ALERT: Pennsylvania’s Prompt Pay Act, Rather than the Contractor and Subcontractor Payment Act, Applies to Government Owned Projects

July 9, 2015

As the saying goes, “ownership is 99% of the law.” In Clipper Pipe & Service, Inc. v. The Ohio Casualty Insurance Co., the Pennsylvania Supreme Court considered the question whether Pennsylvania’s Contractor and Subcontractor Payment Act (“CASPA”) applies to a construction project where the owner is a governmental entity. Ordinarily, Pennsylvania’s Procurement Code (Pennsylvania’s “Prompt Pay Act”) applies to public projects.

In this case, the Navy entered into a contract with the general contractor for construction of an addition and renovations to a training center owned by the Navy. The general contractor subcontracted performance of mechanical, heating, ventilation and air conditioning work to a subcontractor. The subcontractor filed suit against the general contractor and its surety, based upon allegations that the general contractor failed to pay the subcontractor in accordance with the terms of their agreement. Eventually, the case proceeded to trial and a verdict was entered in favor of the subcontractor and against the general contractor. Subsequently, the Court awarded interest, penalties and counsel fees available under CASPA rather than the Prompt Pay Act. Because of a conflict between federal case law and state case law concerning the applicability of CASPA or Prompt Pay Act, the Supreme Court of Pennsylvania was asked to resolve the issue.

CASPA typically applies to private projects, and the Prompt Pay Act applies to government owned or public projects. The dispute in this case, however, was between the contractor and subcontractor. Notably, there was no dispute with the owner. Yet, in order to determine which statute applied, the Supreme Court looked to who owned the project and found that since the project was government owned, the Prompt Pay Act applied.

This can make a difference in what’s recoverable, or, as the case may be, what’s owed. Under CASPA, interest shall be awarded at 1% per month, that is 12% per annum, a penalty payment shall be awarded at 1% per month, that is 12% per annum, and reasonable attorney’s fees and expenses shall be awarded to the substantially prevailing party. The Prompt Pay Act, on the other hand, is a bit more discretionary and provides for the award of interest, but at the reduced rate of 3% per annum, penalty interest at 1% per month, that is 12% per annum, but there must be a finding that the outstanding amount was withheld in bad faith, and reasonable attorney’s fees and expenses may be awarded if there is a determination that the failure to pay was in bad faith.

Thus, in the event of a dispute about payment between an owner, general contractor and subcontractor, the threshold question, in order to determine whether CASPA applies or the Prompt Pay Act applies, will be whether the owner is a governmental or public entity or private entity.

For additional information, please contact one of the attorneys in our Business Law Department at (215) 661-0400.

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