provisions in construction contracts. Second, it creates new regulations to govern when and how parties to construction contracts pay one another. Third, it regulates construction “retainages.” Lastly, it allows fee shifting when parties sue to enforce their KFCA rights.

            Construction Contracts

Because of the KFCA, two common provisions in construction contracts are unenforceable. First, construction contracts cannot restrict litigation rights.[1] No construction contract can prevent a party from enforcing his/her/its rights through litigation.[2] Second, no construction contract can waive a contractor’s right to recover damages caused by a client’s “undue delay.”[3] If a provision in the  contract is found to be unenforceable under the KFCA, the unenforceable provision will not affect the other provisions of the contract that comply with the KFCAWorkers' Compensation Attorneys Bowling Green Elizabethtown KY

            Payment for Construction Services

The KFCA regulates when (a) clients must pay contractors and (b) contractors must pay subcontractors. Construction clients must pay “undisputed” contracting bills within thirty days.[4] On the thirty-first day, contracting bills accrue interest at 12% per year. After a client pays a contractor, the contractor has fifteen days to pay any subcontractor’s “undisputed” bill.[5] On the sixteenth day, bills from subcontractors accrue interest at 12% per year.[6]

            Retainage

Retainage is “money earned by a contractor or subcontractor but withheld to ensure proper performance by the contractor or subcontractor.”[7] The KFCA caps retainage. For the first one-half of a project, no client can withhold more than 10% of a contract’s total value as retainage.[8] For the second half, no client can withhold more than 5% of a contract’s total value as retainage.[9] Once a client releases a general contractor’s retainage, the contractor must release subcontractors’ share within fifteen days.[10] Untimely releases of retainage accrue interest at a rate of 12% per year.[11]

            Fee Shifting

In Kentucky, we typically follow the “American rule” regarding litigation costs, which says that each party to an action pays its own legal fees and expenses. However, the KFCA allows the prevailing party to be awarded its legal fees and expenses if the losing party is deemed to have acted in bad faith.

Kerrick Bachert regularly advises clients on issues related to construction law and the KCFA. If you or your company have any questions regarding the KFCA or construction litigation, please contact Tom Kerrick or Caleb Hanes.

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[1] Ky. Rev. Stat. Ann. § 371.405(2)(a) (West 2019) (voiding all provision in construction contracts “that purport to waive, release, or extinguish the right to resolve disputes through litigation in court or substantive or procedural rights in connection with such litigation, except that a contract may require binding arbitration as a substitute for litigation or require nonbinding alternative dispute resolution”).

[2] See Louisville & Jefferson Cty. Metro. Sewer Dist. v. T+ C Contracting, Inc., 570 S.W.3d 551, 555 (Ky. 2018) (“The KFCA nullifies contract provisions that prohibit the parties from asserting preserved claims to a neutral third-party adjudicator, but it does not nullify claim-preservation requirements in a contract.”). But see id. (provisions requiring binding arbitration and nonbinding ADR are enforceable).

[3] See Ky. Rev. Stat. Ann. § 371.405(2)(c) (West 2019).

[4] Ky. Rev. Stat. Ann. § 371.405(6) (West 2019). But see Ky. Rev. Stat. Ann. § 371.405(7) (postsecondary institutions and boards of education have forty-five days).

[5] Ky. Rev. Stat. Ann. § 371.405(8) (West 2019).

[6] Id.

[7] Ky. Rev. Stat. Ann. § 371.400(9) (West 2019).

[8] Ky. Rev. Stat. Ann. § 371.410(1) (West 2019).

[9] Id.

[10] Ky. Rev. Stat. Ann. § 371.410(2) (West 2019).

[11] Ky. Rev. Stat. Ann. § 371.410(3) (West 2019).

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