Supreme Court of Pennsylvania Holds Contractor and Subcontractor Payment Act Inapplicable to Public Works Projects

Thomas J. Madigan, Partner, Pepper Hamilton LLP
Kristopher Berr, Associate, Pepper Hamilton LLP

Clipper Pipe & Service, Inc. v. The Ohio Cas. Ins. Co., 2015 Pa. LEXIS 1275 (PA  June 15, 2015)

The Supreme Court of Pennsylvania held that the Contractor and Subcontractor Payment Act (“CASPA”), 73 P.S. §§501-516, “does not apply to a construction project where the owner is a governmental entity.”  This decision once and for all resolved the issue of whether CASPA applies to payment disputes between prime contractors and subcontractors on public works projects, either instead of or in addition to the prompt payment provisions of the Commonwealth Procurement Code, 62 Pa.C.S. §§ 3931-3939 (commonly referred to as “the Prompt Payment Act”).

The decision is in line with what most practitioners already understood: that the Pennsylvania General Assembly intended to establish two separate statutory payment schemes governing public and private projects, respectively.  As argued by the appellants in Clipper, it would seem untenable that both CASPA and the Prompt Payment Act would apply to payment disputes on public construction projects, given that there are substantial differences in the required notice, the rate of interest on delayed payments and the burden of proof associated with penalty and attorneys’ fee awards under those statutes.  Despite this seeming incongruence, subcontractors on public projects who hoped to access the more advantageous provisions of CASPA have, to this point, seized on its somewhat imprecise definition of “owner” to argue that CASPA could be read to apply to payment disputes between prime and subcontractors on public projects.  After Clipper, there is no longer any question that CASPA does not apply to such disputes, which are governed exclusively by the Prompt Payment Act.

The case arose from a project for certain improvements to the Navy/Marine Corps Reserve Training Center in Pennsylvania’s Lehigh Valley.  In furtherance of the project, the United States Department of the Navy contracted with Contracting Systems, Inc. (“CSI”) as general contractor.  In turn, CSI subcontracted with Clipper Pipe & Service, Inc. (“Clipper”) to perform certain heating, ventilation and air conditioning work .  Eventually, Clipper filed suit against CSI and its surety in the United States District Court for the Eastern District of Pennsylvania, alleging that CSI had failed to pay Clipper sums that were due under the parties’ subcontract.  Clipper further asserted a claim against CSI under CASPA.

CSI moved for summary judgment on Clipper’s CASPA claim, arguing that CASPA did not apply in the context of a public works project.  The District Court denied the motion and, ultimately, Clipper prevailed on its CASPA claim after the subsequent jury trial.  CSI then appealed to the Court of Appeals for the Third Circuit.  The Third Circuit applied to the Supreme Court of Pennsylvania for certification of a question of law: “does [CASPA] apply to a project where the owner is a governmental entity, such as the federal government in this case?”  The Supreme Court granted certification.

At the outset of its analysis, the Supreme Court noted that CASPA establishes rights and duties among “owners”, “contractors”, and “subcontractors” as it relates to “construction contracts.”  To the Court, the definition of “owner” is crucial to determining CASPA’s scope because the term “owner” is used throughout the statute.  For example, as the Court pointed out, CASPA defines “contractor” as a “person authorized or engaged by an owner” to make certain improvements to property. 73 P.S. § 502.  Thus, unless there is an “owner” within the meaning of CASPA, there can be no “contractor.”

Accordingly, as it relates to a public works project, the central question was whether or not the government could be deemed an “owner.”  The Supreme Court held that it could not.

CASPA defines “owner” to mean a “person who has an interest in the real property that is improved and who ordered the improvement to be made.”  73 P.S. § 502.  In turn, “person” refers to a “corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.”  Id.  The Court determined, under the doctrine of ejusdem generis,  the government could not possibly be an “other association” within the meaning of CASPA because the term “other association” must take its meaning from the terms that precede it.  In this case, “other association”  could not be read to encompass the government because the government is “dissimilar to a ‘corporation,’ ‘partnership,’ ‘business trust,’ ‘estate,’ ‘trust foundation,’ and ‘natural individual,’ among which the term ‘association’ appears.”

The Court further observed that “statutes in derogation of sovereignty should be construed strictly in favor of the sovereign.”  This approach is derived from the common law principle of sovereign immunity and is further “grounded on the assumption that non-specific statutes are most often directed to the affairs of the citizenry.”  Consequently, in the absence of express textual authority, the Court declined to construe “association” or “owner” to refer to the government ..

