In the world of construction, the old legal saying “equity aids the vigilant, not those who slumber on their rights” rings true. A weary contractor risks more than an OSHA violation – when a contractor fails to protect its legal rights, it can wake up near the end of the project only to find that it has lost a substantial amount of money with little ability to recover.
By: Joyce J. Sun and Peter Plevritis
As a contractor or subcontractor, timely receipt of payment can be the difference between continuing to grow your company and closing its doors. Because of this, contractors and subcontractors will frequently try to shift the risk of nonpayment by the owner onto their subcontractors through the use of what are known as “pay if paid” clauses in their contracts. A typical pay if paid clause states that the contractor only has to make payment to its subcontractor if it receives payment from the owner for the subcontractor’s work. Therefore, if the owner never pays the contractor, the contractor would never have to make payment to the subcontractor.
In New York, these types of clauses have been unenforceable since 1995, when New York’s highest court decided the landmark case of West-Fair Elect. Contr. v. Aetna Cas. & Sur. Co. In that case, the New York Court of Appeals decided that pay if paid clauses violate New York’s public policy that subcontractors cannot waive their mechanic’s lien rights absent a waiver given in connection with actual receipt of payment. The Court reasoned that a pay if paid clause functions to waive a subcontractor’s right to file a mechanic’s lien because a subcontractor’s right to file a mechanic’s lien arises only when payment is due from the contractor. If a pay if paid clause were in effect, then hypothetically, if the owner never makes payment to the contractor, the subcontractor would never have a right to payment and would never have a right to file a mechanic’s lien.
The Court in West-Fair distinguished a pay if paid clause from a “pay when paid” clause. A pay when paid clause fixes a reasonable time for payment instead of creating a situation where a subcontractor never receives payment from a contractor because the owner never pays the contractor. But beware; courts will look beyond the words of the clause to make sure the clause is not really functioning as an unlawful pay if paid provision.
The context in which pay when paid clauses are most commonly seen is when dealing with retainage. If phrased properly, the withholding of retainage can be a valid pay when paid clause, merely fixing the time of payment from the contractor as opposed to making it conditional upon receipt of payment from the owner. However, if you make receipt of retainage from the owner the condition for the release of retainage to the subcontractor, that would be an invalid pay if paid clause. This scenario often arises when payment is conditioned upon acceptance of the work by the owner.
The withholding of retainage in this context is not without its own limitations. Contractors may not withhold retainage indefinitely or where the owner is unreasonably unwilling to approve the work. In fact, one of New York’s intermediate level courts has held that once the owner accepts the work, the contractor cannot withhold retainage from the subcontractor, even where the owner has not yet made payment to the contractor.
To those contractors and subcontractors who also perform work outside of New York’s borders, it is important to know that not all states protect subcontractors from the harsh outcomes associated with pay if paid clauses.
Joyce J. Sun is a Partner with Cohen Seglias Pallas Greenhall & Furman and focuses her practice on complex construction litigation. She has extensive experience preparing, analyzing and litigating delay and suspension claims, default and termination claims, extra work disputes, and bid protests involving public construction projects.
Peter Plevritis is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. He focuses his practice on complex construction litigation.
Separate but commonly owned or related companies are common place in the construction industry. It is also common for contractors to get squeezed by late or nonpaying owners and/or subcontractors demanding payment for work performed. A recent case in New Jersey highlighted the pitfalls contactors and their owners can fall into in these situations, and the harsh ramifications they could face if they don’t follow corporate policies and are less than honest in their representations to owners and their subcontractors.
In AACON Contracting, LLC v. Glen Poppe et al. (A-1500-11T2), the Appellate Division in New Jersey upheld a trial court decision that found that Glen Poppe, individually, and the three corporations that he owned and controlled, Walter H. Poppe General Contractors, Poppe Construction (“Poppe Construction”) and Poppe Contracting (“Poppe Contracting”), were jointly liable to their subcontractor, AACON Contracting, LLC (“AACON”) for fraud. AACON contracted with one of the Poppe entities, Poppe Construction, to serve as a masonry and concrete subcontractor for the construction of a new Walgreens pharmacy. Prior to entering into the subcontract with AACON, Poppe Construction represented that it was the general contractor and had a contract with Walgreens. But in actuality, a different entity, Poppe Contracting, was the party that had a contract with Walgreens.
