Richard W. Foltz, Jr.
Pepper Hamilton LLP, Partner
Jeffrey R. Mullen
Pepper Hamilton LLP, Associate
An amended version of this post was published in the March 16, 2015 AGC Construction Law in Brief, the weekly newsletter for the Associated General Contractors of America.
Since 1994, Pennsylvania law has provided enhanced remedies for prevailing in a payment dispute arising out of a construction project. The prevailing party in a recent jury trial discovered uncertainty in the precise contours of those available remedies. There was no clear precedent governing recovery of fees of a testifying expert, necessary to overcome the complex accounting and delay claims asserted by the defendant in response to the invoice dispute, and the method of calculating pre-judgment and post-judgment interest and penalty interest under the statute. Because of the large sums at issue, the difference in calculation methods was significant. Entitlement to these matters was unclear in spite of 20 years of precedent under the Pennsylvania Contractor and Subcontractor Payment Act.
Plaintiff Utility Line Services was hired by defendant PVR Marcellus Gas Gathering, LLC to construct a mid-stream pipeline in Lycoming County, Pennsylvania. The pipeline was to gather natural gas from well pads throughout portions of Lycoming County for transport to a pumping station connecting with a common carrier long range pipeline.
The project was subject to significant delays, caused by delays in permitting, right of way acquisition, and unseasonable weather, including two named storms. Moreover, the schedule for construction was further constrained by “no build” periods during ecologically sensitive times for fish breeding in the exceptional value trout streams the pipeline had to cross, and restrictions on right of way access during hunting season.
Moreover, there were disputes over the scope of work connected with the contract, which contained a mix of lump sum, unit-price and cost-plus elements. These issues led to disputes between the parties, which included a termination of a phase of the project, delay claims, and nearly $17,000,000 in disputed invoices, which the pipeline developer refused to pay. The developer also asserted a counterclaim, including for delay and refund of certain amounts paid.
A hotly disputed lawsuit ensued, tried before Judge Charles B. Burr, II in the Court of Common Pleas of Delaware County, Pennsylvania, and a jury. ULS prevailed on all of its claims, recovering not only for $16,471,010.53 in disputed invoices, but also $7,829,357.11 for wrongful termination of phase 3 of the pipeline project. The jury also decided that all $16,471,010.53 of the unpaid invoices were withheld by the defendant without a good faith basis. Click here for a Legal Intelligencer report on the case.
After the jury verdict, ULS turned to post-trial motions to assert its entitlement to remedies for attorneys’ fees, interest, and costs under Pennsylvania’s Contractor and Subcontractor Payment Act. Post-trial motions sought $4.7 million in statutory interest on the unpaid invoices (1% per month for on the order of 24 months), statutory penalty interest of an additional $4.7 million, and $4.3 million is attorney fees and costs, of which nearly $900,000 was for expert witness charges. ULS calculated the interest elements using monthly compounding; a simple interest claim would have been $800,000 less. Those motions led to another pitched battle, due to uncertainty in the law on these important remedies. The parties reached a confidential settlement, but not before major briefing and argument on disputed issues, which remain unsettled under Pennsylvania law. Click here for an Engineering News Report discussion of the case.
The Contractor and Subcontractor Payment Act
The ability of owners and higher tier participants to withhold payment due lower tier parties has traditionally provided these participants with significant leverage in disputes with contractors and subcontractors. Parties have learned from hard experience that often the hardest part of the job is getting paid for the work.
Historically, unpaid contractors and subcontractors found some recourse in Pennsylvania’s Mechanics’ Lien Law, which allows for a pre-judgment lien to prevent the improved property from being sold out from under the unpaid party. However, most owners and developers now require that lower tier parties sign lien waivers in advance of performing work or receiving any payment at all. As a result, the mechanics’ lien is an increasingly unavailable remedy.
The Pennsylvania Legislature entered the fray in 1994, when it passed the Contractor and Subcontractor Payment Act (“CASPA”), 73 P.S. § 501, et seq., to level the playing field by mandating prompt payment to contractors and subcontractors in accordance with the terms of the contract. CASPA applies to all private construction contracts and subcontracts within the Commonwealth, with the exception of small residential projects involving six or fewer residential units under construction simultaneously, and contracts for the purchase of materials by a person performing work on his or her own property.
