Tuesday, June 30, 2015

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. 

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