Payment Bond Fraud in Pennsylvania – Why Subcontractors Should Request Copies of Payment Bonds When Signing Subcontractors for Public Projects

Payment Bond Fraud in Pennsylvania – Why Subcontractors Should Request Copies of Payment Bonds When Signing Subcontractors for Public Projects

The News Story

The Times-Tribune reports that a Lackawanna County insurance agent recently pleaded guilty to fraud for accepting premiums for payment bonds from contractors but never actually procuring those payment bonds from a surety.  This resulted in situations where public works projects were performed without any payment bond providing security for the subcontractors.  Pennsylvania’s Public Works Contractors’ Bond Law of 1967 (i.e. the “Little Miller Act”) requires payment bonds for public projects but imposes no penalty on the public project owner for failing to ensure the requisite bonds are posted.  Thus, Pennsylvania public project owners have no incentive to check to make sure its primes post the required bonds and things like the fraud described in the letter can easily go undetected.


The Practical Lesson for Subcontractors

Accordingly, this story is a good reminder to subcontractors in Pennsylvania about the need to obtain a copy of the payment bond for a public project at the time of subcontract formation rather than waiting until when a dispute arises.  Such action will help protect against the type of fraud described in the Times-Tribune report by revealing the lack of payment bond before the subcontractor finds itself in a compromised position.

Pennsylvania Construction Notices Directory Experiencing Growing Pains

Pennsylvania Construction Notices Directory Experiencing Growing Pains

As this Blog previously reported, Pennsylvania’s Mechanics’ Lien Law underwent significant changes beginning January 1, 2017.  Among those changes was the introduction of an online Construction Notices Directory (the “Directory”) which owners, contractors, and subcontractors must use to file certain notices in order to maintain their mechanics’ lien rights on certain “searchable projects” consisting of the construction, alternation or repair of an improvement costing at least $1.5 million.  The Directory is maintained and managed by the Pennsylvania Department of General Services (“DGS”), and supposedly includes records of every project filed with the Directory since the amendments became effective at the beginning of this year.

However, the Directory’s list of projects currently includes entries for exactly 100 projects dating back to September of 2017.  Does this mean that no notices were filed for searchable projects before September of 2017?  No, it does not.  Babst Calland contacted DGS regarding this issue and was informed that only 100 projects can be listed on the Directory at a given time.  Therefore, as new projects are listed on the Directory, older projects – which may still be under construction and therefore require the filing of additional notices – are no longer listed.  So what should a Directory user do if the project for which they need to file a notice is not among the 100 listed on the Directory?

In order to view these “unlisted” projects, a Directory user must first click the “SEARCH” tab, enter “0” (without quotation marks) into the search bar, and then press enter or click the magnifying glass icon.  As of the date of this entry, following these instructions allows a Directory user to view over 40 “unlisted projects” dating back to December of 2016to which the user would not otherwise have access.

First and second tier subcontractors should therefore be aware that the Directory does not automatically list every “searchable project” for which a Notice of Commencement has been filed.  In fact, the Directory only lists 100 projects at any given time unless the user executes a search for “0”.  Therefore, subcontractors who are uncertain of whether a project is listed on the Directory and wish to file a Notice of Furnishing or Nonpayment should follow this extra step to (1) determine if the project is listed and (2) file the applicable notices.

Babst Calland has made DGS aware of the numerous potential consequences of this issue, but is uncertain if or when a fix will occur.

If you have questions regarding the Pennsylvania Construction Notices Directory or how to view “unlisted” projects, please contact attorney JD Mazzocco at, or 412-394-5451.

Legal Insights into Oil and Gas Infrastructure Projects and Additional Insureds in Property Damage Claims

Legal Insights into Oil and Gas Infrastructure Projects and Additional Insureds in Property Damage Claims

An August 21, 2017 article in the The Legal Intelligencer, co-authored by Babst Calland Attorneys Dave White and Esther Soria Mignanelli, addresses the impacts of the new Pennsylvania Mechanics’ Lien State Construction Notices Directory on oil and gas infrastructure projects. To view the full article, click here.


