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

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.

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

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.

Babst Calland Attorneys Attend Prompt Pay Task Force Coalition Meeting to Discuss Amendments to Pennsylvania’s Contractor and Subcontractor Payment Act

Babst Calland Attorneys Attend Prompt Pay Task Force Coalition Meeting to Discuss Amendments to Pennsylvania’s Contractor and Subcontractor Payment Act

On April 5, 2016 Babst Calland Attorneys Robert Palumbi and Marc Felezzola attended a Prompt Pay Task Force Coalition meeting in Harrisburg organized by the American Subcontractors Association’s Central Pennsylvania Chapter to discuss House Bill 726 of 2015 (“HB 726”). The meeting attendees discussed the proposed legislation, its practical impact on Pennsylvania’s construction industry.

In addition to discussing the as-drafted legislation, meeting participants worked together to prepare proposed changes to the language of HB 726 aimed at clarifying the existing language and placing a cap on the percentage of retention that can be withheld in private construction.

HB 726 is currently before the House Commerce Committee. We anticipate that the Committee will vote upon the Prompt Pay Coalition’s recommended changes to HB 726 at its regularly scheduled meeting in May.

Babst Calland will continue to track HB 726 and provide updates on this blog.

Governor Wolf’s Executive Orders Protect Employees of Government Contractors from Sexual Orientation, Gender Identity Discrimination

Governor Wolf’s Executive Orders Protect Employees of Government Contractors from Sexual Orientation, Gender Identity Discrimination

The employees of government contractors now have much greater protection from discrimination on the basis of sexual orientation and gender identity. In response to the General Assembly’s delay in passing the Pennsylvania Fairness Act (a bill intended to broaden protections available to all Pennsylvania workers that has seen no progress since it was referred to the State House on September 8, 2015), Governor Tom Wolf took action on April 7, 2016, signing two executive orders that protect not only state employees, but also employees of contractors doing business within Pennsylvania.

The first executive order, Order 2016-04, prohibits discrimination against “any employee or applicant for employment on the basis of race, color, religious creed, ancestry, union membership, age, gender, sexual orientation, gender expression or identity, national origin, AIDS or HIV status, or disability.” Order 2016-04 is premised on the belief “that the employment practices of the Commonwealth of Pennsylvania must be nondiscriminatory in intent and effect to promote public confidence in the fairness and integrity of government.” In addition to prohibiting discrimination, Order 2016-04 bans sexual harassment based on the above-referenced bases and empowers the Secretary of the Administration to “supervise the development, implementation, and enforcement of the Commonwealth’s equal employment opportunity programs through the Bureau of Workforce Planning, Development, and Equal Opportunity.” Order 2016-04 rescinds and replaces Executive Order 2003-10.

The second executive order, Order 2016-05, guarantees that “discrimination by reason of race, gender, creed, color, sexual orientation, or gender identity or expression does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 is premised on Pennsylvania’s continued commitment “to promoting the prosperity and economic growth of all businesses and citizens of the Commonwealth of Pennsylvania, regardless of race, gender, creed, color, sexual orientation, or gender identity or expression,” and designates “the Department of General Services as the central agency to develop and manage Commonwealth agency programs to ensure that discrimination . . . does not exist with respect to the award, selection, or performance of any contracts or grants issued by Commonwealth agencies.” Order 2016-05 rescinds and replaces Executive Order 2006-02.

Governor’s Wolf’s actions are intended to demonstrate Pennsylvania’s direct opposition to the recent North Carolina Bill requiring transgender individuals to use public restrooms corresponding to the biological sex on their birth certificate, as well as a Mississippi Bill allowing businesses to deny service to homosexual customers based on religious grounds. According to Governor Wolf, the passage of the North Carolina Bill, coupled with the stagnation of the Pennsylvania Fairness Act, is “a call to pass non-discrimination legislation in Pennsylvania now.” The passage of both executive orders garnered widespread support from a variety of anti-discrimination organizations, including the ACLU, the Anti-Defamation League, Equality Pennsylvania, the Human Rights Campaign, the National Gay & Lesbian Chamber of Commerce, as well as Philadelphia Mayor Jim Kenney and Philadelphia’s City Council.

