Construction Law Blog

On March 11, 2019, the Pennsylvania Superior Court issued its opinion in American Interior Construction & Blinds, Inc. v. Benjamin's Desk, LLC reversing a trial court's dismissal of a subcontractor's mechanics' lien action based upon a finding of improper service of the subcontractor's formal notice of intent to lien. In the American Interior, Benjamin's Desk, LLC ("Benjamin's Desk") hired Brass Castle Building Co., LLC ("Brass") to serve as its general contractor for constructing office space improvements.  Brass, in turn, subcontracted certain aspects of that work to American Interior Construction & Blinds, Inc. ("AICB").  A payment dispute arose between AICB and Brass, and as a result, AICB served Benjamin's Desk with formal notice of its intent to file a mechanics' lien via FedEx on March 21, 2017.  Several weeks later, in early June 2017, AICB filed its Statement of Mechanics' Lien and Complaint to Obtain Judgment on that lien.  In response to those filings, Benjamin's Desk filed preliminary objections in alleging that the mechanics' lien was procedurally defective because AICB failed to serve its formal notice of intent to lien in accordance with the requirements of section 501(d) of the Mechanics' Lien Law of 1963. That statutory section provides formal notice of intent to lien “may be served by first class, registered or certified mail on the owner or his agent or by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting . . . the improvement.”  Thus, according to Benjamin's Desk, service via FedEx is neither by "first class, registered or certified mail", nor is it services "by an adult in the same manner as a writ of summins in assumpsit" (i.e. via sheriff).  In response, AICB argued that the FedEx delivery person is a competent adult, and therefore, services were proper pursuant Rule 400.1 of the Pennsylvania Rules of Civil Procedure - a rule that creates an exception to the general rule requiring service by sheriff for cases in Philadelphia County. The Superior Court sided with AICB and reversed the dismissal of its mechanics' lien action.  However, the Superior Court did not base its conclusion upon the service exception created by Rule 400.1.  Instead, the Superior Court cited to the long line of Pennsylvania case law holding that technical noncompliance with the Rules governing service may be excused absent “intent to stall the judicial machinery or actual prejudice.”  The Superior Court then concluded that because Benjamin's Desk did not allege AICB intended to stall the judicial machinery by serving via FedEx or that service via FedEx caused it actual prejudice, any technical noncompliance with the requirements of section 501(d) of the Mechanics' Lien Law are excused. Importantly, the Superior Court’s decision appears to implicitly hold that service by FedEx is neither acceptable service by mail under section 502(d), nor is it acceptable service by an adult under the Philadelphia specific service Rule.  Instead, this decision appears to stand for the premise that, while not technically proper, subcontractors may serve formal notice of intent to lien via FedEx provided that the service does not prejudice the owner or reflect an intent to stall the judicial machinery.  Thus, from a practical perspective, service of a subcontractor's formal notice of intent to lien is not technically proper under the Mechanics' Lien Law, but an owner will have a difficult time invalidating a subcontractor's lien if its only basis for doing so is the fact that the formal notice of intent was served by FedEx instead of by mail or sheriff.

It is not too late to RSVP to Babst Calland’s annual Construction Law Year in Review seminar, which will be held this Thursday, March 21, 2018 at the Doubletree Hotel in Greentree, beginning with a continental breakfast at 7:30 a.m., followed by the seminar from 8:00 a.m. to 10:00 a.m.  Speakers will include Kurt Fernsler, Matt Jameson, Justine Kasznica, John McCreary, Jim Miller, Rich Saxe, and Dave White.  This seminar qualifies for two (2) PA CLE credits.  We hold this annual seminar as a service to our clients and prospective clients.  This complimentary seminar will provide an overview of 2018′s significant construction law developments (both statutory and case-law). This year’s topics include:

• regulatory developments involving the use of drones on construction projects;
• amendments to Pennsylvania's Contractor and Subcontractor Payment Act (CASPA);
• case law dealing with Mechanics’ Lien claims;
• updates on the use of Project Labor Agreements on public projects;
• updates on "pay if paid" contract clauses;
• forum selection; and
• use of Master Services Agreements in the construction industry.

For more information or to RSVP, please click this link.