Bill Seeking to Amend Pennsylvania’s Private Project Prompt Payment Act Passes House Vote

Bill Seeking to Amend Pennsylvania’s Private Project Prompt Payment Act Passes House Vote

On June 20, 2017, Pennsylvania House of Representatives passed House Bill 566, which proposes amendments to Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”), by a 168 to 26 vote.  The bill introduced by Representative Santora is very similar to HB 1387 (discussed in a blog post here) but is now farther along in the legislative process because it has passed the House and is now with the Senate Labor and Industry Committee for consideration.

The proposed legislation provides that a contractor or subcontractor may suspend performance if payment is not received in accordance with the terms of their construction contract. Specifically, if the contractor/subcontractor is not paid in accordance with the contract terms, the contractor/subcontractor must provide two separate 30 day notices before it can suspend work.  Specifically, the contractor/subcontractor must take the following steps before suspending:

  • Once 30 calendar days have passed since the end of the billing period, the contractor/subcontractor must provide written notice to the owner/contractor, via e-mail or postal service, stating payment has not been made.
  • When an additional 30 days have passed since that notice, the contractor/subcontractor must provide written notice, via certified mail, stating that the contractor/subcontractor intends to suspend work in 10 calendar days.

Thus, suspension of work under the proposed legislation will require two notices and waiting at least 70 days.

The proposed legislation also establishes that the provisions of CASPA cannot be waived in a contract and requires a written explanation of the good faith reason for withholding payment (including retainage payment) for a deficiency item.  Failure to provide such notice will constitute a waiver of the basis to withhold payment and require payment to the contractor or subcontractor in full.

In addition, the proposed bill requires an invoice recipient (owner or general contractor) who believes the received invoice is overstated still must pay the amount of the invoice it believes is correct when that amount would otherwise be due. This revision appears to be aimed at preventing a dispute over one component of an invoice from being used to delay payment of amounts not otherwise in dispute.  It would also permit a contractor or subcontractor to facilitate the release of retainage on its contract before final completion of the project by posting a maintenance bond with approved surety for 120% of the amount of the retainage.  Finally, HB 566 provides that if the withholding of retainage is longer than 30 days after the final acceptance of the work, a written explanation must be provided for the withholding, and failure to provide such an explanation constitutes a waiver of the basis to withhold payment and requires payment in full.

Babst Calland will continue to monitor HB 566 as well as other proposed legislation that may impact the construction industry and post updates on this Blog whenever they become available.

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.

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

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.

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

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.

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

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.

Pennsylvania Commonwealth Court Holds that Contractor Must Enter into Written Contract with Worker Prior to Injury to Classify Injured Worker as Independent Contractor for Workers’ Compensation Purposes

Pennsylvania Commonwealth Court Holds that Contractor Must Enter into Written Contract with Worker Prior to Injury to Classify Injured Worker as Independent Contractor for Workers’ Compensation Purposes

Pursuant to Pennsylvania’s Construction Workplace Misclassification Act “an individual who performs services in the construction industry for remuneration is an independent contractor only if: (1) The individual has a written contract to perform such services[;] (2) The individual is free from control or direction over performance of such services both under the contract of service and in fact[; and] (3) As to such services, the individual customarily engaged in an independently established trade, occupation, profession or business.”  43 P.S.  933.3(a).  If a worker does not meet those requirements, he will be deemed an employee of the contractor.  While this definition of independent contractor seems relatively straight forward, Pennsylvania’s Commonwealth Court was recently tasked with determining whether the written contract requirement for an independent contractor may be satisfied by executing a written independent contractor agreement after the time of injury if all other requirements for independent contractor status appear present.

In Staron v. Workers’ Compensation Appeal Board (Farrier), the claimant responded to an advertisement by Lee’s Metal Roof Coatings and Painting (“Lee’s”) looking for a painter.  The claimant informed Lee’s that he had 20 years of experience in painting and roof work, that he worked as a self-employed painter who usually did work on his own, and that he owned his own truck, tools, and some equipment.  Lee’s agreed to pay the claimant $100 per day but also told the claimant that he would “need to sign a document in order to work” for Lee’s.  Thereafter, without signing any document, the claimant started working at a Lee’s jobsite using his own brushes, caulk gun, painter pans and knee pads and with very little direction from Lee’s.  On his fourth day of work, the claimant slipped and fell off the roof of the project, injuring himself.  Upon his release from the hospital, Lee’s presented the claimant with a written independent contractor agreement, which the claimant freely signed.  Despite signing the agreement, the claimant filed for workers’ compensation benefits as an employee of Lee’s.  The Workers’ Compensation Judge granted the claimant benefits, and the Workers’ Compensation Board affirmed the decision.

