1.1                          A bill for an act 
  1.2             relating to commerce; regulating building and 
  1.3             construction contracts; regulating payments and 
  1.4             retainages, and indemnification provisions and 
  1.5             agreements to insure; prohibiting certain contract 
  1.6             provisions; regulating mechanics liens; amending 
  1.7             Minnesota Statutes 1994, sections 15.72; 16A.124, 
  1.8             subdivision 8; 16A.1245; 337.02; 471.425, subdivision 
  1.9             5; and 514.02, subdivision 1; proposing coding for new 
  1.10            law in Minnesota Statutes, chapter 337; repealing 
  1.11            Minnesota Statutes 1994, section 337.05. 
  1.12  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.13     Section 1.  Minnesota Statutes 1994, section 15.72, is 
  1.14  amended to read: 
  1.15     15.72 [PROGRESS PAYMENTS ON PUBLIC CONTRACTS; RETAINAGE.] 
  1.16     Subdivision 1.  Unless the terms of the contract provide 
  1.17  otherwise, a public contracting agency shall make progress 
  1.18  payments on a public contract for a public improvement monthly 
  1.19  as the work progresses.  Payments shall be based upon estimates 
  1.20  of work completed as approved by the public contracting agency.  
  1.21  A progress payment shall not be considered acceptance or 
  1.22  approval of any work or waiver of any defects therein.  
  1.23     Subd. 2.  A public contracting agency may reserve as 
  1.24  retainage from any progress payment on a public contract for a 
  1.25  public improvement an amount not to exceed five percent of the 
  1.26  payment.  A public agency may reduce the amount of the retainage 
  1.27  and may eliminate retainage on any monthly contract payment if, 
  1.28  in the agency's opinion, the work is progressing 
  2.1   satisfactorily Progress payments on a public contract for a 
  2.2   public improvement and retainages from progress payments are 
  2.3   governed by section 337.10. 
  2.4      Sec. 2.  Minnesota Statutes 1994, section 16A.124, 
  2.5   subdivision 8, is amended to read: 
  2.6      Subd. 8.  [APPLICABILITY.] Subdivisions 1 to 7 apply to all 
  2.7   agency purchases, leases, rentals, and contracts for services, 
  2.8   including construction and remodeling contracts, except for 
  2.9   purchases from or contracts for service with a public utility as 
  2.10  defined in section 216B.02 or a telephone company as defined in 
  2.11  section 237.01 that has on file with the public utilities 
  2.12  commission an approved practice regarding late fees and building 
  2.13  and construction contracts under chapter 337.  
  2.14     Sec. 3.  Minnesota Statutes 1994, section 16A.1245, is 
  2.15  amended to read: 
  2.16     16A.1245 [PROMPT PAYMENT TO SUBCONTRACTORS.] 
  2.17     Each state agency contract must require the prime 
  2.18  contractor to pay any subcontractor within ten days of the prime 
  2.19  contractor's receipt of payment from the state for undisputed 
  2.20  services provided by the subcontractor.  The contract must 
  2.21  require the prime contractor to pay interest of 1-1/2 percent 
  2.22  per month or any part of a month to the subcontractor on any 
  2.23  undisputed amount not paid on time to the subcontractor.  The 
  2.24  minimum monthly interest penalty payment for an unpaid balance 
  2.25  of $100 or more is $10.  For an unpaid balance of less than 
  2.26  $100, the prime contractor shall pay the actual penalty due to 
  2.27  the subcontractor.  A subcontractor who prevails in a civil 
  2.28  action to collect interest penalties from a prime contractor 
  2.29  must be awarded its costs and disbursements, including 
  2.30  attorney's fees, incurred in bringing the action.  A 
  2.31  subcontractor must be promptly paid by the prime contractor for 
  2.32  undisputed services provided by the subcontractor under section 
  2.33  337.10. 
  2.34     Sec. 4.  Minnesota Statutes 1994, section 337.02, is 
  2.35  amended to read: 
  2.36     337.02 [UNENFORCEABILITY OF CERTAIN AGREEMENTS.] 
  3.1      An indemnification agreement or an agreement to provide 
  3.2   specific insurance for the benefit of others contained in, or 
  3.3   executed in connection with, a building and construction 
  3.4   contract is unenforceable except to the extent that the 
  3.5   underlying injury or damage is attributable to the negligent or 
  3.6   otherwise wrongful act or omission, including breach of a 
  3.7   specific contractual duty, of the promisor or the promisor's 
  3.8   independent contractors, agents, employees, or delegatees. 