The Commonwealth Court recently held that a Project Labor Agreement (PLA) required by PennDOT violated competitive bidding laws codified in the Commonwealth Procurement Code, 62 Pa.C.S.A. §512(g). Allen Myers, L.P. v. Department of Transportation, No. 314 C.D. 2018 (Pa.Cmwlth. January 11, 2019)(en banc). Although the facts which gave rise to the dispute are unusual, the decision is significant because it demonstrates the Court’s willingness to question the justifications relied on by PennDOT (and presumably other agencies) in support of mandating PLAs. Allen Myers, L.P., an open shop contractor, had recently completed (early and under budget) the first phase of a PennDOT project for improvements on Markley Street, State Route 202 in Montgomery County. For phase 2, PennDOT mandated that the successful contractor enter into a PLA with the Building and Construction Trades Council of Philadelphia and Vicinity, which represented 11 local construction unions. The PLA would have required the successful contractor to hire its entire workforce of tradesmen pursuant to the hiring practices set forth in the labor agreements of each union, but did not require the unions to accept as members the employees of any contractor that bid on the project. Further, there was an exception to the hiring requirement for contractors whose employees were represented by the United Steel Workers (USW): those contractors did not have to hire from the local unions and could employ their own, USW-represented employees. Allen Myers filed a bid protest under the Procurement Code, challenging the PLA requirement on three grounds: 1) that the PLA was discriminatory because it effectively precluded non-union contractors from bidding and unduly favored contractors affiliated with the USW; 2) the Keystone Report, which PennDOT had relied on as its rationale for including the PLA requirement in the project, was invalid because it did not use objective data and was inherently biased; and 3) that the use of the PLA violated 404.1 of the State Highway Law, 36 P.S. 670-404.1, because a bidder’s union affiliation is not among the statutory criteria for determining a responsible bidder on a highway project. The Secretary of Transportation dismissed Allen Myers’ protest, which then appealed to Commonwealth Court. The Court began its analysis by reiterating the principles behind competitive bidding statutes: to eliminate fraud and favoritism and to provide common standards to foster fair competition that places all bidders on an equal footing. When the procedures followed by an agency interfere with these principles the courts will intercede to restore them. The Court then reviewed its jurisprudence addressing PLAs, concluding that it had found them to be appropriate where “time was of the essence” for project completion and where they permitted non-union contractors an equal opportunity to bid by allowing them to employ at least some of their own employees on the project. E.g., A. Pickett Construction, Inc. v. Luzerne County Convention Center Authority, 738 A.2d 20 (Pa.Cmwlth. 1999); Sossong v. Shaler Area School District, 945 A.2d 788 (Pa.Cmwlth. 2008); Glenn O. Hawbaker, Inc. v. Dep’t of General Services, No. 405 M.D. 2009 (Pa.Cmwlth. December 1, 2009). In light of these factors, the Court determined that the PLA requirement on the Markley Street project violated competitive bidding requirements. It noted that the “exemption for United Steelworkers contractors tilts the playing field” because USW contractors can use their own employees while others must hire their workforce through the local unions. The Court rejected PennDOT’s argument that the PLA was available to all contractors as “lip service to the principle of competitive bidding” because “unlike contractors affiliated with the Local Unions or the United Steelworkers, the nonunion contractor that bids the Markley Street Project cannot use its own experienced workforce.” And because the PLA did not require the Local Unions to accept Allen Myers’ employees as members it “effectively precluded a nonunion contractor, such as Allan Myers, from participating in the bid solicitation.” The Court next critically examined and rejected PennDOT’s reliance on an “expert’s report” as justification for the PLA. The Court stated that its PLA precedent “did not establish the broad principle that a PLA is appropriate so long as it contains the boilerplate language ‘time is of the essence’ and ‘nonunion contractors may bid’”:

The use of a PLA is permitted where the contracting agency can establish extraordinary circumstances, and PennDOT did not make that demonstration in this case. The Markely Street Project is a long term road improvement, the first phase of which was completed a year ahead of schedule. Nor is there any evidence that there is a labor shortage in the greater Philadelphia area. The Keystone Report’s recommendations did not justify the PLA because it did not identify any extraordinary circumstances surrounding the Markley Street Project that warranted its use.

(Emphasis supplied). Because of the PLA’s inherent unfairness to nonunion contractors and PennDOT’s failure to establish the “extraordinary circumstances” to justify its use, the Court held that the “PLA requirement in the bid solicitation for the Markley Street Project violates competitive bidding” and canceled the bid solicitation. The most signifcant aspect of the Allen Myers case is the Court’s willingness to examine the justifications for the use of PLAs by contracting agencies. If Commonwealth Court really means that PLAs are warranted only in “extraordinary circumstances,” then the routine use of PLAs for government contracts in the Commonwealth is of dubious validity.