On appeal, the Commonwealth Court determined that the claimant did not qualify as an independent contractor because there was no written independent contractor agreement at the time that claimant was injured.  The Commonwealth Court found that the independent contractor agreement the claimant signed upon release from the hospital had no import because, “a written contract for services did not exist at the time of Claimant’s injury.”

Thus, the takeaway point from Staron is that an independent contractor agreement must be signed prior to the time of injury for it to have any effect in establishing an independent contractor relationship for workers’ compensation purposes.  Accordingly, because one never knows when a workplace injury will occur, best practice is to have an independent contractor sign an independent contract agreement before she/he begins working at a job site.

A subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond. But, that right may be waived.

A subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond. But, that right may be waived.

In United States ex rel. Marenalley Constr., LLC v. Zurich American Ins. Co., et al, Civil Action No. 14-4581 (E.D. Pa. March 13, 2015), a subcontractor filed suit under the Miller Act to recover against the prime contractor’s payment bond for additional work performed at the VA Medical Center in Philadelphia, PA. The Miller Act provides a subcontractor the right to bring suit against the surety that issued the prime contractor’s payment bond if the subcontractor is not paid within ninety days of the completion of its work.

Prior to the commencement of the action, the prime contractor sought additional compensation from the VA in an administrative proceeding, which included the additional compensation sought by the Subcontractor. The VA had not approved payment for the additional work at the time the subcontractor filed suit. The prime contractor and its surety moved to dismiss, or in the alternative, to stay the action pending the outcome of the prime contractor’s claim against the VA.

The court denied the motion to dismiss, and held that the administrative procedure between the prime contractor and VA provides no direct remedy to a subcontractor for any claim it has against the prime contractor. The Court explained, “When a subcontractor and prime contractor have a dispute about the amount due the subcontractor, that dispute is not resolved in the [administrative] proceeding.”

Finally, the Court refused to grant a stay. Citing to non-Miller Act cases, the prime contractor and surety argued that the surety’s liability is “derivative” of the prime contractors and the prime contractor’s liability is being determined in the administrative proceeding.  The Court disagreed, and explained that the surety’s “liability on a Miller Act bond must be at least coextensive with the obligations imposed by the Miller Act if the bond is to have its intended effect.” As such, “a subcontract term that conflicts with the Miller Act is ineffective in a suit against the surety on the payment bond.” The practical takeaway from this case is the reminder the Miller Act permits a subcontractor to seek payment against the payment bond once the requisite ninety-day period has elapsed regardless of other administrative procedures that may be contractually required. Those Miller Act rights, however, may be waived, if: (1) the waiver is in writing; (2) signed by the person whose right is waived; and (3) executed after the person whose rights are waived has furnished labor or materials for use in the performance of the contract.

Authorized Agents of a Property Owner Are Not Subject to Individual Liability Under CASPA

Authorized Agents of a Property Owner Are Not Subject to Individual Liability Under CASPA

It is not uncommon for contractors and subcontractors to be verbally directed to perform extra work on construction projects without written change orders. Construction attorneys frequently deal with payment claims for such work if payment for that extra work is not made voluntarily. The individual directing the change, however, generally does not think that they will be held individually liable for directing a contractor/subcontractor to perform extra work. Nevertheless, that issue was recently addressed in Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, No. 2493 EDA 2012 (Pa.Super. November 20, 2014).

In Scungio, 410 Shurs Lane Developers, LLC (“410 SLD”) hired  Scungio Borst & Associates (“SBA”) as the general contractor to construct SLD’s condominium project in Philadelphia, Pennsylvania (the “Project”). SBA performed the work under the contract, as well as $2.6 million in extra work at the direction of 410 SLD and its President and fifty percent shareholder, Robert DeBolt.  When SBA was not paid approximately $1.5 million incurred due to the extra work, it filed suit against 410 SLD (the company) and DeBolt (the individual). DeBolt subsequently filed a motion for summary judgment as to all claims pending against him individually, which included a claim for the alleged violation of the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”). The trial court granted DeBolt’s motion.