After concluding that the government is not an “owner” as that term is used in CASPA, the Supreme Court turned to the question of whether CASPA would nonetheless apply to a dispute between a contractor and subcontractor on a public project if the dispute did not directly involve the government.  Holding in the negative, the Court recognized the existence of the dual statutory schemes established by CASPA and the Prompt Payment Act, and noted that the timing and penalty provisions for late payment under the Prompt Payment Act differed from those under CASPA.   The Court concluded that “the Legislature simply did not design CASPA to apply independently to subcontracts in scenarios in which the foundational contract resides outside its boundaries” (i.e., where the contract between the owner and general contractor was governed by the Prompt Payment Act).  Thus, the Court held that, even though CASPA’s policy of protecting contractors and subcontractors would be promoted if it were applied to the case before it, “such application is too disharmonious with the statutory mechanics to support the extension.”

 

Article originally posted June 25, 2015 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

What Useful Construction Litigation Data Are We Missing?

Frank Sommers’ wrote a thought-provoking article for the recent June 2015 issue of Litigation News in which he explored the data that civil litigants might attempt to access to prove their case, including GPS data, Event Data Recorder (“EDR”) data, and cell tower “ping” data. At the end of the article, he identifies now-popular home sensor technology as a possible location of evidentiary data.

While not the primary focus of Mr. Sommers’ article, he makes an excellent recommendation for construction lawyers. With the proliferation of “smart” commercial building design and technology aimed at greener and more convenient construction, maintenance, and use, what useful data do our buildings hold for use in construction disputes? Could a Nest or similar thermostat provide data that consultants can use to identify the cause of moisture intrusion and mold in buildings? Do smartphones or devices that might be installed during construction store data that can be accessed to identify the number of workers present in a project area to track and/or defend delay and productivity claims? By way of example, linked here is Nest’s Privacy Statement for Nest Products and Services, which identifies some of the data that its products collect.

We do not yet know the answers to the questions above, but we should be asking those and similar questions to our clients and witnesses, and perhaps even to opposing parties in formal discovery. In fact, arguments could be made that we are obligated to inquire about, instruct our clients to preserve, and produce such devices and their stored data in litigation. But regardless of whether the inquiries are formal or informal, we will not know what data is available until we know what devices are installed that might hold that data.

Discovery Denied in ICC Arbitration over Panama Canal

As many people are aware, the Panama Canal expansion is one of the largest "megaprojects" going on in the world today. In January of 2014, the joint-venture contractor called GUPC (which stands for Grupo Unidos Por El Canal, S.A.) announced that cost overruns required $1.6 billion in additional money to be paid to it by the Panamanian government.  Then, in December of 2014, the GUPC consortium stated that it had additional claims totaling $737 million.

Of course, in the world of the international construction lawyer, this means arbitration.  GUPC filed its arbitration in December of 2013 under the International Chamber of Commerce ("ICC") rules in Miami, Florida, in accordance with the contractual dispute resolution clause. Discovery in the case is being conducted under the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration -- the IBA Rules.

In that arbitration, GUPC seeks compensation for its cost overruns and other damages from Autoridad del Canal de Panama -- the Panama Canal Authority, or ACP.  ACP contracted with CH2M Hill Panama, S. de R.L., for CH2M Hill-Panama to serve as ACP's program manager for the Canal expansion.

GUPC believed that CH2M Hill-Panama would have documents necessary for its arbitration with GUPC and served a request for production of documents under 28 U.S.C. § 1782 on CH2M Hill-USA in Colorado as a result.  CH2M Hill-USA refused to provide the documents.

The result of that subpoena ended up in a battle in the United States District Court for the District of Colorado.  In re Application of Grupo Unidos Por El Canal, S.A., Civil Action No. 14-mc-00226-MSK-KMT (D. Colo. April 17, 2015).  Bear in mind that this opinion is a magistrate's recommendation to the District Court, so this is by no means a final decision.

CH2M Hill-USA made five major arguments.  First, CH2M Hill-USA argued that the ICC arbitration was not a tribunal as that term is defined under §1782.  Second, CH2M Hill-USA claimed that the ICC arbitration is not a "foreign or international tribunal" as is required by § 1782.  Third, CH2M Hill-USA stated that they do not have possession or control of the documents -- CH2M Hill-Panama does -- and, further, that the documents are located outside the United States. Fourth, CH2M Hill-USA argued that the subpoena was unduly burdensome and intrusive. Finally, CH2M Hill argued that the subpoena in federal court was an attempt to circumvent discovery limitations imposed in the ICC arbitration.