As of October 1, 2018, General Contractors operating on construction services projects in Maryland are now potentially subject to additional liability under the “General Contractor Liability for Unpaid Wage Act” introduced through Maryland Senate Bill 853 (the “Act”).  Specifically, a general contractor may be jointly and severally liable for subcontractors’ failure to properly pay employees.  To make matters more complex, this applies to subcontractors who are not even in direct contractual privity with the general contractor and can arguably extend infinitely down the sub-subcontracting chain. Indeed, general contractors may now be liable for ensuring that every down-the-chain subcontractor on a project properly pays their employees in a manner consistent with Maryland wage and hour laws. This controversial law also contains both a multiplier and an attorneys’ fees provision.  Specifically, if a subcontractor fails to pay an employee in accordance with Maryland’s wage and hour laws, both the employee’s direct employer and the general contractor may be liable to the employee for up to three times the wages owed, plus reasonable attorney fees and costs.  A claimant may make a claim against both the general contractor and the non-paying party as soon as two weeks after a violation occurs, and as late as three years after the occurrence. In an attempt to balance the scales, the new law requires subcontractors who fail to properly pay their employees to indemnify the general contractor for “any wages, damages, interest, penalties, or attorney fees owed as a result of the subcontractor’s violation;” however, this indemnity protection is only as strong as the subcontractor’s ability to pay such damages and costs.  The exception to the requirement for subcontractors to indemnify general contractors occurs either when: (1) indemnification is already provided for in a contract between the general contractor and the subcontractor; or (2) the violation arose due to the general contractor’s failure to make timely payments to the subcontractor. The full repercussions of this new law are yet to be determined, but ambiguity in the Act raises several questions.  First, the Act imposes no obligation on the subcontractors to provide the general contractor full access to all payroll and supporting records that would be needed to defend a claim, including a potentially fraudulent claim.  Second, the Act fails to specify whether an employee-claimant need even be staffed on the same project as the general contractor, or whether merely being an employee to the subcontractor who has staffed other employees on the project will suffice.  These questions will likely be clarified through litigation.  

Steps you can take:

In response to the Act, both general contractors and subcontractors should review their contract provisions with counsel, general contractors may consider requiring subcontractors to obtain a bond or insurance to protect against wage claims by a subcontractor’s employees, and consider adding contract provisions to allow for review of their subcontractors’ pay practices, records, and history of wage claims and lawsuits for at minimum three years following final payment.  General contractors should further consider requiring a subcontractor’s principal or officer to sign certified payrolls, thereby attesting that employees were paid properly.

On October 10, 2018, significant changes to Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA) will take effect.  Some of the areas impacted include a prohibition on the waiving of CASPA rights, the creation of a right to suspend work for nonpayment, the requirement that notice of deficiencies justifying the withholding of payment must be in writing, and right to post a maintenance bond to trigger the release of retainage. In addition, the use of medical marijuana under Pennsylvania’s Medical Marijuana Act (MMA) raises several employment law issues that must be considered by construction companies, as they try to balance the competing interests of the MMA, federal employment laws, and collective bargaining agreements. Please join Babst Calland’s construction attorneys on Wednesday, October 10 from 4:00 p.m. to 5:00 p.m. for a brief yet informative complementary program at the DoubleTree Hotel in GreenTree to learn about the impact of these two important issues.  A complementary cocktail and networking reception will immediately follow the program.  You can still RVSP by sending an e-mail to Vicki Landa at vlanda@babstcalland.com.

Babst Calland recently released its annual energy industry report: The 2018 Babst Calland Report – Appalachian Basin Oil & Gas Industry: Forging Ahead Despite Obstacles; Legal and Regulatory Perspective for Producers and Midstream Operators.  This annual review of shale gas development activity in the Appalachian Basin acknowledges an ongoing rebound despite obstacles presented by regulatory agencies, the courts, activists, and the market. To request a copy of the Report, please send an e-mail to info@babstcalland.com. In this Report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to those involved in the shale gas industry. According to the U.S. Energy Information Administration’s May 2018 report, the Appalachian Marcellus and Utica shale plays account for more than 40 percent of U.S. natural gas output, compared to only three percent a decade ago. Since then, the Appalachian Basin has become recognized in the U.S. and around the world as a major source of natural gas and natural gas liquids. The industry has been forging ahead amidst relatively low natural gas prices, infrastructure building, acreage rationalization and drilling plans that align with business expectations. The policy landscape continues to evolve with ever-changing federal and state environmental and safety regulations and tax structures along with a patchwork of local government requirements across the multi-state region. Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report provides perspective on the challenges and opportunities of a shale gas industry in the Appalachian Basin that continues to enjoy a modest rebound. While more business-friendly policies and procedures are emanating from Washington, D.C., threats of trade wars are raising concerns about the U.S. energy industry’s ability to fully capitalize on planned exports to foreign markets.” To read more: click here.