SBA appealed, challenging the grant of summary judgment in favor of DeBolt on the CASPA claim.  The issue before the Superior Court of Pennsylvania was whether SBA can maintain a CASPA claim against DeBolt, individually, based upon 410 SLD’s failure to pay SBA. SBA’s theory of liability was that DeBolt, as an authorized agent of 410 SLD who authorized the extra work, is an “owner” as that term is defined under CASPA.  Alternatively, SBA argued that DeBolt was individually liable under CASPA for failure to pay pursuant to all written and verbal change orders. The Court rejected both arguments.

Under CASPA, “Owner” means 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).  “Person” means a “corporation, partnership, business trust, other association, estate, trust, trust foundation or a natural individual.” Id.  The term “Agent,” however, is not defined under CASPA.

After a detailed analysis of selected sections of CASPA and statutory construction principles, the Court held CASPA liability lies against “contracting parties” only.  The Court recognized, “Performances by a contractor or a subcontractor …shall entitle the contractor or subcontractor to payment from the party with whom the contractor or subcontractor has contracted.” Id. § 504 (emphasis added). Since 410 SLD contracted with SBA, not DeBolt, DeBolt was not liable to 410 SLD under CASPA.  The Court added, “The reference to authorized agents in the definition of owner merely reinforces that their conduct is imputed to and binding upon the owner. Since the term ‘agent’ is not defined in the statute, conceivably that term could include architects, project managers, and designated representatives who are acting on behalf of the owner in dealing with the contractor.”

Additionally, the Court held that DeBolt was not individually liable under CASPA because there were no allegations that his dealings with SBA created a new contract with him personally.  The Court reasoned that DeBolt’s verbal authorizations were part of the construction contract between SBA and 410 SLD.  Accordingly, the Court found no basis to subject DeBolt to personal liability based on his verbal authorizations and change orders.

Judge Bender filed a Dissenting Opinion, which Judges Mundy and Wecht joined. Judge Bender’s characterization of the facts is as follows:  The parties entered into a construction contract on September 2, 2005, in which SBA was to receive $3.8 million for the labor and materials it supplied to the Project. SBA claimed it was directed to submit all bills to 410 SLD and DeBolt. However, at the end of June 2006, SBA stopped receiving payments, but was assured by DeBolt that payment would be forthcoming. Based upon these assurances, SBA continued its performance until November 8, 2006, when SBA was informed that the contract was terminated. At that time, SBA was owed $1,544,161, plus interest and costs, which related to change orders authorized by DeBolt.  Finally, 410 SLD’s position was that oral change orders were not valid.  Nevertheless, SBA asserted that it was often the practice that DeBolt would verbally authorize change orders and would not sign them.  SBA argued that that because DeBolt had an active role in decision making and authorizing change orders, he should be considered an agent of the owner and subject to liability pursuant to CASPA.  Judge Bender agreed.  As such, Judge Bender concluded that genuine issues of material fact existed and that granting summary judgment in DeBolt’s favor was improper.

The take-away from this case is that this “agent of owner” argument could be used again if, for example, a corporate constituent or member of a limited liability company, representing an owner, makes first-person and informal statements to a contractor regarding payment from the owner.  In fact, the Superior Court held that there was sufficient evidence to establish that a managing member of a limited liability company which constructed new homes assumed personal responsibility when the managing member assured the purchasers of one of the homes that he would take care of their concerns regarding problems that arose during construction and that he personally guaranteed the final quality of the home. See Bennett v. A.T. Masterpiece Homes at Broadsprings, LLC, 40 A.3d 145, 150 (Pa.Super. 2012) (“person acting as an agent may assume personal liability on a corporate contract where he executes a contract in his own name or voluntarily undertakes a personal responsibility”) (emphasis added).


Pennsylvania Amends Mechanics’ Lien Law to Protect Home Owners from Double Jeopardy and Clarify Priority Given to Open Ended Mortgages

Pennsylvania Amends Mechanics’ Lien Law to Protect Home Owners from Double Jeopardy and Clarify Priority Given to Open Ended Mortgages

On July 9, 2014, Governor Tom Corbett signed into law legislation amending Pennsylvania’s Mechanics’ Lien Law of 1963 (the current Mechanics’ Lien Law in Pennsylvania).  The stated primary purpose of the amendments is to protect homeowners who pay the prime contractor(s) that perform improvements to their residential property from mechanics’ liens of subcontractors that the prime contractor fails to pay.  The amendments accomplish this by eliminating a subcontractor’s right to a mechanics’ lien on residential property if: (1) the owner or tenant pays the full contract price to the prime contractor; (2) the property is to be used as the residence of the owner or a tenant of the owner; and (3) the residential property consists of one or two dwelling units.

