Highlighting the Kentucky Fairness in Construction Act (KRS 371.400 et seq.)
By: Howard P. Ball, Associate
Since its enactment in 2007, the Kentucky Fairness in Construction Act (KRS 371.400 et seq., the “KFCA”) has been a tool for lawyers with clients in the construction business. The KFCA’s provisions are relevant to both litigators and transactional attorneys. Notably, the KFCA does not apply to residential construction.
The following is merely a summary of the KFCA and should not be interpreted as legal advice. Readers should independently seek legal counsel on any questions they may have regarding their rights and obligations under the KFCA.
Litigation Notes
For those in construction disputes, the KFCA may provide the means for enhanced relief—or added liability. The statute applies to public and private projects by and between a “contracting entity”, a “contractor” or a “subcontractor”, all of which have common definitions in the statute. KRS 371.400. A contracting entity is, for example, a property owner or its agent. KRS 371.400(3). A contractor is an entity having a contract with a contracting entity, and a subcontractor is an entity that does not have a contract with the contracting entity but is doing construction work covered by the contract between the contracting entity and the contractor. KRS 371.400(4) and (10).
In contracts between a contracting entity and a contractor, payment must be made within thirty (30) business days of an “undisputed request for payment.” KRS 371.405(5). Between a contractor and a subcontractor, or a subcontractor and another subcontractor, undisputed requests for payment must be satisfied within fifteen (15) business days. KRS 371.405(8), (10). In any of these scenarios, failure by the payor to satisfy the request for payment entitles the contractor or subcontractor, as the case may be, to twelve percent (12%) interest per annum on the unpaid amount. KRS 371.405(5), (8), (10). Note also that these requests for payment are subject to the KFCA’s retainage provisions, which are discussed below.
In any action brought under the KFCA, the prevailing party may also be entitled to reasonable attorney’s fees if the other party “is deemed to have acted in bad faith.” Bad faith is not defined in the act, however, the Kentucky Court of Appeals in construing the KFCA has found bad faith equivalent to “dishonesty of belief or purpose.” D.W. Wilburn, Inc. v. Painting Company, 577 S.W.3d 782, 785 (Ky. App. 2019).
Drafting Notes
For those drafting construction contracts, they should consider reviewing the KFCA. The KFCA deems the following contractual provisions as against public policy, void and unenforceable:
- A waiver of a contractual party’s right to “resolve disputes through litigation in court…”, provided, however, that a contract may still require binding arbitration;
- A waiver of the statutory lien rights found in KRS Chapter 376, with the exception of the common practice of partial lien waivers given in exchange for progress payments; and
- A waiver of the right to claim delay costs.
KRS 371.405(2)(a)-(c). Notwithstanding the prohibition on waiving delay costs in KRS 371.405(2)(c), the immediately following subsection still allows various conditions to be attached to recovering delay costs. KRS 371.405(3).
The KFCA also sets forth requirements for “retainage”, defined as “money earned by a contractor or subcontractor but withheld to ensure proper performance by the contractor or subcontractor and that shall be paid upon completion of contractual obligations.” KRS 371.400(9). KRS 371.410(1) provides that while a construction project remains less than fifty percent (50%) complete, no more than ten percent (10%) may be withheld as retainage from an “undisputed payment due”. After a project is fifty-one percent (51%) complete, no more than five percent (5%) of the “total contract amount” may be held as retainage. Within thirty (30) days of “substantial competition” of the project, the party withholding payment must release the retainage but less two hundred percent (200%) of its “reasonably estimated cost” of the “contractually obligated, yet uncompleted, work remaining.” KRS 371.410(2). In other words, the party obligated to pay for the work can continue to withhold some of the retainage until the work is one hundred percent (100%) complete. Failure to pay retainage accordingly entitles the contractor or subcontractor to twelve percent (12%) interest per annum on the amount due. KRS 371.410(3).