During the course of the Project a dispute arose between Poppe Construction and AACON regarding the installation of a concrete floor. The third entity, Walter H. Poppe General Contractors, was the company issuing payments to AACON. These payments stopped when the dispute arose, resulting in the withholding of the contract balance from AACON. However, Poppe Contracting continued to represent to Walgreens in its payment applications that it was paying AACON, and Walgreens continued make payments. At the same time, Poppe Construction was representing to AACON that that it could not pay AACON because it had not received payment from Walgreens, and that AACON would be paid when Poppe Construction was paid by Walgreens. AACON relied upon these representations and continued working.
AACON then filed a construction lien claim against the project for unpaid work. Walgreens paid AACON $34,900 in exchange for AACON’s completion of its work and discharge of the lien. AACON arbitrated its payment dispute with Poppe Construction, and was awarded the majority of its contract balance. AACON then filed a lawsuit against all three corporations and Glen Poppe, individually, for, among other things, fraud. The trial court held Glenn Poppe and all three corporations liable for fraud.
Corporate and Personal Liability for Fraud
The Court’s finding of fraud was based on several key facts: (1) that Poppe Construction represented to AACON that it had a contract with Walgreens when it didn’t; (2) Poppe Contracting and Glenn Poppe represented to AACON that it would be paid when Walgreens issued payment, when in fact Walgreens had already issued payment to Walter H. Poppe General Contractors; (3) Poppe Contracting represented to Walgreens that it had paid AACON for its work, when it fact it hadn’t; and (4) AACON was induced to continue working on the project by Poppe Construction’s misrepresentation that it had not yet been paid by Walgreens.
Finally, and perhaps most significantly, the Court held that Glen Poppe was personally liable for the fraud of the corporations because he clearly controlled all three corporations and was the sole individual responsible for “the shuffling of these corporations” to avoid their payment obligations to AACON.
The Poppe case reminds us of the importance of maintaining corporate formalities when operating related businesses, and that when they are not, the related entities, and the individuals who control them, can be jointly liable for their debts. Most importantly, general contractors, and their principals and officers, must avoid making false certifications to owners regarding the status of payments to owners, and also false statements to subcontractors regarding the status of payments from owners, lest be subject to claims of fraud and personal liability.
Robert Ruggieri is a Senior Associate at Cohen Seglias Pallas Greenhall & Furman PC and practices in the area of complex construction litigation.
Jennifer Budd, an Associate with Cohen Seglias contributed to this post.
By: Jason C. Tomasulo
An amendment to the Virginia Public Procurement Act (VPPA) has cut in half the amount of time a sub-subcontractor or supplier has to make a payment bond claim on public construction and transportation projects in Virginia. Payment bonds ensure payment to those who provide labor materials, equipment rentals and public utility services to a construction project. The VPPA requires payment bonds on public construction projects that exceed $500,000 and transportation projects that exceed $250,000.
Prior Law – 180 Days Notice
Until last year, the VPPA required a sub-subcontractor or supplier of a first-tier subcontractor to provide notice of its payment bond claim to the contractor who secured the payment bond within 180 days from the day it last furnished labor or material. Failure to timely provide notice is fatal to a payment bond claim. It was well established in Virginia that this 180-day period could not be shortened by the bonding company or the contractor, even when language in the payment bond required notice within a shorter period.
Current Law – 90 Days Notice
All of that changed last year when the Virginia Legislature amended the VPPA and reduced the notice period from 180 days to 90 days. This change makes the VPPA consistent with:
- The notice period typically required by sureties in payment bonds;
- The notice requirements for similarly situated claimants in Maryland, the District of Columbia and Pennsylvania under their state statutes; and
- The Federal Miller Act, which applies to federal projects in Virginia and elsewhere.
Sub-subcontractors and suppliers to subcontractors in Virginia must be aware of this change in order to protect their payment bond rights on public construction projects. A sub-subcontractor or supplier who fails to timely provide notice within 90 days of last providing labor or materials will lose his right to assert a payment bond claim. For contractors, subcontractors and sureties defending against a payment bond claim, the reduced notice period may provide a defense to payment bond claims if the claimants are not aware of this statutory change.Jason Tomasulo is Senior Counsel at Cohen Seglias Pallas Greenhall & Furman PC. He focuses his practice on construction law and represents owners, general contractors, subcontractors, suppliers and sureties.
