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.
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.
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.
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.
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.
The Pennsylvania Supreme Court recently granted allowance of appeal of the Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC case that we blogged about in February of this year. As described more fully in our prior blog post, in Scungio Borst, the Superior Court of Pennsylvania (i.e. the intermediate level court) held that Robert DeBolt, the President and 50% shareholder of 410 Shurs Lane Developers, LLC did not qualify as an “owner” as defined in Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”), and therefore, could not be held personally liable for sums that the 410 Shurs Lane Developers, LLC failed to pay to a general contractor.
On July 28, 2015, however, Pennsylvania’s highest Court agreed to hear an appeal of that decision. The Court summarized the issue before it as follows:
Did the lower court commit an error of law or abuse its discretion in granting summary judgment to [Robert] DeBolt under [the Contractor and Subcontractor Payment Act (“CASPA”), 73 P.S. §§ 501 et seq.], where: (a) CASPA makes the owner [(410 Shurs Lane Developers, LLC)] and the “agent of the owner acting with the owner’s authority” (DeBolt) liable to contractors such as [Petitioner], (b) DeBolt is a fifty percent owner of [410 Shurs Lane Developers], (c) [Petitioner] consistently dealt with DeBolt and received his authorizations for change orders, (d) [Petitioner] never received payment for the change orders, and (e) [Petitioner’s] construction of CASPA is consistent with the courts’ construction of the Wage Payment and Collection Law[, 43 P.S. §§ 260.1et seq.]?
Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, No. 30 EAL 2015, 2015 WL 4545986, at *1 (Pa. July 28, 2015) (alterations in original).
While it is still far too early to tell how the Pennsylvania Supreme Court will answer the above question, the mere fact that the Court agreed to hear the appeal – a discretionary act that the Court exercises for only a select few cases every year – raises concerns that individuals possessing a significant ownership interest the corporation or limited liability company may become personally liable for the CASPA damages for unpaid change orders that they authorize on behalf of the corporation or limited liability company in which they hold a significant ownership interest.
Babst Calland will continue to monitor the Scungio Borst case and will post updates on its Construction Law Blog as they become available.
In East Coast Paving & Sealcoating, Inc. v. North Allegheny School Dist., No. 751 C.D. 2014 (Pa.Cmwlth. March 6, 2015), East Coast filed a complaint against the School District seeking, among other things, damages under the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”). During trial, East Coast moved to amend its complaint to add claims under a portion of the Procurement Code (referred to by the Court as the “Prompt Pay Act”), 62 Pa.C.S. §§ 3931-3939, as an alternative to the complaint’s CASPA claim. The School District opposed the motion on the grounds that it was barred by the two-year statute of limitations for an action upon a statute for a civil penalty. The trial court denied East Coast’s motion to amend. Nevertheless, the trial court entered a verdict in favor of East Coast and awarded East Coast statutory interest and attorneys’ fees pursuant to CASPA.
On appeal, the School District argued that the trial court erred in holding that CASPA applied to East Coast’s claim against a school district. Instead, asserted the School District, East Coast’s claim is governed by the Prompt Pay Act, 62 Pa.C.S. §§ 3931-3939. The School District also argued that the trial court erred by not applying the two-year statute of limitations to East Coast’s CASPA claim.
In a question of first impression, the court was tasked with the statutory construction questions of whether a school district can be held accountable to its contractor under either CASPA or the Prompt Pay Act or both. The court held that Prompt Pay Act, not CASPA, governs construction contracts between a governmental agency, such a school district, and a contractor. Accordingly, the trial court erred in applying the remedies set forth in CASPA. Note that the Court did not address the issue of whether a subcontractor on a public project is limited to remedies under the Prompt Pay Act.
Next, the court addressed the statute of limitation argument, noting that the issue was important because the trial court denied East Coast’s motion to add a count to the complaint under the Prompt Pay Act, because it accepted the School District’s position that the motion was untimely under the two-year statute of limitations for civil penalties and forfeitures in Section 5524(5) of the Judicial Code. Under Section 5524(5), an action upon a statute for a civil penalty must be commenced within two years.
The court held that Section 5524(5) does not apply to either CASPA or the Prompt Pay Act. In support of its holding, the court reasoned that “a two-year statute of limitations would be illogical for a statute intended to reimburse a contractor for attorneys’ fees incurred in litigation that itself was subject to a four-year statute of limitations, i.e., a breach of contract claim. The court further explained that, unlike civil penalties imposed by a governmental agency for violation of a statute, regulation or permit, the penalty and attorney fees provisions of the Prompt Pay Act, are remedial and compensatory, not purely punitive.
Finally, since neither statute has established its own statute of limitations, the court held that the residual six-year statute of limitations set forth in Section 5527(b) of the Judicial Code applies to both CASPA and the Prompt Payment Act. As such, the court held that the trial court erroneously denied East Coast’s motion to amend its complaint to include a Prompt Pay Act count. This case creates an interesting scenario in which a contractor may no longer have a breach of contract claim (which has a four-year statute of limitations), but it may have a valid claim under the Prompt Payment Act portion of the Procurement Code (which the Court interpreted as having a six-year statute of limitations).
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).
As a service to its clients and prospective clients, the law firm of Babst Calland will provide a complimentary “year in review” breakfast seminar which will cover an overview of 2013’s significant developments (both statutory and case-law) in the area of construction law. This year’s topics include: CASPA, mechanics’ liens, payment bonds, pipeline construction, the Procurement Code and Public-Private Partnerships (“P3”). The seminar will be held on Tuesday, February 18, 2014 at the Doubletree Hotel in Greentree, beginning with a continental breakfast at 7:30 a.m., followed by the seminar at 8:00 a.m. For more information, please email Matt Jameson. Speakers will include Kurt Fernsler, Matt Jameson, Rick Kalson, Dave White, Nino Legeza, and Dave McKenery.
As the natural gas industry expands in the region, energy and midstream companies and their contractors need to be aware of the unique Pennsylvania construction law issues that may impact development.
Although Pennsylvania courts have not yet addressed whether natural gas construction activities constitute an “improvement” under the Pennsylvania Mechanics’ Lien law, contractors and subcontractors may have mechanics’ lien rights for services rendered. Thus, it is undecided whether the lien would attach to the fee simple interest of the owner of the real property at issue, or whether a lien claimant is limited to attaching its lien to the leasehold interest of either the lessee or easement holder.
Although also not yet addressed by a Pennsylvania appellate court, it seems clear that the Pennsylvania Contractor and Subcontractor Payment Act (CASPA) applies to contracts entered into for natural gas development. Under CASPA, owners of construction projects must pay contractors according to the terms of their contracts. If owners fail to do so, courts may award the contractor interest along with penalty fees and attorneys’ fees. Furthermore, under CASPA a venue and/or choice of law provision selecting a venue outside of Pennsylvania or seeking to apply non-Pennsylvania law is unenforceable.