In the end, the magistrate agreed with CH2M Hill-USA on all of its arguments.  First, the ICC arbitration was not a "tribunal" because it arose out of a private agreement to decide claims using certain rules. Even though those rules may lend the appearance of being a quasi-judicial proceeding, the court was not persuaded that voluntarily agreeing to those rules created a "tribunal" for purposes of §1782.

Second, the court held that private arbitration does not fall under the meaning of "foreign or international tribunal" under §1782.  The distinction drawn is that arbitral proceedings that are the product of contractual agreements differ from state-sponsored proceedings in foreign courts. The magistrate was persuaded that enforcing the subpoena "would defeat the timeliness and cost-effectiveness of arbitration, and would place a heavy burden on the federal courts to determine discovery requests." Slip Op. at 16.  Further, the magistrate was not persuaded that this was an international arbitration because it was being held in the United States, but she did not rule on the issue because it was not necessary to do so.

Third, as to the location of the documents, the magistrate cited to the fact that Congress likely meant for the reach of §1782 to apply only to evidence located inside the United States. After all, it would be outside the Court's jurisdictional reach to compel CH2M Hill-USA to produce documents physically located in Panama.

Fourth, in analyzing the burden issue on CH2M Hill-USA, the magistrate considered the factors set forth in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).  Even though the magistrate was not required to reach these factors, the court noted that if the statutory requirements under §1782 had been met, she still would have denied production. Under Intel, certain discretionary factors such as burden come into play. Here, production would have required CH2M-Panama to produce 89 boxes of paper and 1.6575 terabytes of information -- which works out to approximately 80,000 boxes of documents. Thus, the magistrate held that on that fact alone, it is likely that the requests were too broad.

Finally, the magistrate agreed that the subpoena was an effort to circumvent the ICC panel's authority related to discovery.  GUPC neither sought nor received approval from the arbitration panel to obtain the information requested.  This fact led the magistrate to believe that the delay associated with such a "grandiose document production" would not be well received by the Panel.  As such, for every reason possible -- both statutory and those within the court's discretion -- the request for the subpoena to be enforced was denied.

Hawaii Finds Arbitration Agreement With “Severe Limitations on Discovery” is Unconscionable, By Liz Kramer*

Hawaii issued a bold arbitration decision this month. It applied its state contract law to conclude that the parties did not form a clear arbitration agreement, but even if they did, it was unconscionable because it prohibited both discovery and punitive damages.  Narayan v. The Ritz-Carlton Dev. Co., Inc., __ P.3d __, 2015 WL 3539805 (Haw. June 3, 2015).

Kapalua Bay Beach

The plaintiffs purchased the first condos in a development in Kapalua Bay.  The developer defaulted on loans, however, and it or its agent withdrew over a million dollars from the association’s operating fund.  The plaintiffs sued for breach of fiduciary duty and other claims.

In response, the developer moved to compel arbitration.  It argued that the plaintiffs’ purchase agreements incorporated the condominium declaration, which had an arbitration clause.  The trial court denied the motion to compel, but the intermediate court of appeals reversed.  The Hawaii Supreme Court found the intermediate court gravely erred and the plaintiffs did not have to arbitrate their claims.

Under Section 2 of the FAA, the Hawaii Supreme Court applied state law to decide whether an arbitration agreement existed and whether it was valid.

On the first question, the Hawaii Supreme Court found the parties did not form an agreement to arbitrate, because the purchase agreement was ambiguous regarding the parties’ intent to arbitrate.  Notably the purchase agreements themselves did not mention arbitration and instead stated that the venue for any action shall be in Hawaii state court.  The arbitration clause was only included in the separate condominium declaration.  The court found “it is facially ambiguous whether those disputes would be consigned to arbitration in Honolulu pursuant to the condominium declaration or the [state court] pursuant to the purchase agreement.”  The court’s analysis applied Hawaii case law that appears to create different (and higher) standards for proving the existence of an arbitration agreement than the standards required to prove other contracts.  But, Hawaii avoided any FAA preemption problem by offering up a second, independent basis for its refusal to enforce the arbitration clause: unconscionability.

