The CASPA Amendments Part I – New Rules for the Owner That Withholds Payment

The amendments to the Pennsylvania Contractor and Subcontractor Payment Act (“CASPA”) went into effect on October 10, 2018, and changed the rules for withholding payment on private construction projects. There are now strict procedures that the owner, contractor and subcontractor must follow if they intend to withhold payment downstream. This is Part I of a series of articles I will be writing on the CASPA amendments over the next couple months to make you aware of the important aspects of the amendments. This article focuses on the owner’s right to withhold payment from a general/prime contractor.

The owner’s basic right to withhold payment from a contractor for “deficiency items” was not changed by the amendments and remains intact. “Deficiency item” is still defined under CASPA as “work performed but which the owner, contractor or the inspector will not certify as being completed according to the specifications of a construction contract.”

However, the amendments impose two new requirements on an owner that decides to withhold payment:

(1) The Amount: The amount withheld must be reasonable.
(2) Notice: The owner must notify the contractor of the deficiency item:

(a) in writing;
(b) that includes a written explanation of its good faith reason for withholding;
(c) within 14 calendar days of the date that the invoice is received.

What is the consequence to the owner that does not comply with the foregoing requirements? The amendments provide that a failure by the owner to “comply” with these requirements constitutes a waiver of the basis to withhold payment and necessitatespayment to the contractor in full for the invoice. Think about what that means….

It means that if the owner receives a contractor’s payment application on January 25th, for example, and the contractor does not receive any written notice from the owner about withholding payment by February 9th (15 calendar days later), then the full amount of that payment application is now due to the contractor AND the owner has waived any basis to withhold (i.e., cannot assert a basis to withhold payment on that application in the future). In addition, interest (at 1% per month) and penalty (at 1% per month) is most likely accruing since the owner has waived any basis to withhold. This provides general/prime contractors real certainty in a short time frame at least as to their legal entitlement to a given progress payment.

What is less clear is whether the owner waives its right to withhold payment in the situation where it timely issues a written notice, BUT either: (a) fails to explain in the notice its reasons for withholding; (b) gives a baseless or unsupportable reason for withholding payment; or (c) withholds an unreasonable amount. I would certainly take the position that each of these circumstances constitute a failure to comply with CASPA despite the issuance of timely written notice, and, as a consequence the owner has waived any basis to withhold payment on that application. Whether the courts will ultimately agree with this argument is “to be determined” as the amendments have yet to be litigated, but it is certainly a valid legal argument that the contractor can now assert when pursuing payment.

Lastly, the amendments mandate that when an owner withholds payment from a contractor for a deficiency item, the owner must pay the contractor for each other item that “has been satisfactorily completed” under the contract. For example, assume there is a genuine deficiency in the drywall work performed by a general contractor (and this is the only deficiency at the time). The owner can withhold payment for the drywall work (subject to the requirements discussed above), but the owner must pay for all of the other items of work certified as complete in the pending payment application. This requirement is new in the amendments and precludes an owner from withholding payment of an entire payment application for one aspect of the work that is deficient. An owner that does this now is likely subjecting itself to liability for interest (at 1% per month) and penalty (at 1% per month) on the full amount of the application.

Stay tuned for Part II of this series which will examine the new rules for contractors withholding payment from subcontractors….

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