Pennsylvania Superior Court Places Time Limit on Good Faith Withholding Under Prompt Payment Act

Constructural Dynamics, Inc. v. Thomas P. Carney, Inc., No. 1104 EDA 2021, 2022 Pa. Super. Unpub. LEXIS 1500, 2022 WL 2390125 (Pa. Super. July 1, 2022), reargument denied (Sept. 8, 2022).

Like many prompt payment acts, Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA) permits owners and contractors to withhold payment for good faith claims — but not forever. Owners and contractors who wait too long could find themselves litigating prompt payment claims and paying the penalties those acts impose on procrastinating payors. A recent decision by the Pennsylvania Superior Court provides some guidance on how long is “too long” to withhold.

The decision arose from a breach of contract action by concrete supplier Silvi Concrete Products, Inc. (Silvi) against contractor Thomas P. Carney, Inc. (Carney). Silvi supplied concrete to Carney for the construction of a Philadelphia luxury hotel. Initial tests of Silvi’s concrete indicated that it broke at lower-than-expected compression strengths. Carney immediately terminated Silvi and hired a replacement supplier. Supplemental testing was conducted, during which Carney withheld payments to Silvi. The project engineer ultimately accepted Silvi’s concrete. Even after acceptance, Carney continued to withhold payment.

Silvi filed a complaint against Carney, alleging breach of contract, violation of CASPA, and unjust enrichment. Carney counterclaimed for breach of contract. A jury found in favor of Silvi on its breach of contract claim and awarded its unpaid $160,000 contract balance and $1 million in lost profits. In a subsequent bench trial, the court denied Silvi’s CASPA claim, finding that Carney had withheld payment in good faith. Carney appealed, and Silvi cross-appealed.

Silvi asserted that the trial court abused its discretion in denying its CASPA claim. It argued that in finding that Carney breached the parties’ contract, the jury implied that Silvi’s CASPA claim was valid. Silvi also argued that Carney did not prove that the amount it withheld was reasonably related to the value of its claim.

The appeals court concluded that the jury’s finding that Carney breached the contract was irrelevant to the validity of Silvi’s CASPA claim. Despite the breach, Carney had good faith basis for withholding payment — at least initially. And the amount withheld ($160,000) was reasonable since it was significantly outweighed by the potential cost to remove and replace the concrete ($13 million to $19 million). The court remanded for the trial court to reexamine whether Carney’s withholding after the project engineer accepted the concrete was in good faith, and whether Silvi could receive CASPA penalties as a result.

In its cross-appeal, Carney argued that the trial court erred by allowing Silvi to present evidence of its lost profits because its claim for lost profits was in essence a “lost volume seller” claim. Pennsylvania disallows “lost volume seller” claims because “[a]pplication of the doctrine would encourage the non-breaching party to do nothing to minimize its damages.”

The appeals court rejected Carney’s argument. Despite disallowing “lost volume seller” claims, “Pennsylvania permits a non-breaching party that has reasonably attempted to mitigate its damages to recover damages for lost profits.” The trial court specifically found that Silvi “made every reasonable effort to mitigate the lost sales and damages it suffered at the hands of Carney by reselling the material, thereby fulfilling the non-breaching party's duty to mitigate losses.” The trial court thus properly allowed the lost profits evidence.

Author Rachael Cain is an associate in the Litigation practice of Troutman Pepper Hamilton Sanders LLP, and a member of the Construction practice group. Prior to joining Troutman Pepper, Rachel served as Land Use and Real Estate General Counsel for Building & Land Technology. Her experience includes negotiating and drafting construction, design, architectural, and service contracts, as well as presenting zoning applications. Rachael has experience in both litigation and transactional matters and has appeared in state and administrative courts. 

 Author Jane Fox Lehman is an associate at Troutman Pepper Hamilton Sanders LLP, and a member of the Construction practice group. Jane has substantial experience representing a variety of construction project participants in disputes arising from industrial, commercial, and multifamily residential construction projects. In addition to representing clients in state and federal courts and alternative dispute resolution proceedings, Jane assists clients with bid protests, contract review and negotiation, project management issues, and risk assessments. She is the co-editor of the firm’s construction law blog, Constructlaw.com.

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.