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Pennsylvania Statutory Protections for Unpaid Contractors, Subcontractors Suppliers and Designers

Article

Construction Group Newsletter

January 3, 2011

When general contractors, subcontractors, material suppliers and certain design professionals seek payment for goods or services rendered in connection with construction projects, Pennsylvania statutes provide helpful protections including the potential imposition of prejudgment liens, substantial penalties and interest on amounts wrongfully withheld, and attorneys’ fees. This article provides a brief overview of three statutes, specifically the Pennsylvania Mechanics Lien Law of 1963, 49 P.S. § 1101 et seq., the Contractor and Subcontractor Payment Act (“CASPA”), 73 P.S. § 501 et. seq., and the Prompt Payment Act (“PPA”), 62 Pa. C.S.A. §§ 3931-3939, that such parties can potentially utilize to obtain redress for non-payment.

Mechanics’ Lien Law of 1963, 49 P.S. § 1101 et. seq.

The Pennsylvania Mechanics’ Lien Law of 1963, 49 P.S. §§ 1101-1902, as amended, provides meaningful mechanics’ lien rights to secure payment of debts due for labor or materials furnished in the erection, construction, alternation, or repair of an improvement to real property. 49 P.S. § 1301. Mechanics’ liens are not allowed, however, for labor or materials furnished for a “purely public purpose.” 49 P.S. § 1303(b). For public works projects, contractors and subcontractors must look to enforce their rights under the common law or under statutory (public works) bonds.

Pursuant to amendments which became effective January 1, 2007, pre-payment (forward looking) lien waivers are unlawful and void as against public policy for non-residential projects with one exception. 49 P.S. § 1401. Such lien waivers are effective in non-residential projects only by subcontractors for projects where the contractor has posted a labor and material payment bond guaranteeing payment. Id. § 1401(b). For residential projects (properties on which there is or will be a residential building not more than three stories in height), per 2009 amendments to the Mechanics’ Lien Law), lien waivers remain valid and enforceable. 49 P.S. § 1401(a).

Another significant change in the 2007 amendments was in the area of lien priority. Following those amendments, a mechanics’ lien is subordinate to both a statutory open-end mortgage and a purchase money mortgage irrespective of the effective date of the mechanics lien. 49 P.S. § 1508(c). Otherwise, there was no change from prior law. Thus, in the case of erection and construction (essentially new construction), the lien is effective from the date of commencement of work on the ground, while in the case of alteration and repairs (renovation projects) the lien is effective from the date of filing of the claim. 49 P.S. § 1508(a), (b).

To perfect a mechanics’ lien, a claimant must file a lien claim with the Prothonotary in the county where the improvement (property) is located within six months after completion of its work. 49 P.S. § 1502(a). Written notice of the filing of the mechanics’ lien must be served on the owner within one month after filing, and an affidavit of service must be filed within 20 days thereafter. 49 P.S. § 1502(a)(2). Subcontractors, whether for erection and construction or for alteration and repairs, are required to provide the owner formal written notice of intent to file the lien claim 30 days before filing with the Prothonotary. 49 P.S. § 1501.

After obtaining the lien, the claimant must reduce the lien to judgment. Within two years from the date of filing a mechanics’ lien, the claimant must file a complaint to enforce the lien (referred to as “Actions Upon Mechanics’ Liens”). 49 P.S. § 1701(b). Whereas the mechanics’ lien is an in rem right that attaches to the property itself, an action to enforce the mechanics’ lien is an in personam action. The practice and procedure utilized in obtaining judgment on the mechanics’ lien claim is governed by the Pennsylvania Rules of Civil Procedure, Rules 1651-1661.

Contractor and Subcontractor Payment Act, 73 P.S. § 501 et seq.

CASPA applies to “construction contracts,” which is broadly defined as an “agreement whether written or oral, to perform work on any real property located within the Commonwealth,” and provides protections to certain parties to such contracts 73 P.S. §§ 502; 504 505(a). The only exceptions to CASPA are for (1) improvements “to real property which consists of six or fewer residential units which are under construction simultaneously” and (2) contracts for the purchase of materials by a person performing work on his or her own property. 73 P.S. § 503.

Where CASPA applies, performance of work or supply of materials entitles a contractor or subcontractor to payment from the party with whom the contractor has contracted. 73 P.S. § 504. “Contactor” and “subcontractor” are defined broadly by CASPA to include parties to a contract to improve real property. For example second-tier subcontractors fall within the definition of “subcontractor.” Moreover, because CASPA defines “improve” as designing and providing professional or skilled services, architects, surveyors and engineers can constitute a “contractor” or “subcontractor” within the purview of CASPA. 73 P.S. § 502.

