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Bill Seeking to Amend Construction Payment Act Introduced in Pennsylvania’s Legislature

On May 18, 2017, Representative David S. Maloney, Sr. (R., Berks County) introduced House Bill 1387, which seeks to amend Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA).  The changes include the inserting language amending CASPA to state the following:
  • A contractor or subcontractor may not contractually waive CASPA rights;
  • Failure to provide written notice of a deficiency item results in a waiver of the right to withhold for the deficiency and requires payment of the invoice in full;
  • If withholding for a deficiency item, payment for all non-deficient work must still be made;
  • If a party receiving an invoice alleges the invoice contains an error, the party must pay the correct invoice amount on the date payment would otherwise be due;
  • A party seeking release of retention may post a maintenance bond for 120% the amount retained to obtain release of retention;
  • Withholding retention for longer than 30 days after “final acceptance of the work” will qualify as an improper withholding unless the appropriate notice requirements are followed;
  • Withholding requirements also apply to subcontractors’ sub-subcontracts with lower-tier subcontractors; and
  • Compliance with the notice requirements for withholding based upon deficiencies is necessary for the withholding to “not be deemed to have been wrongfully withheld.”
Babst Calland will continue to monitor HB 1387 as well as other proposed legislation that may impact the construction industry and post updates on this Blog whenever they become available.

Tagged:  CASPA, Contract Clauses, Industry news, Proposed Legislation, Subcontractors

Use of the New State Construction Notices Directory for Oil and Gas Construction Projects

An article in the March 2017 issue of The PIOGA Press, co-authored by Babst Calland Attorneys Dave White and Esther Soria Mignanelliaddresses the impacts of the recent amendments to the Pennsylvania Mechanics’ Lien Law (Act No. 142) and related newly created on-line State Construction Notices Directory on oil and gas infrastructure projects. To view the full article, click here.

Tagged:  Mechanics' lien, Pipeline construction

AIA B101-2007 Supports Architect’s Copyright Infringement Claim against Contractor, Subcontractors

In a case of first impression, in April 2016 the Northern District of Ohio held in Eberhard Architects, LLC v. Bogart Architecture, Inc., 314 F.R.D. 567 (N.D. Ohio 2016), that a contractor and its subcontractors may have committed copyright infringement by continuing work after the architect terminated the nonexclusive license to use the architect’s instruments of service (“IOS”).

Eberhard Architects, LLC (“Eberhard”) agreed to provide architectural services to Lifecare Hospice (“Lifecare”) in accordance with AIA B101-2007 (the “Agreement”). Based on the standard language of AIA B101-2007, Eberhard granted Lifecare a nonexclusive license to use the IOS created by Eberhard in connection with the construction of a 12-bed hospice inpatient facility:

Upon execution of this Agreement, the Architect grants to the Owner a nonexclusive license to use the Architect's Instruments of Service solely and exclusively for purposes of constructing, using, maintaining, altering and adding to the Project, provided that the Owner substantially performs its obligations, including prompt payment of all sums due, under this Agreement. The Architect shall obtain similar nonexclusive licenses from the Architect's consultants consistent with this Agreement. The license granted under this section permits the Owner to authorize the Contractor, Subcontractors, Sub-subcontractors, and material and equipment suppliers, as well as the Owner's consultants and separate contractors, to reproduce applicable portions of the Instruments of Service solely and exclusively for use in performing services or construction for the Project. If the Architect rightfully terminates this Agreement for cause as provided in Section 9.4, the license granted in this Section 7.3 shall terminate.

Eberhard obtained a copyright in connection with the IOS for the project. Lifecare later breached the Agreement by failing to make required payments and Eberhard terminated the Agreement. Eberhard brought suit against Lifecare for breach of contract, and also asserted claims for copyright infringement against Lifecare and the contractor and subcontractors (the “Contractor Defendants”) alleging that the Contractor Defendants continued to use Eberhard’s copyrighted IOS after Eberhard terminated the nonexclusive license.