To effect the statutory mandate and level the playing field between construction participants, CASPA provides for additional remedies against upstream parties failing to promptly pay for services rendered or materials supplied. CASPA’s armaments include provisions allowing for enhanced interest on withheld amounts, accruing at 1% to 2% per month, as well as an award of attorney fees and expenses to the substantially prevailing party.
Over the decades since its enactment CASPA has proven to be an effective measure of recourse in almost any construction dispute involving payment. Surprisingly, however, CASPA is cited in fewer than 200 reported opinions. As CASPA continues to slowly evolve, many questions remain unanswered. Is interest “simple” or “compound”? Does enhanced interest under CASPA continue to accrue post-judgment on the contract balance or the molded verdict? Are expert fees included within “attorney fee” and/or “expense”? While outwardly simple, the answers to these questions can be game changers in the course of a litigation, particularly where as in the ULS v. PVR case large sums and long delays are involved. Until the courts or the Legislature squarely address these issues, among others, litigants must navigate the grey areas of CASPA’s statutory framework where the potential swing in damages can be in the millions. This article explores some of these unanswered questions and outlines the competing arguments at bay.
Statutory 1% Interest
Section 505(d) of CASPA provides for an enhanced rate of statutory interest on untimely payments. Section 505(d) provides as follows:
INTEREST. —Except as otherwise agreed by the parties, if any progress or final payment to a contractor is not paid within seven days of the due date established in subsection (c), the owner shall pay the contractor, beginning on the eighth day, interest at the rate of 1% per month or fraction of a month on the balance that is at the time due and owing.
The plain language of this provision makes clear that an owner is required to pay a contractor interest at the rate of 1% per month for untimely payments unless the parties agree to a different arrangement. CASPA does not, however, specify whether the statutory interest is “simple” or “compound.”
Of course, owners and contractors defending a claim under CASPA argue for the former calculation of interest. In so arguing, these parties rely on the general common law precept favoring simple interest as the “default.” The Pennsylvania Supreme Court has held that “the law in this Commonwealth frowns upon compound interest and as such will only permit compound interest on a debt when the parties have provided for it by agreement or a statute expressly authorizes it.” Powell v. Allegheny County Ret. Bd., 246 A.2d 110, 115 (Pa. 1968). This precept has been an established part of Pennsylvania’s public policy for over a century, and the Legislature presumably knew of it when it enacted CASPA in 1994. Therefore, these parties argue that because the Legislature chose not to provide that interest is “compound”, and in fact expressly permitted contracting parties to “otherwise agree” to any rate, the Legislature must not have intended to mandate compound interest. Proponents of simple interest also cite to the limited CASPA case law to date. While this precise issue has not yet been addressed in any reported state court opinion, courts awarding statutory interest under CASPA appear to calculate interest at a simple rate of 1% per month or 12% per annum. This position also finds support in the federal case of F.S.I. Inc. v. Viola Constrs., 2003 U.S. Dist. LEXIS 1288 (E.D. Pa. Jan. 21, 2003), where a magistrate judge stated without analysis that simple interest was to be applied.
On the other hand, contractors and subcontractors asserting a claim under CASPA argue for the compounding of interest. These parties contend that a closer look at the language chosen by the Legislature reveals that CASPA does expressly authorize compound interest. CASPA requires an owner to pay its contractor, “beginning on the eighth day [after] payment is due, interest at the rate of 1% per month or fraction of a month on the balance that is at the time due and owing.” Based on a plain reading of the statutory language, these parties argue that an owner is obligated to pay, and the contractor is automatically entitled to receive, the mandatory 1% interest under CASPA on the eighth day after payment was due. At that point and going forward, the interest is compounded because it becomes part of the “balance that is at the time due and owing” to which the 1% per month interest applies.
