Last week, the Supreme Court of Pennsylvania  issued a decision which has important consequences for all members of the construction industry involved with public works projects. In Clipper Pipe & Service, Inc. v. The Ohio Casualty Insurance Co., the Court held that the Contractor and Subcontractor Payment Act (CASPA), which is a statute that addresses when payments are to be made on construction projects and provides remedies for noncompliance, does not apply to public works construction projects. The Court’s decision means that, when working on public projects, the contractor-friendly remedies under CAPSA are not available to contractors and subcontractors, who must now rely exclusively on the less favorable and less certain relief under Pennsylvania’s Prompt Payment Act (PPA).

Court, vintage scales and dollar sign.

Prior to the Court’s decision, it was unclear whether CASPA applied to nonpayment claims on public works construction projects because the courts were divided. After the Supreme Court’s decision in Clipper Pipe, CASPA’s favorable remedies are no longer available to contractors or subcontractors on public works projects.  Those remedies are only available on private construction projects in Pennsylvania.

By clarifying the applicability of CASPA, the Court’s holding has practical consequences for all construction project participants. CASPA and the PPA have important differences that affect the rights of owners, contractors, and subcontractors (which includes second-tier subcontractors/suppliers). The most important differences involve the penalty, attorney’s fees, and interest provisions of the respective statutes.

CASPA requires a court to impose a penalty of one percent (1%) per month on a party who has wrongfully withheld payments. The PPA provides a court with discretion to award an additional one percent (1%) penalty if the court determines that the nonpaying party acted in an “arbitrary” or “vexatious” manner in withholding the payment(s) in question. The CASPA penalty, unlike the PPA penalty, is not discretionary.  Therefore, an unpaid contractor has a better chance of recovering additional damages under CASPA than under the PPA for wrongful withholding of payments.

CASPA also mandates an award of reasonable attorney’s fees to the substantially prevailing party in litigation or arbitration. The court is permitted, but not required, to award attorney’s fees under the PPA to the prevailing party, if the party withholding payment acted in bad faith. Although a contractor has a higher burden under CASPA (“substantially” prevailing party), if it meets that standard, the court must award attorneys’ fees.  Under the PPA, if a contractor meets the lower standard (“prevailing party”), a court can still decide not to award attorney’s fees, even if the court determines that the nonpaying party acted in bad faith.

In addition to these remedies, under CASPA, unpaid contractors or subcontractors can recover interest at a rate of one percent (1%) per month on any unpaid amount that is considered late under the contract or statute. Conversely, the PPA’s rate is determined by the Secretary of Revenue and thus, is less clear and fluctuates (currently, the rate is .25% per month).

Given the differences between the two payment statutes, those defending against payment claims on public projects – which can include owners, contractors, or, in some instances, subcontractors – will view this decision as a good one because the more favorable CASPA remedies are no longer available.  Those prosecuting such claims – which can include contractors or subcontractors – may perceive it as weakening their ability to induce payment.

It is important for owners, contractors, and subcontractors to know ahead of time what potential costs and legal standards apply to their construction projects.  These legal standards affect the likelihood of recovering costly expenses such as attorney’s fees, which, in turn, influences business decisions involving payment disputes.  While members of the construction industry will view this decision differently, they can all agree that the Court brought clarity to this previously unresolved issue.

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.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Patrick Cullen, a summer associate with Cohen Seglias, contributed to this post.