On June 12, 2018, Governor Wolf signed HB 566, as amended, into law.  The new law makes some significant changes to the Contractor and Subcontractor Payment Act (“CASPA”) and it will take effect on October 10, 2018 (120 days after it was signed). The new law has the following effect:

• Any contract provision purporting to waive rights afforded under CASPA is unenforceable unless waiver of the right is expressly permitted by CASPA (for example, CASPA permits parties to modify by contract the CASPA right to interest at a rate of 1% per month).
• For contracts lacking a provision permitting suspension of work for nonpayment, contractors and subcontractors now have a statutory right to suspend work for nonpayment under the following conditions:
  • Payment has not been made within the period of time required by the contract or the statutory period set by CASPA, whichever is applicable;
  • After 30 calendar days have passed since payment was due, written notice of the nonpayment is sent via email or postal service to the person who owes the payment or their authorized agent; and,
  • After 30 calendar days since the written notice of nonpayment was sent, written notice is sent via certified mail (to the person who owes payment or his/her authorized agent) of the intent to suspend performance in 10 calendar days if payment is not made.
  • Thus, under this statutory right, work may be suspended no earlier than 70 days after payment was due.
  • Parties can contract for a shorter period of time to suspend performance after nonpayment.  Conversely, any suspension of work provision that provides for a longer period of time (or does not permit suspension in the event of nonpayment) is unenforceable.
• Good faith withholding of payment now expressly requires written explanation of the reason for the withholding within 14 days of receipt of an invoice.
• Most notably, the Act expressly provides that failure to provide a written explanation within 14 days will constitute a waiver of the right to withhold and require payment of the invoiced amount in full.  As always, the amount of the withholding must be reasonable (i.e. a reasonable estimate of the cost to correct the deficient work or the damages sustained).
• These written notice of deficiencies requirements must also be followed for retainage to be withheld beyond 30 days of final acceptance of the work; otherwise, the right to withhold retainage is waived.
• Delay of payment due to an error in an invoice is now expressly prohibited.  CASPA has always required written notice of invoice errors to be sent within 10 working days of receipt of an invoice.  The Act now makes it clear that, once the notice of the error is received by person who sent the mistaken invoice, payment of the correct invoice amount must be made when due regardless of whether (or when) the invoice is corrected.
• Finally, contractors and subcontractors now have the express right to payment of retainage upon substantial completion if they post a maintenance bond for 120% of the retainage amount.

Courts likely will construe this Act to not apply to contracts entered before October 10, 2018, but we suggest that owners, contractors and subcontractors begin complying on that date with any new duties imposed on them to avoid possibly waiving rights or arguably becoming subject to the remedies provided by CASPA. We have drafted a red-lined copy of CASPA that shows the revisions made by this law and it is available for you to review here.

It is not too late to RSVP to Babst Calland’s annual Construction Law Year in Review seminar, which will be held on Thursday, March 22, 2018 at the Doubletree Hotel in Greentree, beginning with a continental breakfast at 7:30 a.m., followed by the seminar from 8:00 a.m. to 10:00 a.m.  Speakers will include Marc Felezzola, Kurt Fernsler, Matt Jameson,  Molly Meacham, Esther Mignanelli, Jim Miller, and Rich Saxe.  This seminar qualifies for two (2) PA CLE credits.  We hold this annual seminar as a service to our clients and prospective clients.  This complimentary seminar will provide an overview of 2017′s significant construction law developments (both statutory and case-law). This year’s topics include:  revisions to the AIA contract documents, recent mechanics' liens cases, proposed amendments to the Contractor and Subcontractor Payment Act, piercing the corporate veil, employment and labor law issues impacting the construction industry, and the legal impact of the recently proposed steel tariffs. For more information or to RSVP, please e-mail Matt Jameson.

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.

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 jmazzocco@babstcalland.com, or 412-394-5451.