Owners and Contractors Beware: Pennsylvania (Significantly) Strengthens Contractor Payment Act
Yesterday, Governor Tom Wolf signed into law House Bill 566 which make major changes to Pennsylvania’s Contractor and Subcontractor Payment Act. Owners and General Contractors that fail to take head of the changes could face significant financial consequences.
The Pennsylvania Contractor and Subcontractor Payment Act, known as CAPSA or simply the Payment Act, was passed into law in 1994. The intent was “to cure abuses within the building industry involving payments due from owners to contractors, contractors to subcontractors, and subcontractors to other subcontractors.” Zimmerman v. Harrisburg Fudd I, L.P., 984 A.2d 497, 500 (Pa. Super. Ct. 2009). In reality, abuses still occurred. While the Payment Act purportedly dictated a statutory right to payment within a certain amount of time and imposes stiff penalties for failure make payment, including 1% interest per month, 1% penalty per month, and reasonable attorneys fees, the language of the Payment Act left recalcitrant contractors with wiggle room. Particularly, the Payment Act allowed owners and higher tier subcontractors to withhold payment “deficiency items according to the terms of the construction contract” provided it notified the contractor “of the deficiency item within seven calendar days of the date that the invoice is received.” 73 P.S. Section 506. The problem was that the Payment Act did not expressly state where the notice must be in written, what it must say, and what happened if notice was not given.
The changes to the Payment Act close this and other loopholes. Here are a summary of the changes:
- Contractual waivers. Parties cannot waive the applicability of the act through contract. Therefore, any clause in a contract purporting to waive the Payment Act’s applicability is void.
- Suspension of work. Unpaid contractors and subcontractors have always enjoyed a common law right to suspend performance until payment was made. Now, they also have a statutory right to do so. Section 5 of the Payment Act ads a subpart (e) which states that an unpaid contractor or subcontractor can suspend performance without penalty if it is not paid.
- Written notice of deficiency items. Owners or contractors seeking to withhold payment must now do so in writing and with a written explanation of its good faith reason for non-payment within 14 days of receiving an invoice that it intends not to pay in whole or in part.
- Waiver of defense to payment. Perhaps the most critical change to the Payment Act is the part that says failure to provide written notice explaining non-payment within 14 days shall constitute a waiver of the basis and necessitate payment in full for the invoice. As it stands, if notice is not timely and properly provided a contractor or subcontractor could file a complaint, get an admission that written notice was not provided, and move for judgment on the pleading or summary judgment. In essence, failure to provide the required notice makes an owner or contractor strictly liable.
- Retainage. If retainage is to be withheld beyond 30 days after final acceptance of the work, then an owner or contractor, as the case may be, must provide written notice as required for deficiency items.