Relying on the language of AIA B101-2007, the Court noted that the parties expressly agreed that Eberhard’s termination of the Agreement would also terminate the nonexclusive license. The Court therefore denied the Contractor Defendants’ motion to dismiss and allowed Eberhard to proceed with its copyright infringement claims against the Contractor Defendants.

The Eberhard decision demonstrates the full scope of the power an architect wields via its ability to grant and revoke a nonexclusive license. If the architect terminates its design agreement with the owner, it may be able to effectively halt work on the entire project until the dispute is resolved or the parties reach an agreement as to the continued use of the architect’s IOS. In light of this possibility, contractors desiring additional protection should consider including language in their contracts permitting them to suspend work (or even terminate the contract) if the architect terminates the design agreement and questions arise as to the validity of the license protecting the architect’s IOS.


Tagged:  Breach of contract, Construction Contracts, Contract Clauses, Design-Build, Subcontractors

Eastern District of PA Declines to Broaden Bilt–Rite Exception to Economic Loss Doctrine

In an unreported decision handed down this summer, the United States District Court for the Eastern District of Pennsylvania in Elliott-Lewis Corp. v. Skanska USA Bldg., Inc., 2015 WL 4545362 (E.D. Pa. July 28, 2015), declined to extend the Bilt–Rite exception to Pennsylvania’s economic loss doctrine – which established that architects and design professionals can be liable in tort to contractors for purely economic harm resulting from the inclusion of erroneous information in design documents – to a contractor that supplied information to design professionals during remedial construction. The Franklin Institute (“Franklin”) contracted with Saylor Gregg Architects (“Saylor Gregg”) to design significant renovations to the Franklin Institute in Philadelphia.  Saylor Gregg entered into an agreement with Urban Engineers (“Urban”) and Marvin Waxman Consulting Engineers, Inc. (“Marvin Waxman”) to provide engineering services for the project.  Franklin contracted separately with Skanska USA Building, Inc. (“Skanska”) to construct the project. Skanska subcontracted with Elliott-Lewis Corporation (“ELCo”) to install the project’s HVAC piping and controls.  Skanska and ELCo had discretion to choose the exact make and model of the HVAC system’s cooling tower so long as Marvin Waxman’s design specifications were met, and ultimately elected to use a four-cell cooling tower which required different piping and controls than the two-cell tower specified in the original plans. The HVAC system was not completed in accordance with project deadlines and the cooling tower overflowed when the system was first tested, damaging the building itself.  In troubleshooting the issues with the HVAC system, Marvin Waxman utilized information provided by the supplier of the HVAC’s pump system, Patterson Pump Company (“Patterson”), and Patterson’s representative, Clapp Associations, Inc. (“Clapp”).  After several weeks of unsuccessful repair efforts, Patterson eventually admitted that there were problems “intrinsic to the pumps supplied.” Despite performing extra work on the HVAC system and providing Franklin with a temporary cooling system, ELCo was never paid for this extra work by Skanska.  ELCo sued Skanska for breach of contract and Skanska filed a third-party complaint against Saylor Gregg, Urban, and Marvin Waxman (the “Design Defendants”), claiming that ELCo’s extra work was necessitated by errors in the design drawings and specifications.  The Design Defendants filed a fourth-party complaint against Patterson and Clapp, alleging that they reasonably relied on inaccurate information regarding the HVAC system supplied by Patterson and Clapp when drafting the design documents. Patterson and Clapp claimed that the Design Defendants’ suit was barred by Pennsylvania’s economic loss doctrine, which prohibits a plaintiff from recovering in tort if the loss suffered is purely economic and not accompanied by an injury to either person or property.  However, the Design Defendants argued that their claims were valid under the Bilt–Rite exception to the economic loss doctrine, which permits recovery in tort for purely economic injuries when information is negligently supplied by one in the business of supplying information (such as an architect or design professional) and where it is foreseeable that the information will be used and relied upon by third parties.  See Bilt–Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa.2005). Here, the Eastern District declined to extend this exception to Patterson and Clapp because they are not in the business of supplying information.  Specifically, Patterson manufactured a product and Clapp facilitated the sale of that product.  The court noted that the “sale of a product is fundamentally different than the sale of information, even if the seller provides information about the product to consummate the sale,” and that a “manufacturer and a manufacturer's representative are very different from the accountants, lawyers, and architects noted in Bilt–Rite.”  The court further reasoned that, if the Bilt–Rite exception were to apply to Patterson and Clapp in this situation, then many typical commercial transactions would be subject to this standard and the economic loss doctrine would be rendered meaningless.  Because the sale and purchase of a product often involves at least some conveyance of information by the seller, the court determined that broadening Bilt–Rite to include such run-of-the-mill transactions was inappropriate and dismissed the Design Defendants’ claims against Patterson and Clapp. While the Bilt–Rite exception remains narrowly-tailored, the court also noted that the Design Defendants failed to demonstrate that they reasonably relied on any representations made by Patterson and Clapp when drafting the design documents.  Therefore, contractors should therefore be wary of making representations to design professionals on which the design professionals will rely when drafting design documents.