Proponents of compound interest compare the unique statutory language chosen for CASPA to that used in prior statutory interest provisions. For example, CASPA’s public counterpart, the Prompt Pay Act (the “PPA”), 62 Pa.C.S.A. § 3901 et seq., provides for “simple interest” at the rate of “6% per annum.” Further, unlike the PPA and the standard language employed by the Legislature in the majority of Pennsylvania statutory interest provisions, CASPA specifies that interest applies to the balance due and owing from month to month. It is argued that had the Legislature intended simple interest under Section 505(d) it would have simply stated “interest at 1% per month” or “12% per annum.” These parties contend that the Legislature intended and authorized compound interest because any alternative interpretation renders the modifying language chosen by the Legislature superfluous.
Penalty 1% Interest
Section 512(a) of CASPA mandates an additional 1% interest as penalty on payments that were wrongfully withheld. Section 512(a) provides as follows:
PENALTY FOR FAILURE TO COMPLY WITH ACT.— If arbitration or litigation is commenced to recover payment due under this act and its determined that an owner, contractor or subcontractor has failed to comply with the payment terms of this act, the arbitrator or court shall award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was wrongfully withheld. An amount shall not be deemed to have been wrongfully withheld to the extend it bears a reasonable relation to the value of any claim held in good faith by the owner, contractor or subcontractor against whom the contractor or subcontractor is seeking to recover payment.
Like the statutory interest provided under Section 505(d), CASPA’s penalty provision does not specify whether interest is “simple” or “compound.”
In addition to the arguments outlined above, those arguing for the application of simple penalty interest highlight the Legislature’s use of different language in Section 512(a). Whereas the 1% per month statutory interest is “on the balance that is at the time due and owing,” penalty interest is 1% per month “of the amount that was wrongfully withheld.” Therefore, these parties contend that even assuming, arguendo, statutory interest under CASPA is compound, the Legislature intended for penalty interest at a simple rate.
Proponents of compound interest point out, however, that Pennsylvania courts construing claims under analogous statutory provisions apply compound as opposed to simple interest. See, e.g., Colyer v. Nat’l Grange Mut. Ins. Co., 2001 Pa. Dist. & Cnty. Dec. LEXIS 319 (Pa. C.P. 2001) (compounding interest on insurance claims arising under Pennsylvania’s Bad Faith Statute, 42 Pa.C.S. § 8371(1)) aff’d No. 929-MDA-2001 (Pa. Super. Apr. 24, 2002) (memorandum opinion). Similar to CASPA’s penalty provision, the statutory interest provision considered in Colyer is triggered upon a finding of bad faith and provides for an “[a]ward of interest on the amount of the claim from the date the claim was made by the insured [at the prime rate plus 3%]”. 42 Pa.C.S. § 8371(1). While acknowledging that the statute is silent as to how interest is calculated, the court held that compound interest was warranted. In so holding, the Colyer court “took into consideration, inter alia, the purpose of the statute and the fact that had the legislature solely intended the interest to be simple, it could have stated as much.” Id. at *14. Under CASPA too, withholding a contract balance without a good faith basis is exactly the type of reprehensible conduct contemplated by the statute. And, it is argued, had the Legislature intended simple interest to apply or for penalty interest to be calculated differently, it could have stated as much. Consequently, these parties argue that the additional penalty interest imposed by CASPA is also compound.
The Effect of CASPA Post-Judgment
One development arising out of the construction of CASPA is the application of CASPA’s enhanced interest and penalty post-judgment. Prior to the 2009 Superior Court case Zimmerman v. Harrisburg Fudd I, L.P., CASPA interest and penalties applied only to the period of time prior to the entry of judgment. In Zimmerman, however, the Superior Court expressly held that interest under CASPA continues to accrue post-judgment as an exception to statutory post-judgment interest at the legal rate. See 984 A.2d 497, 501. While Zimmerman and its progeny make clear that CASPA interest continues to accrue post-judgment, courts have yet to specify the principal to which CASPA’s post-judgment interest applies.
Those defending claims under CASPA argue for a narrow application of the court’s holding in Zimmerman and contend that post-judgment CASPA interest and penalties continue to accrue only on the contract balance found due and owing and wrongfully withheld respectively, in the same manner as accrued pre-judgment. Similar to the arguments advanced in favor of the calculation of simple interest, these parties argue that any contrary calculation of post-judgment interest under CASPA stretches Zimmerman too far by impermissibly allowing interest on interest. It is reasoned that had the Legislature intended for stringent post-judgment interest on the molded verdict, it would have stated as much.
