WHEN CONTRACTORS NEED TO USE SPECIAL TOOLS TO GET PAID
August 31st, 2018 | James T. Shoemaker
Cashflow is the lifeblood of the construction industry. Not being paid for a job can jeopardize a business and threaten future projects.
Sometimes a demand letter written by an experienced business law attorney will result in payment by letting the debtor know that you mean business. However, HKQ Law Attorney James Shoemaker cautions that “in many instances, stronger action may be required. One option is a breach of contract lawsuit.“
Disputes involving $12,000 or less are usually treated as small claims cases. In most of Pennsylvania, most of these cases are adjudicated by a magisterial district judge. Some individuals who pursue small claims cases choose not to have legal representation, and may instead present their own cases. The decision of the small claims court can be appealed by either party. The appeal would be heard before a Pennsylvania Court of Common Pleas.
A Court of Common Pleas is where breach of contract cases involving over $12,000 are typically filed. Cases before one of these Courts are more complex than small claims cases. It is not advisable to initiate a Court of Common Pleas case without the representation of a highly-qualified construction law attorney. Prevailing in a breach of contract lawsuit requires (1) a valid written or oral contract with some method of enforcement; (2) a material violation of contract terms; and (3) proof of damages or losses. A well-crafted contract can enhance the chances of a contractor receiving a favorable judgment.
The prospect or initiation of a breach of contract lawsuit may lead to a desire on part of the debtor to reach a settlement. An experienced attorney is invaluable in negotiating terms favorable to the contractor and incorporating them in the settlement agreement.
Aside from traditional litigation, there are other legal tools that can help a contractor collect a debt. These tools provide the contractor with a number of statutory protections, which include potential prejudgment liens, substantial penalties and interest on funds wrongfully withheld, and even attorneys’ fees. The Pennsylvania statutes which set forth the protections includes the following:
- Pennsylvania Mechanics’ Lien Law of 1963
- Contractor and Subcontractor Payment Act (“CASPA”)
- Prompt Payment Act (“PPA”)
Pennsylvania Mechanics’ Lien Law
A mechanic’s lien is a security interest placed on a title to real property for the benefit of those who have supplied labor or materials that improve that property.
Our state’s Mechanics’ Lien Law has very specific requirements for contractors and subcontractors regarding when and how to file a lien, and provide notice to the real property owner. Failure to follow the procedures and meet the deadlines will invalidate a contractor’s or subcontractor’s claims. Under §1301 of the Mechanics’ Lien Law, a contractor or subcontractor is able to file and “perfect” a mechanic’s lien against the title of real property for the payment of debts due by the owner to the contractor or subcontractor for labor and materials furnished in the erection, construction, alteration or repair of the property. In Pennsylvania, a mechanic’s lien has priority from the date materials are delivered or the contractor begins construction. However, regardless of that date, a mechanics’ lien may be subordinate to purchase-money mortgages or certain open-ended construction mortgages.
Mechanics’ liens can not be filed on public works projects, as such projects provide labor and material payment bonds as a security in exchange for giving up right to file a mechanics' lien. On a related note, property owners are no longer able to require contractors to waive their rights to file a lien in advance if the work will be performed on a non-residential property.
Contractor and Subcontractor Payment Act
Until 1994, unpaid contractors had relied heavily, if not exclusively, on Pennsylvania’s Mechanics’ Lien Law for a measure of relief. Additional remedies were introduced in 1994 with the passage of the Contractor and Subcontractor Payment Act, which in essence clarified Pennsylvania common law. CASPA applies to all construction contracts within Pennsylvania (with two exceptions). The Act contains a provision that requires an owner who misses the established payment due date to pay the contractor interest at the rate of 1% per month or fraction of a month on the balance that is at the time due and owing. It is important to note that under CASPA contractors are subject to the same penalties for non-payment to subcontractors as owners are for non-payment to contractors.
Recently passed amendments which go into effect on October 20, 2018 will strengthen contractors rights by, among other things:
- Allowing contractors to suspend work for non-payment
- Enabling contractors to facilitate release of retainage before final acceptance
- Prohibiting the wavier of CASPA protection except as permitted by the Act itself
- Entitling contractors to written explanations for withholdings
Prompt Payment Act
The PPA applies to contracts exceeding $50,000 for construction, reconstruction, alteration, or repair of any public building, public work, or improvement where the contracting body is the Commonwealth of Pennsylvania, any state-aided institution, or any political subdivision, local governmental unit, local authority, or other public instrumentality (referred to in the PPA as “government agencies”). There are a few important exceptions to the payment obligations imposed on government agencies by the PPA.
The PPA sets payment deadlines for payment to contracting parties. It contains penalty provisions similar to those set forth in CASPA, and affords rights to recover penalties, interest, attorney’s fees, and costs.
If you are a contractor who is owed a substantial amount of money for a construction project, HKQ Law can put our experience to work for you. To speak with a business law attorney, call (800) 760-1LAW (1529).