Tagged:  Construction Contracts, Construction Economics, Design-Build, Subcontractors

Pennsylvania Supreme Court Affirms Contractor Cannot Maintain a CASPA Claim against Owner’s Agent

On September 28, 2016, the Pennsylvania Supreme Court affirmed a decision by the Pennsylvania Superior court that held an owner’s agent cannot be individually liable under the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”), unless the agent’s dealings created a new contract between the contractor and the agent personally. See Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, No. 28 EAP 2015 (Pa. Sept. 28, 2016). Under Section 502 of CASPA, “Owner” is defined as a “person who has an interest in real property that is improved and who ordered the improvement to be made. The term includes successors in interest of the owner and agents of the owner acting with their authority.” 73 P.S. § 502 (emphasis added). In Scungio, the contactor argued “one can read Section 502’s definition of owner — as including ‘agents of the owner acting with their authority’ — to indicate that such agents are equivalent to owners for purposes of the Act,” and can therefore be held personally liable under the Act. The Supreme Court first acknowledged the text of Section 502 is ambiguous; subject to two conflicting, yet reasonable, interpretations. The Court nevertheless concluded CASPA does not create individual agent liability for three main reasons. First, the Court emphasized CASPA’s purpose is to protect contractors and subcontractors by encouraging fair dealing among parties to construction contracts. Second, an interpretation of Section 502 of CASPA that results in the extension of liability against an owner’s agents would improperly reshape the right to payment beyond that contemplated in other sections of the Act. See 73 P.S. § 504 (“[p]erformance by a contractor . . . in accordance with the provisions of a contract shall entitle the contractor or subcontractor to payment from the party with whom the contractor . . . has contracted,") (emphasis added); 73 P.S. § 507(a) (providing that a subcontractor is entitled to payment "from the party with whom the subcontractor has contracted") (emphasis added). Finally, the contractor’s proffered interpretation “would require that a property owner’s agents personally assume the obligations of the owner’s construction contracts with respect to payments to contractors, contrary to longstanding and fundamental common law agency principles.” If the General Assembly intends to modify the common law, the Court generally expects a clear statement to that effect, rather than the mere insertion of “an ambiguous clause in a definitional provision,” like in Section 502. As more fully addressed in our previous post reporting on the Superior Court’s decision, the contractor in Sungio did not provide sufficient evidence suggesting the agent’s dealings gave rise to a contractual relationship with the agent personally. Thus, the Supreme Court’s decision does not preclude a contractor from recovering from an agent where that agent either executes a contract in his own name or voluntarily undertakes a personal responsibility for payment under a contract.