Commonwealth Court Affirms Award of Delay Damages to Government Contractor despite Contract’s “No Damages for Delay” Clause

Commonwealth Court Affirms Award of Delay Damages to Government Contractor despite Contract’s “No Damages for Delay” Clause

The Commonwealth Court recently concluded that a contractor in a Pennsylvania public project can be entitled to delay damages, even if there is a “no damages for delay” clause in its contract, as long as the delay was caused by the government’s “active interference.” John Spearly Construction, Inc. v. Penns Valley School District, No. 2050 C.D. 2014, 2015 WL 4497726 (Pa. Commw. Ct. July 24, 2015).  The Commonwealth Court further concluded that the contractor’s failure to comply with the contract’s formal notice procedure was not fatal to its delay claim.  In Spearly, a school district entered into a contract with several contractors for the design and construction of a biomass boiler system. John Spearly Construction, Inc. was the contractor retained to construct the building that would house the boiler plant.  Spearly’s contract stated that an extension of the contract time shall be the sole remedy against the District or Architect for delays, “unless a delay is caused by the acts of [the District] constituting active interference, as defined under applicable law and subject to the limitations stated herein …”  It also defined “active interference” to exclude the following type of conduct: “[The District’s] exercise or failure to exercise any rights or remedies under the Contract Documents (including without limitation, order changes in the work, or directing suspension, rescheduling or correction of the work), regardless of the extent or frequency thereof, shall not be constructed as active interference with [Contractor’s] performance of the work.”

Under Pennsylvania law, a “no damages for delay” provision like this one is considered an exculpatory clause; subject to stringent standards in order to be enforceable. See Keystone Aeronautics Corp. v. R.J. Enstrom Corp., 499 F.2d 146 (3d Cir. 1974).  Thus, the party asserting it must prove, among other things, that the contract: (1) does not contravene public policy; and (2) relates solely to the private affairs of the contracting parties. See Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195 (3d Cir. 1995).  In Spearly, the Court refused to find that the District’s contract was only related to the “private affairs” of the contracting parties.  See also State Pub. Sch. Bldg. Auth. v. Goodea Constr. Co., 24 Pa. D. & C. 3d 648 (Pa. Com. Pl. 1981) (proper construction of public school buildings is a matter of interest to the public or state).  Therefore, the Court construed the contract against the District (i.e., the party seeking immunity) and held that delay damages were available to the contractor since the District delayed the issuance of several change orders.  The Commonwealth Court also held the District was properly attributed responsibility for the actions of “third-parties” where the District had control over the hiring and management of those third parties.  Specifically, a third-party contractor, whose work disturbed Spearly’s access to the work site, and the Architect’s lack of oversight was ultimately attributable to the District.  Finally, the Court concluded that Spearly was not barred from bringing its delay claims by its failure to adhere to the notice procedures for such claims required by the contract. The Commonwealth Court followed the United States Court of Federal Claims’ rationale that a narrow application of notice provisions is not appropriate where the government was aware of the delay.  See Hoel-Steffen Construction Co. v. United States, 456 F.2d 760 (Ct. Cl. 1972).  In light of this decision, contractors should look closely at the cause of any delay on the public construction project before concluding that a delay claim is barred by a “no damages for delay” clause.

Superior Court Holds “Express” Misrepresentations are not Required in Bilt-Rite Pleadings

Superior Court Holds “Express” Misrepresentations are not Required in Bilt-Rite Pleadings

The Pennsylvania Superior Court recently held that a negligent misrepresentation claim may be based on an architect’s faulty design, even absent allegations of an express misrepresentation by the architect. Gongloff Contracting, L.L.C. v. L. Robert Kimball & Associates, Architects & Engineers, Inc., 2015 PA Super 149, — A.3d —-, 2015 WL 4112446 (July 8, 2015).  Although Pennsylvania law generally bars claims brought in negligence that result solely in economic loss, a narrow exception is found in Section 552 of the Restatement (Second) of Torts entitled, “Information Negligently Supplied for the Guidance of Others.” In Bilt-Rite Contractors, Inc. v. The Architectural Studio, the Pennsylvania Supreme Court adopted Section 552 and held that it applied in cases where 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 persons, even if the third parties have no direct contractual relationship with the supplier of information. 866 A.2d 270 (Pa. 2005).