When the aggrieved party is the contractor, the owner is obligated to pay the contractor “strictly in accordance with the terms of the construction contract,” and, in the absence of a due date in the contract, payment must take place promptly within 20 days after the end of a billing period or delivery of an invoice. 73 P.S. § 505(c). Any progress or final payment to a contractor not paid within seven days of the date due results in an additional obligation on the owner to pay interest to the contractor on the eighth day at either the contract rate of interest or 1% per month in the event the contract does not specify an interest rate. 73 P.S. § 505(d). Owners have the express right pursuant to CASPA to withhold payment for deficiency items. 73 P.S. § 506(a). A “deficiency item” is defined as “work performed but which the owner, the contractor or the inspector will not certify as being completed according to the specifications of a construction contract.” 73 P.S. § 502. The owner must, however, pay for items that have been satisfactorily completed. 73 P.S. § 506(a). Moreover, if an owner withholds payment for a “deficiency item” the owner must notify the contractor that it is doing so within seven days of receiving the invoice. 73 P.S. § 506(b).

The payment obligations under CASPA also apply to retainages. If payments under a construction contract are subject to retainage, any amounts retained and which are due to be released to the contractor upon final completion must be paid within thirty days after final acceptance of the work. 73 P.S. § 509(a). If any party unreasonably withholds acceptance of work or fails to pay retainage in accordance with the above, CASPA imposes interest charges of 1% per month on the balance due as of the date acceptance was unreasonably withheld or the date retainages were due, in addition to other penalties. 73 P.S. § 509(d).

Where the aggrieved party is a first or second-tier subcontractor, CASPA treats contractors like owners with respect to their obligations to subcontractors. Contractors are subject to the same penalties for non-payment to subcontractors as owners are for non-payment to contractors. If payment to the subcontractor is delayed more than 14 days after receipt of payment from the owner or 14 days after receipt of the subcontractor’s invoice, whichever is later, the contractor will be responsible for paying interest to the subcontractor beginning on the fifteenth day at either the contract rate of interest or 1% per month in the event the contract does not specify an interest rate. 73 P.S. §§ 507, 505 (c). After receiving retainage payments from an owner, a contractor must pay to its subcontractor and so on down the line, the full amount due each subcontractor within fourteen days of receipt of the retainage. 73 P.S. § 509(c). CASPA authorizes a contractor to withhold payment from a subcontractor for good faith deficiencies, as long as it notifies the subcontractor of the deficiency within seven calendar days of receiving notice of a deficiency item. 73 P.S. § 511.

CASPA contains significant penalty provisions against owners or contractors who do not make prompt payment. If arbitration or litigation is commenced and an owner or contractor has failed to pay on time, the court or arbitrator is required to award, in addition to all other damages due, a penalty equal to 1% per month of the amount wrongfully withheld. 73 P.S. § 512(a). The question of whether a withheld payment will be subject to the penalty provisions of CASPA is based on the reasonableness of the withholding. The question of reasonableness is a question of fact that is resolved by a jury or other factfinder. See, e.g., Joseph F. Cappelli & Sons v. Keystone Custom Homes, Inc., 815 A.2d 643, 647 (Pa. Super. 2003).

In addition to the foregoing, the “substantially prevailing party” in any proceeding to recover payment pursuant to CASPA is entitled to reasonable attorneys fees in an amount determined by the Court or arbitrator, together with expenses, notwithstanding any agreement by the parties to the contrary. 73 P.S. § 512(b). Notably, courts have held that either party may recover attorneys’ fees under CASPA as long as that party is the “substantially prevailing party.” See, e.g., Zavatchen v. RHF Holdings, Inc., 907 A.2d 607, 610 (Pa. Super. 2006). Although the award of attorneys’ fees pursuant to CASPA is mandatory where there is a “substantially prevailing party,” the question whether either party has satisfied the heightened standard associated with a “substantially prevailing party” is reserved to the discretion of the factfinder. See id. (noting that the “substantially prevailing party” standard was higher than the “prevailing party” standard often used in contractual fee shifting provisions, and concluded that a significant showing was required to establish that a party had “substantially” prevailed).

The recent decision in Zimmerman v. Harrisburg Fudd I, L.P., 984 A.2d 497 (Pa. Super. 2009) further elaborated on the penalty provisions of CASPA. In that case, plaintiff subcontractor obtained a judgment following an arbitration award against defendant contractor under CASPA for non-payment under the subcontract. After two years of unsuccessfully trying to collect the judgment, the subcontractor filed a motion with the trial court to collect interest, penalties and attorneys fees incurred because of the delay. The trial court denied the motion without a hearing or opinion and the plaintiff appealed. Citing to its previous decision in Ruthrauff, Inc. v. Ravin, 914 A.2d 880 (Pa. Super. 2006), the Superior Court held that when a withholding of funds is “unreasonable,” CASPA permits the recovery of interest, as well as a penalty for withholding, both at a rate of 1% per month owing since the date the payment became due. It further held that the trial court’s failure to hold a hearing on the reasonableness of the withholding of payment, which the Court defined as being in bad faith, was an abuse of discretion.