Tagged:  CASPA, Pennsylvania Supreme Court, Subcontractors

PA Superior Court Suggests Service of Mechanics’ Lien Impermissible by Mail in Non-precedential Opinion

In a January 18, 2017 decision, the Superior Court of Pennsylvania issued a non-precedential decision in Babich v. Buffalo Wild Wings suggesting that service of a lien claim by mail upon an out-of-state owner in accordance with Pennsylvania Rules of Civil Procedure 403 and 404 does not satisfy the service requirements for a lien claim.  Instead, the Babich decision suggests the only manner of service permissible for a lien claim is by sheriff, and if the sheriff is unable to effectuate service, then by posting on the property being liened. In the Babich case, the claimant had its lien dismissed on preliminary objections because it failed to strictly comply with the service requirements in section 502(c) of the Pennsylvania's Mechanics' Lien Law (the "Lien Law").  That section states:

Manner of service.  Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous part of the improvement.

Interpreting this requirement, the court commented that the language of section 502(c) means service of notice of filing a claim must be made “in person by the sheriff to the extent practicable” and “[o]nce the claimant establishes that personal service has not been successful, the statute permits posting as an alternative method of service.” Notably, the project owner was Buffalo Wild Wings – an entity whose corporate headquarters are outside the Commonwealth.  Thus, one might expect the claimant could have argued its service complied with Rules 403 and 404.  However the opinion makes no mention of this argument and contains no discussion of the interplay, if any, between section 502(c) of the Lien Law and the service rules.  Thus, one could read the Babich decision to implicitly prohibit service of a lien claim outside the Commonwealth via mail as contemplated by Rules 403 and 404, and instead, require service of a lien claim by sheriff, and if the sheriff is unable to effectuate service, then by posting. Also notable from the Babich decision, the Superior Court reaffirmed its position that statutory requirements dealing with notice and service (i.e. procedural requirements) are subject to strict interpretation while statutory requirements dealing with the form of notice or claim (i.e. the substantive information contained within a notice or claim) is subject to a more liberal substantial compliance standard. The attorneys' in Babst Calland's Construction Group are available to answer any questions you may have about Pennsylvania's Lien Law.

Tagged:  Mechanics' lien, Subcontractors

Awards of Attorneys’ Fees and Statutory Penalties are “Discretionary” even when the Government acts in Bad Faith

In A. Scott Enterprises Inc. v. City of Allentown, the Pennsylvania Supreme Court held that an award of statutory interest and attorneys’ fees under Section 3935 of the Procurement Code is not automatic even where a jury finds the public owner to have withheld payment in bad faith. Rather, the decision to issue such an award is within a judge’s discretion. This case arose out of a contract awarded by the City of Allentown to A. Scott Enterprises (ASE) to build a public road in 2009. After the discovery of arsenic contamination on site threatened ASE with additional substantial costs to continue with the project, and attempts to negotiation a continuation of the project failed, ASE sued the city to recover its losses. At trial, ASE presented evidence Allentown was aware of possible contamination when it entered a contract with ASE, and failed to disclose this to ASE or incorporate terms regarding this possibility into the parties’ contract. At trial a jury found the city breached its contract and withheld payments in bad faith, awarding ASE $927,299. When ASE motioned the court for an award of statutory interest and attorneys’ fees, the trial court denied ASE’s request outright, without analysis, stating such an award was unwarranted because ASE’s evidence on damages was “conflicting.” ASE then prevailed on appeal to the Pennsylvania Commonwealth Court, which had held in 2014 that a bad faith finding automatically entitled a contractor to recover its attorney’s fees and the 1% penalty, because, otherwise, “the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith.” But the Supreme Court ultimately disagreed. In reversing the Commonwealth Court’s decision, the Supreme Court held “Section 3935 of the Procurement Code allows—but does not require—the court to order an award of a statutory penalty and attorney fees when payments have been withheld in bad faith. The court’s determinations in this regard are subject to review for an abuse of discretion.” The Court also noted “the instances where a finding of bad faith is deemed not to require a Section 3935 award at all presumably will be rare.” Ultimately, in this case, the trial court’s reliance on the presence of “conflicting” evidence concerning the contractor’s damages alone was insufficient to support its denial of a Section 3935 award outright. For this reason, the case was remanded to the trial court for reconsideration of ASE’s original motion. Therefore, although an award of attorneys’ fees and/or the 1% penalty under Section 3935 is not “automatic,” a court still must have a reasonable basis for denying such an award against an agency that withheld payment in bad faith. In A. Scott Enterprises, the Supreme Court declined to articulate a test for lower courts to apply in determining whether to enter an award under Section 3935; thus, trial courts are without guidance to determine whether attorneys’ fees and/or penalties must be assessed.

