On June 12, Gov. Tom Wolf signed Pennsylvania Act 27 into law, adding significant additional protections to the Contractor and Subcontractor Payment Act, or CASPA. CASPA was originally passed in 1994, and outlines payment guidelines and protections for contractors, subcontractors and suppliers who work on many privately owned construction projects in the state. In addition to setting forth minimal payment timelines and procedures, CASPA defines what constitutes a wrongful withholding of payment for completed work and mandatory penalties (including statutory interest, penalties and attorney fees) which will be assessed by a court or arbitrator where the statute is violated.
The changes signed into law will go into effect on Oct. 10—120 days after it was signed—and further clarify certain aspects of CASPA which were left unanswered in the original legislation, often leading to disputes between parties as they negotiated contracts for a project or proceeded with work once it was underway.
First, Act 27 confirms that unless specifically authorized by other aspects of the statute, parties to a contract governed by CASPA may not waive its protections by written contract or other agreement. While the argument could be made under the prior legislation that waiver of its key protections was not permitted, the clarification provided by this new amendment should be welcomed by anyone presented with written contract terms attempting to set up a waiver of the statute’s rights in the face of a wrongful withholding of payment.
New Right to Suspend Performance for Nonpayment
Additionally, these important revisions to CASPA add an express right on the part of a general contractor or sub/supplier to suspend performance if payment is not received in a timely fashion according to the parties’ contract or the default payment window provided by law. Absent terms in the contract CASPA requires owners to pay within 20 days from invoice, and GCs and subs must pay within 14 days from receipt of invoice or payment.
Pursuant to the new legislation, the general contractor or sub/supplier may suspend performance—without penalty—until payment is received if 30 days have passed since the end of the billing period in which payment is sought, and the payee provides written notice of default to the payor by email or regular mail. Where the situation is not rectified in 30 days of that notice, work can be suspended following an additional 10-day notice served by certified mail. If the parties’ contract includes an express right of suspension for nonpayment, that procedure should be followed, but it may not exceed the timing provided by Act 27’s new suspension procedure.
While this statutory right of suspension seems at first blush to be overly generous to the party owing payment, careful monitoring of the initial 30 days after the end of a billing period, and prompt service of the first notice, might afford a contractor or subcontractor genuine relief where halting or threatening to halt operations for nonpayment is appropriate. While not advisable under every scenario, this new right to stop work—or threaten to stop work—may prove to help even the playing field between owners, contractors and subs as work proceeds on a given project.
Written Notice of Deficiency Clarified
For years, we have advised owners, contractors and subcontractors of the importance under CASPA of providing written advance notice where there is a defect in performance and an intention to withhold payment. Act 27 passes into law much needed clarification on the question of what that notice should state.
Effective this October, anyone intending to withhold payment for defective work must set forth the precise amount to be withheld and a written explanation of the good faith basis for the holdback. Owners must provide this accounting and explanation within 14 days of a contractor’s invoice, and contractors and subs must do so within 14 days of their learning of the deficiency from the party above them. The failure to provide proper and timely written notice will waive the payor’s right to withhold any amount, and necessitate payment in full. As always, payment for all satisfactory work must be made when due. A party never has the right under CASPA to withhold payment for an amount larger than the precise amount in dispute.
Act 27 also adds to CASPA’s retainage provision. Often a problem contractors and subcontractors must face long after their work on a project is complete, these amendments allow a contractor or sub to post a maintenance bond in the amount of 120 percent of the retainage being held in exchange for its release prior to final completion. Additionally, Act 27 outlaws the withholding of retainage for greater than 30 days after final acceptance of the work unless a proper written notice of deficiency (per the revisions discussed above) is issued. The unreasonable withholding of acceptance of work by an owner, contractor or subcontractor continues to be illegal and subject to CASPA interest, penalties and attorney fees.
The real impact of these changes to CASPA will take time as parties to the construction process become educated and begin to implement and enforce them properly. No changes have been made to the Public Prompt Payment Act governing public works projects.