In Gongloff, a subcontractor (Gongloff Contracting, L.L.C.) sued the architect (L. Robert Kimball & Associates, Architects and Engineers, Inc.) that designed the project for negligent misrepresentation, alleging that Kimball negligently misrepresented, either explicitly or implicitly, that the design of the structure would allow it to bear all required loads. Kimball moved for judgment on the pleadings, and the trial court granted the motion, ruling that a negligent misrepresentation claim requires an express misrepresentation, which Gongloff had not alleged in its complaint.

The Superior Court reversed, holding Bilt–Rite subjects architects to liability for Section 522 negligent misrepresentation claims when it is alleged that those professionals negligently included faulty information in their design documents.

The court stated: “The design itself can be construed as a representation by the architect that the plans and specifications, if followed, will result in a successful project. If, however, construction in accordance with the design is either impossible or increases the contractor’s costs beyond those anticipated because of defects or false information included in the design, the specter of liability is raised against the design professional.”  Gongloff, 2015 WL 4112446, at *6.

In reaching its conclusion, the Superior Court distinguished the “actual misrepresentation” requirement under Bilt-Rite from the trial court’s decision to require an “express misrepresentation.” Acknowledging that courts have required plaintiffs to assert “an actual misrepresentation as opposed to assumptions on the part of the recipient,” id. (citing State College Area School District v. Royal Bank of Canada, 825 F.Supp.2d 573, 584 (M.D. Pa. 2011)), the Superior Court rejected the notion that a plaintiff must also identify some particular communication that was expressly false. The plaintiff’s use of the tangible design documents containing the allegedly faulty design was sufficient to allege an “actual misrepresentation” under Bilt-Rite. Id.

The court also pointed out Bilt–Rite does not require that a plaintiff precisely identify the misrepresentation in the design documents. Id. at *7. Although the court in Bilt-Rite mentioned that the design professional therein “expressly represented” that its aluminum curtain wall “could be installed and constructed through the use of normal and reasonable means and methods, using standard construction design tables,” the court did not include an “express representation” as an element of a Section 552 negligent misrepresentation claim. Id. (citing Bilt-Rite, 866 A.2d at 272). Instead, Bilt–Rite only requires “that information, a rather general term, be negligently supplied by the design professional.” Id.

Although a defendant may still defend against a Bilt-Rite claim by showing the plaintiff’s misrepresentation allegations are not substantiated, Gongloff makes it more difficult for a design professional to get the case dismissed on this basis at the pleadings stage.

AIA General Conditions Mediation Clause Covered Contractor’s Mechanics’ Lien Claim

AIA General Conditions Mediation Clause Covered Contractor’s Mechanics’ Lien Claim

The United States District Court for the District of Maryland recently interpreted the mediation clause in the AIA A201 -2007 “General Conditions of the Contract for Construction” to require mediation before proceeding with a mechanics’ lien claim.  Kane Builders S&D, Inc. v. Maryland Pharmacy, LLC, 2013 U.S. LEXIS 83432 (D. Md. June 13, 2013).  In Kane, the subcontractor and contractor used a form AIA contract as their agreement for the subcontractor to furnish labor and materials in the construction of a retail pharmacy.  The parties incorporated as part of the contract the AIA Document A201 – 2007 General Conditions.

The standard conditions in the AIA A201 include Section 15.2.8, which provides, “If a Claim relates to or is the subject of a mechanic’s lien, the party asserting such Claim may proceed in accordance with applicable law to comply with the lien notice or filing deadlines.”  Section 15.3.1, however, states, “Claims, disputes, or other matters in controversy arising out of or related to the Contract . . . shall be subject to mediation as a condition precedent to binding dispute resolution.”  Another relevant clause is Section 15.3.2, which provides that a request for mediation “may be made concurrently with the filing of binding dispute resolution proceedings but, in such event, mediation shall proceed in advance of binding dispute resolution proceedings, which shall be stayed pending mediation for a period of 60 days from the date of filing.”