Tagged:  Commonwealth Procurement Code, Construction Contracts, Procurement Code, Public Construction Projects

Changes to PA Mechanics’ Lien Law in 2017

As this blog as been reporting, significant amendments to Pennsylvania’s Mechanics’ Lien Law will become effective on December 31, 2016, creating new rights and obligations for owners, contractors, and subcontractors. These additional requirements are the result of the passage of Act 142 in 2014. Specifically, Act 142 establishes a structured notice procedure for owners, contractors, and subcontractors to follow, as well as a central repository to file notices under the Mechanics’ Lien Law. The specific notices established by Act 142 must be filed on an internet-based directory that will be maintained by the Pennsylvania Department of General Services. These amendments apply only to “searchable projects,” or projects consisting of the construction, alternation or repair of an improvement costing at least $1.5 million. Before the amendments set forth in Act 142 become effective on December 31, 2016, owners, contractors and first-tier subcontractors should evaluate their form contracts to ensure compliance with a number of new requirements for applicable projects. Notably, all contracts for searchable projects must include a written notice stating that a subcontractor’s failure to comply with the Act’s notice requirements will result in the loss of lien rights. Act 142 sets forth the exact language that must be included in the contract. Furthermore, the owner and general contractor on a searchable project must now make reasonable efforts to ensure the “Notice of Commencement” – a new type of notice filed by the owner or its agent – is made a part of the contract documents provided to all subcontractors awarded work on the project. Failure to comply with these requirements could potentially constitute a violation of the amended Mechanics’ Lien Law. Owners and contractors should also consider adding flowdown clauses in their contracts that impose requirements on contracting parties to include the necessary written notice in subcontracts and include the Notice of Commencement as a contract document for any subcontract. Any person who requests, encourages or requires a subcontractor not to comply with the Act’s notice provisions may face civil and criminal penalties, including payment of attorneys’ fees and court costs. The person may also be liable for actual damages resulting from the subcontractor’s resulting failure to comply with the new notice provisions. With the effective date of the amendments to the Lien Law fast approaching, Babst Calland recommends that owners, contractors, and subcontractors review the amendments and update their standard form contracts to ensure compliance with the Act. Failure to comply with Act 142 could have significant consequences and create exposure to unanticipated liabilities. Babst Calland is offering a seminar to help those in the construction industry navigate these new obligations and begin using the new notice directory website. This seminar will provide a more comprehensive overview of the Lien Law amendments. For more information on the changes to the Lien Law or modifying your standard contracts to comply with the amendments please contact D. Matthew Jameson III at mjameson@babstcalland.com or (412) 395-5491.

