The Distinction Between Private and Public Construction Payment Acts
Pennsylvania passed payment statutes governing construction on private and public projects in the 1990s with the goal of protecting contractors and subcontractors against not being paid promptly for labor and materials. These statutes aim to protect contractors and subcontractors by providing guidelines for prompt payment, and their purpose is often summarized as “leveling the playing field” between public or private owners and construction professionals.
This leveling is accomplished by outlining payment expectations between contracting parties where written terms are either unclear or nonexistent, by clarifying when and how an owner or contractor can withhold payment on a project, and by setting significant penalties in the form of attorney fees, interest and penalties when the statutes’ payment and withholding provisions are not complied with.
The Contractor and Subcontractor Payment Act, or CASPA, appears at 73 P.S. Section 501, and does not expressly include or exclude government agencies from its definition of a project “owner.” On the other hand, the Public Prompt Payment Act is codified as part of Pennsylvania’s Procurement Code at 62 Pa. C.S. Section 3931, and addresses a contractor’s entitlement to payment from a government agency only, as well as subcontractor payment expectations thereunder. CASPA’s broad reference to a project’s owner—as opposed to the Public Prompt Payment Act’s limited application to projects owned by government agencies—has led to much debate among practitioners wishing to assert the proper basis of statutory relief in payment claims, because while the objectives of each statute are similar, the penalties to offending owners or contractors are dramatically different for those contractors, subcontractors and suppliers damaged by a wrongful withholding or payment.
Under CASPA, the penalty to an owner, contractor or subcontractor who is found to have wrongfully withheld monies is a mandatory award of interest at the parties’ agreed rate or 1 percent per month plus an additional penalty of 1 percent per month. CASPA also requires the payment of reasonable attorney fees and litigation expenses to the substantially prevailing party in any claim brought thereunder. The Public Prompt Payment Act, on the other hand, calculates interest on progress payments at a lower rate set by the secretary of Revenue for overdue taxes where the parties have not otherwise agreed. The penalty of 1 percent per month on wrongfully withheld monies plus reasonable attorney fees to the prevailing party is merely discretionary on public projects, provided the nonpayment of the government agency, contractor or subcontractor is found to have been in bad faith to the extent the withholding was “arbitrary or vexatious.” Final payments including retainage due on government agency projects are subject to additional scrutiny and differing interest rate calculations.
Until recently, where permitted by a trial court or arbitrator, savvy construction practitioners found it benefited their clients to take advantage of CASPA’s broad definition of “owner” when pressing claims for wrongful withholding on both private and public projects, to utilize its mandatory penalty and attorney fee award provisions. In a case of first impression, the Commonwealth Court has signaled an end to this failure to differentiate between public and private project owners in East Coast Paving & Sealcoating v. North Allegheny School District, No. 751 C.D. 2014 (March 6, 2015). In East Coast Paving, the plaintiff contractor on a public school paving project asserted that the district wrongfully withheld payments for contract balance and change order work totaling $219,896, plus mandatory interest and penalties under CASPA. During trial, the plaintiff’s motion to amend its complaint to add claims under the Public Prompt Payment Act was denied, but the trial court proceeded to enter judgment, which included interest and attorney fees under CASPA.
On appeal, the school district argued, inter alia, that it was error for the trial court to apply CASPA to the plaintiff’s contract claim against a government agency such as the district. The Commonwealth Court agreed that the district’s conduct toward its contractor could not be governed by both CASPA and the Public Prompt Payment Act, adding that a contrary ruling would allow aggrieved contractors to always invoke CASPA for its lower penalty and attorney fee threshold, thus rendering the public statute meaningless. Drawing a clear distinction between the two statutes that had not previously been delineated, the East Coast Paving court concluded for the first time that the Public Prompt Payment Act, and not CASPA, governs construction contracts between a government agency and a contractor.
The school district then argued that Judicial Code Section 5524(5)’s two-year limitation period for actions upon a statute for civil penalty or forfeiture gave the trial court authority to bar the plaintiff’s motion to amend its claims to include the Public Prompt Payment Act at trial. The Commonwealth Court disagreed, holding that 42 Pa. C.S. Section 5524(5) was limited to punitive claims, and CASPA and the Public Prompt Payment Act were not merely punitive but remedial and compensatory in nature. East Coast Paving held that neither construction payment statute has its own established statute of limitations, requiring application instead of the residual six-year limitations period for claims brought under either the private or public act.
In light of its determinations, the Commonwealth Court remanded to the trial court the question of school district liability for statutory interest, penalties and attorney fees, and expressly to consider whether an award under 62 Pa. C.S. Section 3935 for bad-faith withholding was warranted. With its holding that application of CASPA to the claims was in error, the trial court will be required to make a determination of whether the district’s withholding of payment was arbitrary or vexatious in order to award penalties or attorney fees under the Public Prompt Payment Act.
It has been almost two decades since Pennsylvania’s passage of the public and private payment acts. The nature of payment disputes in the construction field often results in decisions being rendered by arbitrators, whose rulings do not yield published case law. Nevertheless, with the Commonwealth Court’s recent decision in East Coast Paving, practitioners, claimants and fact-finders are given much-needed guidance in the applicability of each statute and the proof necessary to secure relief thereunder. As of publication, there is no indication of an appeal by either party to the decision of the Commonwealth Court.
Robert R. Watson Jr. has been practicing construction law since 1999 and is a shareholder in Eastburn & Gray’s Blue Bell office.
Reprinted with permission from the May 12, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.