The subcontractor filed a mechanics’ lien in state court for nonpayment, and the owner contended that mediation was a condition precedent to the subcontractor prosecuting its lien claim.  Distrct Court Judge Deborah K. Chasanow held that Section 15.3.1 is sufficiently broad to include mechanics’ lien claims.  The court also rejected the subcontractor’s argument that litigation does not constitute “binding dispute resolution” as that term is used in Section 15.3.1.  Therefore, the court concluded that mediation was a condition precedent to the subcontractor’s right to prosecute its mechanics’ lien claim.

Notwithstanding this point, the court declined to dismiss the action.  Judge Chasanow noted that Section 15.3.2 expressly contemplated that the subcontractor had the right file the lien claim while concurrently requesting mediation, and have the litigation stayed pending mediation.  The court reasoned that staying the litigation, rather than dismissing it, was appropriate.

The practical takeaway from this case is the reminder that if parties do not wish to subject a mechanics’ lien claim (or other specific types of claims) to mediation or another form of alternative dispute resolution provided for in the contract, the parties should expressly exclude lien claims from the mediation or ADR provisions.  Otherwise, the parties are at the mercy of the court to determine whether the claim falls within or outside of the ADR requirement, and awaiting the decision of the court on this matter will only serve to delay the ultimate resolution of the underlying dispute.

United States Supreme Court Delcares Choice of Forum Clauses Enforceable

United States Supreme Court Delcares Choice of Forum Clauses Enforceable

In June of 2013 we reported that the United States Supreme Court agreed to decide In re Atlantic Marine Construction Co. to resolve a split between the United States Courts of Appeals regarding whether a federal court must honor a forum selection clause in a construction contract by transferring the case to the forum so designated in the contract.

On October 9, 2013, the Supreme Court heard oral argument in the Atlantic Marine case.  Less than two months later, on December 3, 2013, the nation’s highest court issued an opinion declaring that upon motion of one of the parties, a federal district court should transfer a case to the forum selected in the contract “unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor the transfer.”

The Supreme Court’s Atlantic Marine opinion reaffirms the enforceability of choice of forum clauses and suggests that courts may only disregard the contractually designated forum for litigating disputes under exceptionally rare circumstances.  Accordingly, owner, contractors and subcontractors should pay particular attention to the choice of forum clauses in their contracts and subcontracts because federal courts now have a clear mandate that they must be enforced.

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

Construction subcontracts often contain “forum selection” clauses requiring that the parties to the contract settle all of their disputes in arbitration or litigation in some state that seems entirely unrelated to the construction project but happens to be the state where the general contractor maintains its home office.  These clauses provide economic and strategic benefits to the general contractor by eliminating or mitigating the travel expenses for key personnel and by requiring litigation in a court familiar to the contractor’s legal counsel.

This ability to contract for a “home field advantage” has been eroded by provisions included in some states’ recently enacted prompt payment laws (which require that all disputes by resolved by courts in the jurisdiction of the project location), and it was more recently rejected by the Court of Appeals for the Fifth Circuit in In re Atlantic Marine Construction Company, Inc.  In that case, the Fifth Circuit held that a subcontractor could file suit against a general contractor in Texas (where the project was located), despite a clause in the subcontract agreement requiring that all disputes arising from the contract be resolved in a specific federal court in Virginia.

The Fifth Circuit’s decision directly contradicts the majority of federal circuit courts, including the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, all of which have held that a forum selection clause in a contract negotiated at arms’ length should be enforced by the federal courts. On April 1, 2013, United States Supreme Court agreed to review the split between the Circuit Courts on the choice of forum issue by granting certiorari for the Atlantic Marine case.  This nation’s highest Court will hold argument in case and decide it next term, which begins in October of this year.  We will post the Supreme Court’s ruling on this important case as soon as it is issued.