The court also found the arbitration agreement unconscionable under Hawaii law.  It found it was procedurally unconscionable because the plaintiffs could not negotiate it, it was “buried in an auxiliary document,” and it was ambiguous.  With respect to substantive unconscionability, the court focused on three provisions of the arbitration agreement.  The arbitration agreement provided that the arbitrator could order the parties to exchange copies of “nonrebuttable exhibits” and witness lists, but “the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.”  The arbitration agreement  also precluded parties from “disclos[ing] the facts of the underlying dispute…without prior written consent of all parties.” The Hawaii Supreme Court concluded that “if the arbitration clause were enforced as written, the [plaintiffs] would have virtually no ability to investigate their claims, and thus, would be deprived of an adequate alternative forum.”  Furthermore, the arbitration agreement precluded punitive damages, which the court found “substantively unconscionable” in a contract of adhesion.

If there is a continuum of state arbitration decisions, varying from hostile to arbitration on one end to rubber-stamping of arbitration on the other end, I think Hawaii just situated itself on the very hostile end, even further than California and Missouri.  But, this case offers a reminder of two important rules for drafters of arbitration clauses: make the agreement to arbitrate very clear and easy to find; and do not overreach when inserting arbitration provisions that favor your client.

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* Liz Kramer is a partner at Stinson Leonard Street LLP where she handles complex commercial disputes, often in the construction and franchise contexts.  After litigating arbitrability on many occasions, Liz began blogging about arbitration law at www.arbitrationnation.com in addition to her law practice in 2011.  Her blog has been recognized as one of the best in the nation by the ABA Journal for the past three years and educates thousands of lawyers each month about the Federal Arbitration Act and its interpretation.

Sub Wins Against Owner -- It Was A Strategic Decision Not To Sue The GC

In South County Post & Beam, Inc. v. Brian T. McMahon, et al. ("McMahon"), the Rhode Island Supreme Court affirmed an "unjust enrichment" claim by a subcontractor against an owner.  The case is a cautionary tale for owners and will likely become a frequently cited case for subcontractors seeking multiple avenues for payment.

To avoid a "surprise" unjust enrichment cause of action by subcontractors, and particularly following this case, some takeaways for owners include:

• Do communicate solely through your general contractor. 
• Don't issue direct payment to subcontractors as a courtesy to the general contractor.  
• Don't negotiate directly with subcontractors regarding billing/commercial terms.  
• **Be careful about direct email communications with subcontractors** 

Contractors, whether a general contractor or a subcontractor, who deal with difficult owners could possibly lay the groundwork for such a quasi contract claim by engaging in these activities and direct owner/subcontractor communications.  The case creates precedent for the proposition that it is not necessarily inequitable for a general contractor and a subcontractor to purposefully collaborate to avoid lawsuits between themselves so that the sub/general business relationship remains strong.  

The Facts: A family buys undeveloped property on Block Island, Rhode Island with the intention to build a house. Family hires general contractor. General contractor hires a roofing subcontractor.  During construction, the family decides to build a "barn" for their children and, later on, a roof deck on the house.  No change order was issued for the roof deck. Subcontractor received three payments -- one of which was a direct payment from the family (at the request of the general contractor).  There was also some email correspondence between subcontractor and the family regarding subcontractor's billings. 

Lawsuit Against the Family: Subcontractor sued family for breach of contract (express and implied) and unjust enrichment.  Subcontractor did not sue general contractor because it did not want to disrupt the existing business relationship.  (The family didn't file a third party indemnification claim against the general contractor.) 

Contract Cause of Action -- Family Wins: Trial Justice found there was no express or implied contract, and therefore, entered judgment for the family.

Unjust Enrichment -- Subcontractor Wins: Despite the absence of a contract and the subcontractor's strategic decision not to sue the general contractor, the Trial Justice found that it was equitable to enter judgment for subcontractor against the family on the unjust enrichment claim. 

On appeal, the Rhode Island Supreme Court first set forth the elements of a claim for unjust enrichment:

It is well settled in our state that, '[t]o recover for unjust enrichment, a claimant must prove: (1) that he or she conferred a benefit upon the party from whom relief is sought; (2) that the recipient appreciated the benefit; and (3) that the recipient accepted the benefit under such circumstances that it would be inequitable for [the recipient] to retain the benefit without paying the value thereof.'

McMahon, at *8, quoting Emond Plumbing & Heating, Inc. v. BankNewport, 105 A.3d 85, 90 (R.I. 2014) (emphasis added).  Next, the Court explained that, under Rhode Island law, the causes of action for unjust enrichment and quantum meriut were essentially the same.  "'While unjust enrichment focuses on the propriety of a payee or beneficiary retaining funds or a benefit, quantum meruit's primary focus is on the value of services rendered.'" McMahon, at *8, citing Process Engineers & Constructors, Inc. v.DiGregorio, 93 A.3d 1047, 1052 (R.I. 2014). (Presumably, the Court engaged in this discussion because the proof of damages related the value of the services rendered rather than the "benefit" conferred on the family by the subcontractor's work.)