Jason C. Tomasulo is Senior Counsel at Cohen Seglias Pallas Greenhall & Furman PC. He focuses his practice on construction law and represents owners, general contractors, subcontractors, suppliers and sureties.
It goes without saying that subcontractor management is a tricky business for those who select and contract with subcontractors in these interesting economic times. The earlier a general contractor can recognize the warning signs of a subcontractor’s financial troubles, the better. Early diagnosis of a subcontractor’s potential financial troubles can give a general contractor a chance to better protect itself from claims by unpaid vendors, sub-subcontractors and other entities. The following are some, but not all, of the warning signs that your subcontractor may be headed towards serious financial trouble:
- Falling Behind Schedule – The subcontractor fails to complete scheduled activities and/or satisfy project milestones in a timely manner;
- Late Deliveries – Material is delivered to the project site late and/or the wrong material is delivered to the project site;
- Inquiries from Suppliers and Vendors Regarding Payment – Suppliers, Vendors, Sub-sub contractors and/or other entities contracting with the subcontractor begin to complain about late payment or non-payment;
- Inadequate Manpower – The subcontractor fails to adequately man the project as it anticipated at the time the subcontractor bid the work;
- Failure To Document – The subcontractor fails to submit required documentation in a timely manner, such as daily reports;
- Equipment – Equipment the general contractor expects to see at the project site is absent or, if it appears at the project site, fails to function properly;
- Excessive Claims – The subcontractor begins to submit an excessive number of claims and/or notices of potential claims; and
- Asks for advance payment – The subcontractor requests advance payment and/or expresses concern about the flow of payment.
The presence of one or several of these factors on a particular project site may indicate that a subcontractor is headed for financial trouble. In this event, a savvy general contractor who has the right provisions in its contract can employ certain policies and procedures at the jobsite to minimize or protect itself from claims by vendors, suppliers and/or other sub-sub contractor entities. For instance, the general contractor may be able to pay by “joint check” (i.e. checks that name the subcontractor as well as the sub-subcontractor or supplier for whose work or materials are at issue). Also, the general contractor might be able to mandate that releases of all claims to date be executed before making any payment. Finally, the general contractor might, if necessary, call on the payment and performance bonds provided by the subcontractor. In order to utilize these strategies, however, critical contract provisions that address each of these issues must have been made part of the parties’ contract. In the coming months, we will examine the force and effect of specific contract provisions.
By: Jennifer M. Horn and Robert Ruggieri
A September 1, 2011 decision by the Maryland Court of Special Appeals reminds us of the critical importance of strictly following contractual and procurement procedures before performing change order work for a pubic entity; and of the perils of proceeding with work outside the scope of a contract without formal approval, even where employees and agents of the public entity request and provide informal, and even written authorization, for the additional work.
Baltimore County, Maryland v. AECOM Services, Inc., f/k/a DMJM H&N, Inc.
This case concerned a dispute between Baltimore County (County) and DMJM H&N, Inc., now known as AECOM Services, Inc. (DMJM) over payment for services performed by DMJM for the County in connection with the expansion of the Baltimore County Detention Center (Project). DMJM entered into a contract with the County to provide architectural and engineering services for the Project. The County sued DMJM seeking damages for an alleged breach of contract and negligence. DMJM countersued, seeking payment for services provided both under the “base contract” and for “additional services” performed outside the scope of the base contract. After trial, the jury found that DMJM did not breach its contract, and had not been negligent. More importantly, the jury awarded DMJM damages in the amount of $1,653,600, the majority of which included payment for the additional services. Appeals followed, with the most important issue being whether DMJM was entitled to payment for the additional services where DMJM had not obtained a formal contract amendment approved by the County Council for the additional services.
Language in the contract required not only written authorization by the County, but also approval by the County Council before the contract amount could be increased. DMJM claimed that during the course of the Project it had performed significant additional services valued at $1,471,498, that were authorized and requested by County officials, but had not been formally approved by a contract amendment.