On the other hand, however, is the well-settled rule, codified at 42 Pa.C.S. § 8101, that post-judgment interest applies to the molded verdict. CASPA claimants reason that the only difference between post-judgment interest under CASPA and statutory post-judgment interest is the rate of interest that applies. Because statutory interest at the legal rate applies to the molded verdict, and because post-judgment interest under CASPA is an exception to the legal rate under Zimmerman, CASPA claimants contend that the enhanced interest and penalties should also apply to the molded verdict. Borrowing the established doctrine developed in the context of statutory post-judgment interest, it is argued that the molded verdict fixes the amount then due and owing under CASPA, subject to the combined interest and penalty at the rate of 1% per month statutory interest and 1% per month penalty interest, as well as attorneys’ fees that are molded into the judgment.
CASPA’s mandatory fee-shifting provision in Section 512(b) provides as follows:
AWARD OF ATTORNEY FEE AND EXPENSES.— Notwithstanding any agreement to the contrary, the substantially prevailing party in any proceeding to recover any payment under this act shall be awarded a reasonable attorney fee in an amount to be determined by the court or arbitrator, together with expenses.
In the decade since the enactment of CASPA, courts have established standards for determining the “substantially prevailing party.” And, it is now well-settled that the substantially prevailing party includes both parties asserting and defending CASPA claims. Less clear, however, is whether Section 512(b) permits the recovery of expert fees and, if so, what expert fees are recoverable.
Parties seeking to exclude the recovery of expert fees cite to Pennsylvania jurisprudence construing statutory fee-shifting provisions that provide for the recovery of attorney fees and “costs”. These cases hold that expert fees are not included as “costs.” To the contrary, the common and approved meaning of “costs,” as used in statutory-fee shifting provisions, is “court costs” or “docket costs.” In fact, where the Legislature has intended to permit the awarding of expert fees, in many cases it has expressly so provided. See e.g., Grossi v. Travelers Personal Ins. Co., 79 A.3d 1141, 1162 (Pa. Super. 2013) (citing Pennsylvania statutes that expressly use the phrase “expert witness fees”). Consequently, equating “costs” with “expenses”, it is argued that expert fees are not recoverable under CASPA.
On the other hand, those seeking to recover expert fees point out the Legislature’s use of the term “expenses” instead of “costs.” It is argued that had the Legislature intended for the narrow interpretation given to the term “costs” to apply under CASPA, it would have used the term “costs” and not “expenses.” These parties also argue that limiting the recovery to attorney fees and court costs is inconsistent with CASPA’s underlying objective of making an unpaid contractor whole where it is forced to commence litigation to recover amounts due. Further, the parties cite to case law construing an identical fee-shifting provision in the PPA. At least one court construing this language under the PPA has held that “expenses” may include expert fees, but that the recovery is limited to those expert fees incurred to recover the outstanding contract balance under CASPA. See e.g., James Corp. v. N. Allegheny Sch. Dist., 938 A.2d 474, 493-92 (Pa. Commw. Ct. 2007).
Conclusion and Recommendations
In an industry where cutthroat practices have pushed many a contractor to the edge of insolvency, CASPA has given unpaid contractors and subcontractors a tool to push back. As litigators and courts continue to forge this tool, however, the leverage it provides a contractor or subcontractor remains to be defined. While CASPA is still under construction, and regardless of how its provisions are ultimately defined, parties subject to payment obligations should be aware that withholding contract balances may subject the withholding party to significant interest and penalties. And, particularly in light of CASPA’s imprecise statutory language, the withholding party should scrutinize its justification before any payment is withheld.
Contracting parties can add to remedies provided by law, but they cannot detract from many of them, as provided in the statute itself. Many owners and higher tier contractors find it effective to provide for contract remedies that are complementary to the unwaivable CASPA remedies for their benefit. Precise contract language can afford remedies that are both clear and clearly mutual.