CASPA’s Reach Challenged
The Contractor and Subcontractor Payment Act (CASPA) provides rules and deadlines to ensure prompt payments under construction contracts and discourage unreasonable withholding of payments in the Commonwealth of Pennsylvania. CASPA is designed to protect contractors and subcontractors and encourage fair dealing among parties to a construction contract. The question of whether the legislature intended to expand CASPA’s obligations toward fair dealing to non-contracting parties recently arose in a Pennsylvania Superior Court case. The court addressed the question of whether a shareholder in a Pennsylvania real estate development company could be personally liable under CASPA when the company failed to pay $1.5 million to its general contractor. Just how wide is CASPA’s net? Does it include a developer’s shareholder that personally directs work? No – not yet, anyway.
Relevant Facts
410 Shurs Lane Developers, LLC (the Owner) contracted with Scungio Borst & Associates (the General Contractor) to build a 23-unit condominium in the Manayunk section of Philadelphia. In addition to performing the contract work, the General Contractor also performed $2.6 million in additional work. The Owner’s principal and 50% shareholder personally directed the General Contractor to perform this change order work. At one point during the project, the General Contractor stopped work because it was not getting paid. The Owner’s principal orally guaranteed the General Contractor that it would get paid. The General Contractor resumed work – and, of course, we know the outcome. The Owner again failed to pay. There was $1.5 million due and owing on change order work. The General Contractor filed suit for various causes of action, including a violation of CASPA against the Owner’s principal, alleging that he should be held personally liable for the outstanding balance.
Review of CASPA
CASPA provides that when a contractor or subcontractor performs work on a project, it is entitled “to payment from the party with whom the contractor or subcontractor has contracted.” CASPA then imposes penalties for failure of owners, contractors, and subcontractors to comply with its payment terms.
In determining whether the Owner’s principal – or an agent of the Owner – could be held personally liable under CASPA for nonpayment, it is necessary to review the relevant definitions:
- “Owner” is defined as “[a] person who has an interest in the real property that is improved and who ordered the improvement to be made. The term includes successors in interest of the owner and agents of the owner acting with their authority.”
- “Person” is defined as “[a] corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.”
The court noted it was undisputed that the Owner was a “person” for purposes of the statute. In addition, the court held that the Owner was the entity that contracted for the improvements. Clearly, the developer would be obligated by CASPA but what about the principal, who was also acting as the developer’s agent? The ambiguity lies in the fact that “agent” is not defined under CASPA.
The Court’s Decision
The General Contractor asked the court to interpret the statutory language as acknowledging that authorized agents could be liable for additional interest, penalties, and attorneys’ fees when the contracting party fails to pay on time. The court rejected this approach, holding that the Owner’s principal here was not an “owner” within the meaning of CASPA. The court recognized that holding otherwise would impose statutory penalties upon an entity or person who was not a party to the contract, which is contrary to well-established agency and contract principles. If the court had adopted such a broad interpretation of “agents” of the owner, architects, project managers, and designated representatives acting on behalf of the owner could be held liable under CASPA, too.
Three of the nine judges hearing this case disagreed with the court’s holding and the General Contractor appealed to the Pennsylvania Supreme Court, which will make the ultimate decision. As such, we will wait for the Supreme Court’s decision and update you when that decision is made. Until then, know that a developer’s principal will not be considered an “owner” within the meaning of CASPA – even if that principal personally directs change order work.