  3.9      Sec. 5.  [337.10] [PROMPT PAYMENT TO CONTRACTORS AND 
  3.10  SUBCONTRACTORS; PROGRESS PAYMENTS AND RETAINAGES.] 
  3.11     Whenever the payor elects to make progress payments under a 
  3.12  building and construction contract, paragraphs (a) to (i) must 
  3.13  be satisfied. 
  3.14     (a) The progress payments must be made monthly, or at more 
  3.15  frequent intervals as stipulated in the contract. 
  3.16     (b) The owner, or other person making the progress payment, 
  3.17  shall pay to the contractor any progress payments due as to 
  3.18  which there is no good faith dispute between the parties within 
  3.19  30 days following a written request for payment according to the 
  3.20  contract.  If any amount of the payment is in dispute, the 
  3.21  owner, or other person making the progress payment, may withhold 
  3.22  from the progress payment an amount not to exceed 150 percent of 
  3.23  the disputed amount.  The contractor shall pay a subcontractor 
  3.24  within ten days of the contractor's receipt of payment from the 
  3.25  owner, or other person making the payment, for labor or 
  3.26  materials provided by the subcontractor. 
  3.27     (c) The progress payments must be made in full to the 
  3.28  contractor without retention of any of the progress payment due 
  3.29  unless the payor determines that the contractor is not making 
  3.30  timely or otherwise satisfactory progress toward the completion 
  3.31  of the contract according to its terms, conditions, and 
  3.32  specifications. 
  3.33     (d) Upon making a determination that a contractor is not 
  3.34  making timely or otherwise satisfactory progress, the payor may 
  3.35  retain from each of one or more progress payments an amount, not 
  3.36  exceeding five percent of the progress payment, as is necessary 
  4.1   to protect the payor's interest in timely and satisfactory 
  4.2   performance of the contract. 
  4.3      (e) Amounts retained under paragraph (b) or (d) must be 
  4.4   deposited in an interest-bearing escrow account. 
  4.5      (f) Amounts retained under paragraph (b) or (d) together 
  4.6   with accrued interest under paragraph (e) shall be released 
  4.7   whenever the payor finds that the contractor is making 
  4.8   satisfactory progress or when each line item listed separately 
  4.9   in the schedule of values is completed and approved. 
  4.10     (g) Upon the payor's final acceptance of the work under the 
  4.11  building and construction contract, any amount still retained 
  4.12  under paragraph (b) or (d) together with accrued interest under 
  4.13  paragraph (e) must be paid promptly to the contractor within 30 
  4.14  days of final acceptance of the project. 
  4.15     (h) A prime contractor shall retain no greater a percentage 
  4.16  from a subcontractor than the promisor is retaining from the 
  4.17  prime contractor for work performed by the subcontractor.  The 
  4.18  prime contractor shall, by appropriate agreement with each 
  4.19  subcontractor, require each subcontractor to establish like 
  4.20  retainage practices with each of its sub-subcontractors. 
  4.21     (i) If any amount is wrongfully withheld by the payor or 
  4.22  contractor, the aggrieved party is entitled to a penalty equal 
  4.23  to two percent per month or any part of a month on the 
  4.24  undisputed amount not paid according to this section and the 
  4.25  party's costs, disbursements, and attorney's fees in bringing an 
  4.26  action to enforce compliance. 
  4.27     For purposes of this section, "payor" includes a public 
  4.28  agency under section 15.71 and a municipality under section 
  4.29  471.425.  
  4.30     Sec. 6.  [337.11] [BUILDING AND CONSTRUCTION CONTRACTS; 
  4.31  PROHIBITED PROVISIONS.] 
  4.32     Subdivision 1.  [CONDITIONAL PAYMENT PROVISIONS.] A 
  4.33  provision contained in, or executed in connection with, a 
  4.34  building and construction contract whereby payment from a 
  4.35  contractor to a subcontractor or supplier is conditioned upon 
  4.36  receipt of payment from any other party, including the state, a 
  5.1   political subdivision of the state, or a private owner, is void 
  5.2   and unenforceable. 
  5.3      This subdivision does not prohibit a claim, cause of 
  5.4   action, or defense that a contractor may have directly against 
  5.5   its subcontractor or supplier. 
  5.6      Subd. 2.  [APPLICATION OF THE LAWS OF ANOTHER 
  5.7   STATE.] Provisions contained in, or executed in connection with, 
  5.8   a building and construction contract making the contract subject 
  5.9   to the laws of another state or requiring that any litigation, 
  5.10  arbitration, or other dispute resolution process on the contract 
  5.11  occur in another state are void and unenforceable.  
  5.12     Subd. 3.  [WAIVER OF LIEN OR CLAIM.] Provisions contained 
  5.13  in, or executed in connection with, a building and construction 
  5.14  contract requiring a contractor, subcontractor, or material 
  5.15  supplier to waive the right to a construction lien or to a claim 
  5.16  against a payment bond before the person has been paid for the 
  5.17  labor or materials or both that the person furnished are void 
  5.18  and unenforceable.  
