The PA Supreme Court Blocks CASPA’s Reach on Public Works Projects
In a decision that has important consequences for contractors and subcontractors who perform work on public construction projects, the Pennsylvania Supreme Court considered whether the Contractor and Subcontractor Payment Act (CASPA), a contractor-friendly statute that provides relief when contractors and subcontractors are not paid, applies on public works projects. In a unanimous decision, Pennsylvania’s highest court determined that CASPA does not apply to contracts and subcontracts on construction projects where the “owner” is a governmental entity. This means that when payment is not forthcoming on a public works project, contractors and subcontractors seeking statutory relief must now rely on the Commonwealth Procurement Code or “Prompt Pay Act.” Although both CASPA and the Prompt Pay Act allow for the demand of penalties, interest and attorneys’ fees against entities who fail to pay, recovery under the Prompt Pay Act is less certain than CASPA and requires adherence to different procedures.
Facts of the Case
In Clipper Pipe & Service, Inc. v. The Ohio Casualty Insurance Co., the United States Department of the Navy (Owner) entered into an agreement with Contracting Systems, Inc., II (General Contractor), as the general contractor responsible for renovations to the Navy/Marine Corps Reserve Training Center in the Lehigh Valley. The General Contractor, in turn, entered into a subcontract with Clipper Pipe & Service, Inc. (Subcontractor) for the performance of mechanical and heating, ventilation, and air conditioning work. Later, when payment was not received, the Subcontractor filed suit in the United States District Court for the Eastern District of Pennsylvania against the General Contractor as well as its surety, the Ohio Casualty Insurance Company (Surety), for failure to pay for work performed in the amount of $150,000. The Surety and General Contractor moved for summary judgment with the trial court, arguing that CASPA did not apply because the United States Department of the Navy was not an “Owner” as defined by CASPA. After accepting a certified question from the Third Circuit, the Pennsylvania Supreme Court considered the issue.
The Court’s Decision
CASPA provides that when a contractor or subcontractor performs work, it is entitled to payment from the party with whom it has contracted. If payment is withheld, CASPA imposes penalties, interest, and attorneys’ fees for failure to comply with its payment terms. Under CASPA, the term “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.” A “Person” under CASPA is “[a] corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.”
Here, the court determined that the Department of the Navy was not a “Person” under CASPA and, therefore, not an “Owner.” In short, even though the Department of the Navy was not directly involved in the payment dispute between the General Contractor and Subcontractor, CASPA’s definitions of “Owner” and “Person” were central to its determination of the statute’s applicability. In addition, the court acknowledged the Prompt Pay Act as the relevant statutory regime.
Practical Consequences
The Prompt Pay Act is widely considered to be a less favorable remedy for those denied payment, while CASPA is perceived to be more contractor-friendly. The two statutory schemes are different with respect to the timing for required notices, the rate of interest on delayed payments, and the burden of proof required for the awards of penalties and attorneys’ fees. For example, CASPA requires the imposition of a penalty of one percent (1%) per month while the Prompt Pay Act provides a court with the discretion to award an additional one percent (1%) penalty only if the court determines that the nonpaying party acted in an “arbitrary” or “vexatious” manner in withholding payment.
In addition, CASPA mandates an award of reasonable attorneys’ fees to the substantially prevailing party in litigation or arbitration. Under the Prompt Pay Act, the court is permitted, but is not required, to award attorneys’ fees to the prevailing party and only if the party withholding payment acted in “bad faith.” The rate of interest also differs between CASPA and the Prompt Pay Act, in that the CASPA rate is one percent (1%) per month on any unpaid amount that is considered late under the contract or statute. For the Prompt Pay Act, the interest rate is determined by the Secretary of Revenue and thus is less clear and fluctuates. (Currently, the rate is .25% per month.)
In short, for anyone prosecuting or defending against payment claims on public works projects, the PA Supreme Court’s decision in Clipper will likely have a far-reaching impact. This decision is viewed as a victory for those defending against payment claims on public projects because CASPA no longer applies. However, for those pursuing payment claims on public works projects, this decision presents an additional hurdle for recovery.