Tagged:  Mechanics' lien, Seminars

Commonwealth Court Addresses Engineer Licensure Requirements

On May 24, 2016, the Commonwealth Court in Se. Reprographics, Inc. v. Bureau of Prof’l & Occupational Affairs, No. 2235 C.D. 2014, 2016 WL 2979844 (Pa. Commw. Ct. May 24, 2016) addressed an issue of first impression and held that the petitioner did not perform an “engineering land survey” in violation of the Engineer, Land Surveyor and Geologist Registration Law (Law), 63 P.S. §§ 148 – 158.2, when it used maps and mobile GPS/GIS equipment to locate and identify a customer’s physical assets for a non-engineering purpose. Southeastern Reprographics, Inc., now known as The Davey Resource Group (“DRG”), was commissioned by Central Electric Cooperative, Inc. (“CEC”), a rural electric distribution cooperative, to locate every piece of electric equipment owned by CEC, including transmission poles, distribution poles, security and street light poles, mounted equipment, regulators, and meters. The purpose of this field inventory was to provide CEC with sufficient information to create a GIS database of its existing assets. Using GIS/GPS technology, DRG assessed over 100 square miles of land, located CEC’s assets to sub meter accuracy, took an inventory of all equipment at each location, and identified and tagged the equipment. DRG then transferred this data to CEC in the form of x-y coordinates to be electronically plotted on a base map. Based on this information, the State Registration Board for Professional Engineers, Land Surveyors, and Geologists (the “Board”) concluded that DRG performed an “engineering land survey” as defined by the Law when it determined by measurement methods the position of fixed objects on the Earth’s surface through the use of GIS/GPS equipment. According to the Board, DRG violated the Law when it conducted this “engineering land survey” without the necessary license. On review, the Commonwealth Court reversed the Board’s determination. Agreeing with DRG, the Court held that “‘engineering land surveys’ regulated or encompassed under the Law are those that are performed in connection with or related to building construction and land development.” And because DRG’s field inventory of CEC’s assets was performed purely so that CEC could create a GIS database of its electrical equipment, it was not an “engineering land survey” as defined by the Law. In a dissenting opinion, Judge McCullough cautioned the Court against overturning legal determinations based on the Board’s extensive “technical expertise.” Judge McCollough also noted that the Law’s licensure requirements are in place to “to safeguard life, health or property and to promote the general welfare.” And because CEC shared DRG’s maps with PA One Call and EMS services for six or seven different counties, Judge McCollough believed that the risk of not properly identifying and locating electrical infrastructure was so great that it should only be entrusted to a licensed professional. The dissent also expressed dissatisfaction with the majority’s limiting the definition of “engineering land survey” to surveying activities performed in connection with building construction or land development. Overall, the Court’s opinion demonstrates that licensure under the Law is not required to simply determine the location of objects on the Earth’s surface. However, design professionals should be aware that they must be licensed under the Law before performing any surveying activities in conjunction with building construction or land development.

Tagged:  Construction Contracts, Design-Build, Industry news

President Obama’s Fiscal Year 2017 Proposed Budget Includes Over $10 Billion for Federal Building Fund

The U.S. General Services Administration (GSA) is the federal government’s real estate manager and director of the government’s real estate investment strategies. The Agency’s FY 2017 funding requests, submitted along with the President’s proposed budget in February, include requests for over $1 billion worth of construction projects in and around the Washington, D.C. area. In addition, GSA is requesting the following funds for infrastructure in Pennsylvania and the region at large: 1. Boyers, Pennsylvania: $31,200,000 for design and related services for the construction of a new federally owned facility of approximately 462,000 gross square feet to provide a long-term housing solution for agencies currently leasing an underground mine location within the area. 2. Philadelphia, Pennsylvania: $52,300,000 for Phase II of a two phase repair and alteration project for the Federal Building (Green Building), located in downtown Philadelphia. The project involves the realignment and reconfiguration of tenant space, and multiple building system upgrades/replacements. 3. Cleveland, Ohio: $15,524,000 for a repair and alteration project to complete, repair, and expand the plaza system at the U.S. Courthouse located in downtown Cleveland. The structural steel that supports the plaza is exposed to the elements and has been since the original construction. (Here is a complete list of GSA’s proposed infrastructure projects in its FY2017 request.) These anticipated projects, coupled with rumors GSA has started the process of implementing much-needed upgrades to fedbizopps.com (the single government point-of-entry for federal government procurement opportunities), suggests the prospect of federal government projects may become more attractive to companies in the region within the year to come. Although the appropriations bills ultimately passed by Congress this fall may or may not mirror these infrastructure plans, GSA’s proposal provides insight into its development priorities. We will track Congress’ final appropriations bills and continue providing updates on this blog.

Tagged:  Federal Construction Projects, Industry news, Public Construction Projects