The Supreme Court framed the issue as "whether [the family] would be unjustly enriched if they did not have to compensate [subcontractor] for the value of the services rendered, and not whether it would actually be proper for [the family] to retain the benefit of plaintiff's work on their new house and barn." McMahon, at *10.  Despite precedent stating that "'[s]imply conferring a benefit upon a landowner by a subcontractor is not sufficient to establish a claim for unjust enrichment[,]" McMahon, at *11, quoting Emond Plumbing & Heating, Inc. v. BankNewport, 105 A.3d 85, 90 (R.I. 2014), the Court "balanced the equities" to determine whether subcontractor could recover directly from the family.  The following were the facts considered by the Court:

Facts Weighing Against A Claim For Unjust Enrichment

• Existence of a Subcontract and lack of contract (even implied) with the family. This was a "factor that weigh[ed] against [subcontractor] recovering the value of its work from [the family." McMahon, at *11.  
• Not pursuing recovery against General Contractor. This fact should strongly make an unjust enrichment claim against the family unsuccessful.  Here, subcontractor surprisingly admitted to the Trial Justice that the subcontractor "had made a strategic decision not to include [the General Contractor] as a defendant in its civil action because it wanted to continue working with [the General Contractor] in the future." McMahon, at *12, fn. 2.  

Facts Weighing In Favor Of A Claim Of Unjust Enrichment

• Family made one $60,100 payment to subcontractor.  It was undisputed that this was done as a courtesy to the general contractor.  
• Family and subcontractor exchanged emails. The emails dealt with the subcontractor's billings and statements.  

The Court held "the trial justice was not incorrect as a matter of law in her analysis and conclusion that the third element of plaintiff's claim was met."  

The family's counsel argued that this case could "render every property owner a de facto party to subcontracts executed by the general - the general and sub could substitute the homeowner as the obligor at their whim, at any time, without notice." McMahon, at *14. While recognizing this policy argument, the Court discounted it because an "unjust enrichment" claim involves a "fact-specific balancing process." McMahon, at *14. In so holding, the Court has substantially widened the "door" for such direct claims by subcontractors against owners and made it more challenging to dispose of such actions through the summary judgment process.  

The Dispute Resolver editors look forward to hearing from you about this case.  Please post your comments on our blog or LinkedIn Subgroup page.  This case summary was prepared by Tom Dunn, a Partner at Pierce Atwood's Providence, Rhode Island office and Co-Editor of The Dispute Resolver. Tom can be reached at rtdunn@PierceAtwood.com or @rtomdunn.  

Litigation tip: Read the Jury Instructions Before Filing Suit

So you're feeling great because you landed a new client, maybe a general contractor who builds the most expensive facilities in the world. That sounds like a good client. The client hires you to file a lawsuit against an owner who failed to pay millions of dollars in retainage at the end of a billion-dollar project. You start by digging up the last Complaint you filed for breach of contract, tweak the names, dates and dollars, and file the lawsuit. Right? Wrong.

Before filing a lawsuit, you should take a deep breath. While many of us file lawsuits frequently, they are a big deal and you want to do it right. As such, you should consider reviewing sample jury instructions and perhaps consulting a "causes of action" practice guide before you do so much as put a caption on your Complaint. Most courts have sample/pattern jury instructions, and there are countless practice guides out there that break down your potential claims.

Wait a minute, why would I start by looking at the jury instructions? Don't I just worry about them in the unlikely event my case actually goes to trial or arbitration? NO. Jury instructions will guide you to the claims which might apply to your dispute. For example, your review of the jury instructions might make you realize the strength of additional claims to be asserted for your client, such as claims for tortious interference with contract, unjust enrichment, quantum meruit, or even fraud. In addition, the jury instructions outline the specific elements of the claims that you will need to plead (which will help you avoid motions to dismiss, for example). The jury instructions can be used as a navigation guide through all phases of the lawsuit, from the pleadings, through discovery, and all the way through trial or arbitration.

Does anyone have other ideas on starting points for drafting complaints? Some attorneys suggest you should even draft your jury instructions before you draft the complaint. I don't personally go that far, but maybe I should.

There are also various ABA Forum publications that you can utilize. For example, check out the Construction Damages and Remedies book here. For some pattern jury instructions, click here (California) and here (8th Circuit).