  5.19     Subd. 4.  [DEFINITION.] For purposes of this section, 
  5.20  "building and construction contract" has the meaning given the 
  5.21  term in section 337.01. 
  5.22     Sec. 7.  Minnesota Statutes 1994, section 471.425, 
  5.23  subdivision 5, is amended to read: 
  5.24     Subd. 5.  [APPLICABILITY.] This section applies to all 
  5.25  goods, leases and rents, and contracts for services, 
  5.26  construction, repair and remodeling.  Purchases from or 
  5.27  contracts for service with a public utility as defined in 
  5.28  section 216B.02 or a telephone company as defined in section 
  5.29  237.01 that has on file with the public utilities commission an 
  5.30  approved practice regarding late fees, and building and 
  5.31  construction contracts under chapter 337, are not subject to 
  5.32  this section. 
  5.33     Sec. 8.  Minnesota Statutes 1994, section 514.02, 
  5.34  subdivision 1, is amended to read: 
  5.35     Subdivision 1.  [ACTS CONSTITUTING.] (a) If a person, on 
  5.36  any improvement to real estate within the meaning of section 
  6.1   514.01, fails to use the proceeds of any payment made to that 
  6.2   person on account of such improvement by the owner of such real 
  6.3   estate or person having any improvement made, for the payment 
  6.4   for labor, skill, material, and machinery contributed to such 
  6.5   improvement, knowing that the cost of any such labor performed, 
  6.6   or skill, material, or machinery furnished for such improvement 
  6.7   remains unpaid, and who has not furnished to the person making 
  6.8   such payment either a valid lien waiver as to any unpaid labor 
  6.9   performed, or skill, material, or machinery furnished for such 
  6.10  improvement, or a payment bond in the basic amount of the 
  6.11  contract price for such improvement, conditioned for the prompt 
  6.12  payment to any person or persons entitled thereto for the 
  6.13  performance of labor or the furnishing of skill, material, or 
  6.14  machinery for the improvement, shall be guilty of theft of the 
  6.15  proceeds of such payment and upon conviction shall be fined not 
  6.16  more than $3,000 or imprisoned not more than one year, or both.  
  6.17     (b) The proceeds of any mortgage on real estate paid to a 
  6.18  prime contractor or subcontractor for improvements upon the 
  6.19  mortgaged premises, and all money paid to a prime contractor or 
  6.20  subcontractor by an owner for improvements, constitute a trust 
  6.21  fund in the hands of the prime contractor or subcontractor to 
  6.22  the amount of all claims due or to become due or owing from the 
  6.23  prime contractor or subcontractor for labor and materials used 
  6.24  for the improvements, until all the claims have been paid.  This 
  6.25  money is not considered a trust fund in the hands of any other 
  6.26  person.  The use of this money by a prime contractor or 
  6.27  subcontractor for any other purpose until all claims have been 
  6.28  paid in full or proportionally in cases of a deficiency, except 
  6.29  those which are the subject of a bona fide dispute and then only 
  6.30  to the extent of the amount actually in dispute, is theft by the 
  6.31  prime contractor or subcontractor of money so misappropriated.  
  6.32  Upon conviction, the person shall be fined not more than $3,000 
  6.33  or imprisoned not more than one year, or both.  If the prime 
  6.34  contractor or subcontractor is a corporation, the 
  6.35  misappropriation of this money also shall be deemed theft by any 
  6.36  officers, directors, or agents of the corporation responsible 
  7.1   for the misappropriation.  Any of the misappropriated money 
  7.2   which has been received as salary, dividend, loan repayment, 
  7.3   capital distribution, or otherwise by a shareholder of the 
  7.4   corporation not responsible for the misappropriation is a civil 
  7.5   liability of the shareholder and may be recovered and restored 
  7.6   to the trust fund specified in this paragraph by action brought 
  7.7   by any interested party for that purpose.  
  7.8      Except as provided in this paragraph, this section does not 
  7.9   create a civil cause of action against any other person.  Until 
  7.10  all claims are paid in full, have matured by notice and filing, 
  7.11  or have expired, the proceeds and money are not subject to 
  7.12  garnishment, execution, levy, or attachment. 
  7.13     Sec. 9.  [REPEALER.] 
  7.14     Minnesota Statutes 1994, section 337.05, is repealed. 
  7.15     Sec. 10.  [EFFECTIVE DATE.] 
  7.16     Sections 1 to 7 and 9 are effective August 1, 1995, and 
  7.17  apply to contracts or agreements entered into on or after that 
  7.18  date.