The Superior Court in Zimmerman, citing to 73 P.S. § 512(b), which governs the award of attorneys fees, noted that a party seeking to collect a judgment is entitled to attorneys fees for both its efforts to collect the judgment, and for its efforts to collect on the fees in relation thereto. The Court noted that because plaintiff had been awarded the amount of his entire claim at arbitration, it was a “substantially prevailing” party as a matter of law. It further held that plaintiff was entitled to reasonable fees for all aspects of the foregoing litigation, including those expended to obtain the judgment, those expended to collect the judgment, those expended to collect the foregoing fees, and any fees expended at the appellate level. The Zimmerman case promises to provide additional teeth for the payment claims of contractors and subcontractors under CASPA.

Prompt Payment Act, 62 Pa. C.S.A. §§ 3931-3939

The PPA, which sets payment deadlines for payment to contracting parties, applies to contracts exceeding $50,000 for construction, reconstruction, alteration, or repair of any public building, public work, or improvement where the contracting body is the Commonwealth of Pennsylvania, any state-aided institution, or any political subdivision, local governmental unit, local authority, or other public instrumentality (referred to in the PPA as “government agencies”). The PPA is part of the public contracting provisions of the Commonwealth Procurement Code, 62 Pa. C.S.A. §§ 101-4604. In short, the provisions of the PPA apply to most public works projects in Pennsylvania.

There are certain important exceptions to the payment obligations imposed on government agencies by the PPA. The PPA does not apply in situations where the government agency’s failure to pay is based on lack of funding by the General Assembly, the state or federal government. 62 Pa. C.S. § 3938(a). Moreover, the PPA does not apply to:

  1. Any municipality determined to be distressed under the Municipalities Financial Recovery Act;
  2. Any school district determined to be distressed;
  3. The City of Philadelphia;
  4. The Philadelphia School District; and
  5. Metropolitan transportation authorities, such as SEPTA.

62 Pa. C.S. § 3938(b).

The payment deadlines established by the PPA for government agencies for public works projects are similar, but not identical, to those established in CASPA for private works. On contracts where the PPA applies, performance of a contractor or design professional that contracts with the government agency in accordance with the contract entitles the contractor or design professional to payment by the government agency. 62 Pa. C.S. §§ 3931(a); 3932. The government agency is required to pay the contractor or design professional strictly in accordance with the contract. 62 Pa. C.S. § 3932(a). In the absence of a due date in the contract, the contractor or design professional is entitled to payment within 45 calendar days of the date the application for payment is received. 62 Pa. C.S. § 3932(b). If the government agency fails to make progress payments on time, the PPA provides “the government agency shall pay to the contractor or design professional, in addition to the amount due, interest on the amount due . . . computed at the rate determined [for overdue taxes],” subject to a 15 day grace period. 62 Pa. C.S. § 3932(c), (d).

The PPA provides similar protection to first and second tier subcontractors on construction projects that fall within the ambit of the PPA. When a subcontractor has performed in accordance with the provisions of its subcontract, the subcontractor shall be paid by the contractor “the full or proportional amount received” for the subcontractor’s work within 14 days of the contractor’s receiving payment from the government agency. If payment is delayed, the contractor is entitled to interest. 62 Pa. C.S. § 3933(c), (d). Similar to CASPA, the PPA allows a government agency to withhold payment for deficiency items, but requires the government agency to pay the contractor for all other work performed. If the government agency withholds payment for deficiency items, it is required to notify the contractor of the specific deficiency item within the time required by the contract, or within 15 calendar days of the date of receipt of the application for payment. The contractor, in turn, is required to notify the subcontractor within 15 calendar days of the date of receipt of a deficiency notice from the government agency. 62 Pa. C.S. § 3934(a), (b).

Finally, the PPA contains penalty provisions similar to those set forth in CASPA and provides that if a government agency, contractor, or subcontractor fails to comply with the payment terms of the PPA, then in addition to other damages, a claimant may be awarded a penalty of 1% per month on the amount withheld in bad faith, which is defined to mean a withholding that is “arbitrary or vexatious”. 62 Pa. C.S. § 3935(a). This section also provides that the claimant will be entitled to an award of reasonable attorneys’ fees upon a finding of bad faith (arbitrary or vexatious withholding). 62 Pa. C.S. § 3935(b).

The PPA provides additional remedies for contractors and subcontractors who do not receive timely payment in accordance with the payment provisions of their contracts, and affords additional rights to recover penalties, interest, attorney’s fees, and costs. Courts have held that the PPA does not apply to sureties, but only to the parties to construction contracts. See, e.g., Structural Group, Inc. v. Liberty Mut. Ins. Co., 2009 U.S. Dist. LEXIS 18587 (M.D. Pa.).

Conclusion

In sum, Pennsylvania statutes afford contractors, subcontractors, suppliers, and certain design professionals with substantial rights of recovery for non-payment. Contractors, first and second tier subcontractors, and suppliers qualify for mechanics’ lien rights on private works to secure their right of payment. In addition, CASPA and the PPA, applicable to private and public works, respectively, provide important rights to collect statutory interest, penalties, and attorneys’ fees on wrongfully withheld payments for contractors, subcontractors, and design professionals.