The Court’s “Harsh” Ruling
The Appeals Court, relying on a strict interpretation of the contact, the Baltimore County Charter, the Baltimore County Code, and prior Maryland case law, reversed the jury’s award to DMJM for the additional services, and held that DMJM was not entitled to payment for any of the additional services because they were not formally approved by the County and County Council in a written amendment. First, the Court stated that the contract language unambiguously required written authorization from the County to obligate the County to pay for the additional services. Second, the Court found that the Baltimore County Code and Baltimore County Charter required that a contract amendment had to be approved by the County Council to be enforceable; because the County Council never approved an amendment for the additional services, the County could not be liable for payment. Finally, the Court relied on prior Maryland case law that set forth the principle that “a government entity may never have an obligation imposed upon it except in the formal manner expressly provided by law.” The rationale behind this principle, the Court provided, is that public funds must be protected by stringent procurement procedures, not only against outside parties, but even against its own employees and agents.
The Court was not persuaded by DMJM’s argument that County Council approval was only required for the underlying contracts, but not for changes to existing contracts. Nor did the Court accept DMJM’s argument that the County had waived its right to rely the strict procedures of the contract and Baltimore’s code and charter by acting and proceeding as if all the requirements had been met and informally approved and authorized the additional services.
The Court acknowledged that its ruling was harsh, but insisted that it was not unjust, and that there are sound policy reasons for its harshness. The Court reasoned that DMJM knew, or should have known, by the terms of the contract, that County Council approval was required for all amendments, and that the law imputes upon the party contracting with the municipality knowledge of the municipality’s limitations. The Court’s decision makes it abundantly clear that even if the additional services were done at the express request and direction of the County’s employees and agents, DMJM would still not be entitled to payment because the exact contract requirements were not fulfilled. The Court reasoned that it is more reasonable that an individual contractor or design professional occasionally suffer from the mistakes of public officials and agents who improperly authorize additional work than to risk detriment or injury to the public. The Court also reiterated that no state more rigidly enforces these principles than Maryland, and that those who deal with employees and agents of a Maryland municipality must, at their peril, take notice of the limits of the powers of both the municipality and those who assume to act as its agents and officers.
Not all states are as unforgiving as Maryland when it comes to allowing payment to contractors and design professionals who have performed work not approved in 100% accordance with contract requirements. States such as Pennsylvania, in certain circumstances, will consider other factors, such as whether the municipality was prejudiced and/or whether the municipality, though its conduct of requesting and informally approving additional work, waived its right to rely on strict contractual procedures to avoid payment obligations. Nonetheless, this case provides an important lesson to all contractors and design professionals, in any state, of the importance of strictly following procedures for changed or extra work and the perils of not doing so, especially when contracting with public entities.
Owners and contractors should be aware of a significant October, 2009 Pennsylvania Superior Court decision, Zimmerman v. Harrisburg Fudd I, L.P., which clarifies the standard for the award of post-judgment interest and attorneys’ fees under the Pennsylvania Contractor and Subcontractor Payment Act (CASPA). In this case, the Superior Court held that a contractor who has obtained a judgment against an owner under CASPA may recover post-judgment interest and penalties, as well as attorney’s fees and expenses incurred to collect the money owed.
The Pennsylvania Contractor and Subcontractor Payment Act
CASPA is a Pennsylvania statute that dictates the proper timing for payment for construction work. CASPA also provides for interest, penalties (when appropriate) and attorneys’ fees when owners or contractors fail to comply with these payment obligations. According to the Zimmerman Court:
The underlying purpose of [CASPA] is to protect contractors and subcontractors… [and] to encourage fair dealing among parties to a construction contract . . . The statute provides rules and deadlines to ensure prompt payments, to discourage unreasonable withholding of payments, and to address the matter of progress payments and retainages. Under circumstances prescribed in the statute, interest, penalty, attorney fees and litigation expenses may be imposed on an owner, contractor or subcontractor who fails to make payment to a contractor or subcontractor in compliance with the statute.
Background of the Zimmerman Case
In this case, Zimmerman, a contractor, entered into a construction contract with Fudd, an owner, for the installation of floor and wall improvements for a new restaurant that Fudd was building. Following completion of its work, Zimmerman submitted an invoice for $10,108.70. Over 4 months later, he was still waiting for payment.
Refusing to wait any longer, Zimmerman elected to invoke CASPA, and filed a claim for breach of contract against Fudd. On the day the matter was scheduled for compulsory arbitration, the parties agreed to the Board’s entry of a stipulated award in favor of Zimmerman for $21,673.99, consisting of the $10,108.70 contract claim plus $11,565.29 of statutory interest, penalty and attorneys’ fees.