Although this new law will likely be viewed as good public policy for owners, it potentially hurts the subcontractor or supplier who did not contract with the owner. Typically, subcontractors and material suppliers do not know if or when an owner makes payment to a general contractor. As such, mechanics’ liens can be effective tools for subcontractors and suppliers to obtain payment on a project when a general contractor absconds with the owner’s payment.

Now, subcontractors and suppliers must manage their projects and accounting more closely than ever before. Failure to do so could leave the subcontractor or supplier with no legal recourse after it financed a project to completion.

The amendments also clarify and significantly expand the definition of “costs of construction” as the term is used in the Mechanics’ Lien Law.  Specifically, the amendments define “costs of construction” as

all costs, expenses, and reimbursements pertaining to erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including but not limited to, costs, expenses, and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property.

The definition is especially notable because it brings legal fees, accounting fees, and other “soft costs” that are typically not considered recoverable as part of a mechanics’ lien within the definition of “costs of construction.”  Unfortunately, however, this expanded definition may have little or no impact for contractors and subcontractors performing work within the Commonwealth because the term “costs of construction” only appears in the the section of the Mechanics’ Lien Law related to the priorities given to mortgages on the property being improved.

Specifically, following the amendments, open-ended mortgages will only receive priority over a mechanics’ lien if at least 60% of the proceeds from the mortgage “are intended to pay or are used to pay all or part of the costs of construction.”  Thus, while the amendments define “costs of construction” very broadly, that broadly defined term may have a very limited impact on the substantive rights the Mechanics’ Lien Law provides to contractors and subcontractors performing work within the Commonwealth because the term is not used to describe those things that an contractor or subcontractor may include in its lien.

Nevertheless, the inclusion of such a broad definition of “costs of construction” in the Mechanics’ Lien Law may open the door for parties to argue that their mechanics’ lien claims should include damages that were once thought to be well outside those that could be included in a mechanics’ lien claim.

The amendments took effect September 7, 2014, and will apply to any lien perfected on or after September 7, 2014 regardless of when the construction giving rise to the lien commenced.


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.

Mechanics’ Liens: Labor Unions’ Right to File a Lien as a Subcontractor

Mechanics’ Liens: Labor Unions’ Right to File a Lien as a Subcontractor

In Bricklayers of Western Pa. Comb. Funds, Inc. v. Scott’s Development Co., 41 A.3d 16 (Pa. Super. Ct. 2012), the Superior Court held that (1) the substantive provisions of the Lien Law (as opposed to its procedural provisions) must be liberally construed to effect the Lien Law’s remedial purpose and (2) labor unions fell within the definition of “subcontractor” under the Lien Law, and therefore had the right to file a mechanics’ lien claim. On November 28, 2012, the Pennsylvania Supreme Court granted Scott’s Development Company’s petition for allowance of appeal. Therefore, in 2013 the Supreme Court will address whether the Superior Court interpreted the Lien Law too liberally and whether a labor union has the right to file a mechanic’s lien claim under the Lien Law.

General Contractor’s Use of a Subcontractor’s Quote Does Not Create a Contract

General Contractor’s Use of a Subcontractor’s Quote Does Not Create a Contract

In Ribarchak v. Monongahela, 44 A.3d 706 (Pa. Commw. Ct. 2012), the Commonwealth Court held that a subcontractor (Ribarchak) could not assert a breach of contract claim against a general contractor (or the owner) based on the fact that the general contractor used the subcontractor’s quote (and identified the subcontractor) in its bid to the owner. Furthermore, even though the contract between the owner and the general contractor required that the general contractor substitute any subcontractors within thirty days after contract award date, the owner decided to permit the general contractor to make a substitution five months after the award, and the Court held that Ribarchak was not a third-party beneficiary of the 30-day substitution provision and therefore could not pursue a claim against the general contractor and/or the owner. This case means that absent a general contractor’s express acceptance of a subcontractor’s bid, there is no contract between the subcontractor and the general contractor.