Getting paid on time for work performed on a construction project is a natural concern for subcontractors. Generally speaking, your subcontract with the general contractor contains a payment clause that sets forth when and how you are entitled to receive payment. Two commonly used types of payment clauses are “pay if paid” and “pay when paid” clauses. In Pennsylvania, these two types of payment clauses are treated differently by the courts. Therefore, it is critical that you know the difference between both types of payment clauses so you can recognize if they are part of your subcontract.
What is a “Pay if Paid” Clause?
A “pay if paid” clause is a payment clause that states that the contractor is obligated to pay its subcontractors only if the contractor receives payment from the owner. In other words, if the owner never pays the contractor, the contractor has no duty to pay you. Pennsylvania courts view a pay if paid clause as a “condition precedent.” This simply means that payment to the contractor by the owner is one of many conditions that must be satisfied before any payment is due to the subcontractor. Just as you would not be entitled to payment if you did not perform the work, you would not be entitled to payment if the owner never paid the contractor. When this type of payment clause appears in a subcontract, the owner’s payment to the contractor is added to the list of conditions, such as satisfactory performance of the work and submission of an application for payment, that must be fulfilled before the subcontractor is entitled to payment.
What is a “Pay When Paid” Clause?
A “pay when paid” clause is a payment clause that states that the contractor is obligated to pay its subcontractors following receipt of payment from the owner. In other words, if the owner delays three months in paying the contractor, the contractor has no duty to pay you during that period of delay. Pennsylvania courts view a pay when paid clause as a “timing mechanism.” This means that payment by the owner triggers the timing of when the contractor must pay you. When this type of payment clause appears in a subcontract, the owner’s payment to the contractor is an event that starts running the clock on when the contractor must pay the subcontractor. In general, the subcontractor must be paid pursuant to the terms of the subcontract. If the subcontract does not contain payment terms, then the subcontractor must be paid within a reasonable period of time.
Pay if Paid vs. Pay when paid: Why Does it Matter Which Clause is in My Subcontract?
The difference between these two types of payment clauses is significant and highlights the need to carefully review subcontracts with your attorney. Where there is a “pay if paid” clause in a subcontract, the subcontractor and the contractor share the risk that the owner will fail to pay. If the owner fails to pay the contractor, it is unlikely that the subcontractor will succeed on a claim against the contractor for payment.
By contrast, where there is a “pay when paid” clause, the subcontractor and the contractor do not share the risk of owner non-payment. Because a “pay when paid” clause controls only the timing of payment, not whether any payment is due, Pennsylvania courts generally allow a subcontractor to sue a contractor for non-payment where a reasonable amount of time has passed following the subcontractor’s demand.
Which is Better: “Pay if Paid” or “Pay When Paid”?
In Pennsylvania, “pay when paid” clauses are better for subcontractors. This is because the courts recognize that where there is a “pay when paid” clause rather than a “pay if paid” clause, the contractor still has a duty to pay the subcontractor even where the owner defaults. Because Pennsylvania courts view these clauses differently, and because they can look similar, it is important to carefully review your subcontract with a Pennsylvania attorney who can properly advise you as to the risk of non-payment if you enter into the subcontract.
It is not uncommon, especially in today’s economy, for a subcontractor to perform work on a project but not get paid. Under Pennsylvania law, there are several courses of action a subcontractor can take to recover payment. One option is for a subcontractor to seek payment directly from the general contractor under a breach of contract claim. When bringing such a claim, it is important to remember that, even if successful, a subcontractor may not be able to recover payment for many reasons, including bankruptcy or non-payment from the project owner. Accordingly, it is wise for a subcontractor to seek other avenues for payment, such as filing a mechanic’s lien against the project or asserting an unjust enrichment claim against the owner and possibly even the project lender.
Valid mechanic’s liens ensure that a contractor has a secured interest in the property where the work was performed, whereas a successful unjust enrichment claim allows a contractor to obtain payment from a third party, such as an owner or lender, when that third party benefits from the work performed under the contract.
In order for an unjust enrichment claim to be successful, a subcontractor must prove:
- That there was an enrichment, i.e., a benefit conferred by the claimant, and
- That an injustice will result if the claimant is denied recovery for the enrichment
A recent Pennsylvania Superior Court decision has further defined and clarified the requirements of an unjust enrichment claim, and in doing so, has severely limited the situations in which a subcontractor can recover payment from an owner or lender.