Back in June, I posted about changes coming to the Pennsylvania Contractor and Subcontractor Payment Act (CAPSA), 73 P.S. Section 501, et. seq. The Act applies to virtually all private construction projects in Pennsylvania.  As of last week (Oct. 10), those changes are effective.  While there is some argument to the contrary, these changes are NOT retroactive and apply to all projects going forward from that date.  To recap, here are some of the important changes you need to be aware of:

1. 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.
2. 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.
3. 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.
4. 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. (I cannot underscore enough how important this change is.  Going forward you must be hyper vigilant about providing written notice to a contractor or subcontractor the reason you are withholding payment.)
5. 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.

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

The changes take effect on October 10, 2018.  Email me with any questions.

Much of the Eastern United States is just now emerging from a historic two week cold snap.  In much of the Northeast and Mid-Atlantic, the temperature stayed below freezing for 15 days straight.  Cities recorded the lowest temperatures in a quarter century.  Winter Storm Grayson reeked havoc along the Eastern Coast bringing snow to places like Charleston and a crippling blizzard to Boston.

The record cold snap also impacted the construction industry.  Delivery delays, the inability to apply weather sensitive applications (like cast in place concrete), and the unavailability of labor are just a few things that extreme weather can cause on a construction project.  If they happen at the wrong time, delays can destroy project schedules and make previous delays even worse. Delays cost money and can mean the difference between a profitable project from both the owner and contractors perspective.

In order to determine what relief you are entitled to because of the Little Ice Age’s impacts to your project, you need to determine three things.  First, is the delay compensable. Second, is the delay excusable.  Third, is the delay critical.

Is it compensable?

Many contractors contain so called “no damages for delay” clauses that limit a contractor’s right to recover for project delays to an extension of time only.  That means a contractor will be entitled to relief from the agreed upon substantial completion date but is not entitled to additional money for the delay.  There are exceptions to no damages for delay clause, as I discussed in this blog post, back in the day.  But, you need to prove those exceptions first.

Is it excusable?

Weather related delay are rooted in the common law rule of impracticability or impossibility of performance.  This means that the weather delays are only compensable when they are so unusual that neither party could have reasonably anticipated them at the time of contract.  Of course, it is reasonable to assume that one should expect cold weather in the Northeast during the winter.  However, what about extreme cold weather for two weeks, like we just had.  Better yet, what about the extreme cold in the Southeastern Conference portion of the United States?

Where weather related delays often become an issue is when they compound other delays.  For example, a general contractor may have anticipated cold weather in the winter when it agreed to the schedule.  However, it did not anticipate that other project delays would cause its ready mix contractor to have to pour in the winter rather than the fall, as it was anticipated.  In that situation, the delay because an issue both for the general contractor and the subcontractor.

Is it critical?

From the prime contractor’s perspective, the delay must be on the critical path for it to matter. For example, a delay by an interior painting contractor will probably not impact the schedule to a large extent.  However, a contractor whose completion is critical to multiple follow trades, like a structural steel contractor, is almost certainly on the critical path.

What about notice?

Assuming the delay is excusable and it is critical, you need to assure that you are giving proper notice to your counter party.  Even if your contract contains a no damages for delay clause, you still want to seek an extension of time to avoid a liquidated damage claim.  Many contract, however, require you to give notice within a certain amount of time of first learning about the delay.  That means if the weather has impacted your schedule and you believe you will require additional time to perform YOU NEED TO GIVE WRITTEN NOTICE IMMEDIATELY.  Otherwise, you will end up waiving your right to claim additional time or additional compensation.

The United States Court of Appeals for the 5th Circuit has been asked to review OSHA’s twenty year old “controlling employer” policy.  As many contractors are surprised to learn, under OSHA’s controlling employer policy, you can be given an OSHA citation even when your own employee is not exposed to the alleged hazard.

A.  The Controlling Employer Policy

OSHA’s current controlling employer policy has been effective since 1999.  That policy applies to multi-employer worksites, which means virtually all construction sites.  Under the policy, OSHA can cite the creating, exposing, correcting, or controlling employer.  A creating employer is one who creates the hazard to which workers are exposed.  The exposing employer is one who permits his employees to be exposed to the hazard, whether it created the hazard or not.  The correcting employer is one who is responsible with correcting known hazards. Finally, the controlling employer is one “who has general supervisory authority over the worksite, including the power to correct safety and health violations itself or require others to correct them.”  Most general contractors and CM’s are controlling employers.

Under OSHA’s policy, a contractor’s OSHA safety obligations hinges on whether it is a creating, exposing, correcting, or  controlling employer.  The creating, exposing, and correcting contractors obligations are fairly straightforward.  However, the controlling contractors obligations are more nuisanced.

If an employer creates a hazardous condition, it must immediately and effective steps to keep everyone away from the hazard and notify the party responsible for correcting the hazard.  If the creating employer is also responsible for correcting the hazard, then it should immediately take steps to correct it all while creating folks away from the hazard.  Pretty basic.

If the employer is the exposing employer, then a normal OSHA citation analysis applies.  The employer will be cited for exposing its employees to the hazard and OSHA must show that (a) the employer knew or should have known of the condition; (b) that the specified OSHA standard applies; and (c) that the employees were actually exposed to the hazard.

If the employer is the correcting employer, then, as common sense would suggest, it should correct hazards that are made known to it.  Also, the correcting employer should regularly inspect the site to make itself aware of hazards that it could correct.

The controlling employers duties are more subjective.  OSHA admits that the controlling employer’s “duty of reasonable care is less than what is required of an employer with respect to protecting its own employees.”  OSHA lists several factors evaluating whether a controlling employer exercised reasonable care.  The one constant is that a controlling employer should take some form of affirmative steps to (a) make itself aware of hazards and (b) enforce a policy to make sure known hazards are corrected.  In other words, the controlling employer cannot make controlling OSHA violations someone else’s problem.  This attitude is more prevalent than you think.

What should the controlling employer do?  Walk the site at regular intervals to inspect for obvious hazards, engage subcontractors with a strong record of safety, maintaining a worksite safety policy and enforce it.  In other words, just having a manual is not enough.

These steps really make all the difference. I recently navigated my client through an OSHA investigation which resulted in OSHA declining to issue a citation.  As much as I would like to say that my legal acumen saved the day, it was really what my client did long before my involvement, which is to credit. It regularly walked the site, it pointed out obvious hazards, it maintained a safety manual and program which it followed, and it hired subcontractors with strong safety records.  We were able to present all of this to OSHA during the investigation and it is what made the difference.

B.  Criticism of the Policy

The chief criticism of the policy is that it extends beyond the Congressional mandate that OSHA cite employers who expose employees to hazards.  Therefore, OSHA lacks the authority to cite a contractor when those exposed to the hazard are employed by someone else.  In 2007, in Sect. of Labor v. Summit Contractors, Inc., the OSHRC struct down the controlling employer policy. However, the 8th Circuit Court of Appeals overturned that decision and reinstated the controlling employer policy.  Now, the 5th Circuit is asked to review the policy.

C.  Takeaways

The bottom line is that every contractor on a construction site needs to be vigilant about safety in order to avoid ending up in OSHA’s cross-hairs.  Even if your employees are far from the hazard, the best approach is that if you see something say something and of course document it in writing.

Disadvantaged business enterprise (DBE) fraud in the construction industry is a topic frequently covered on this blog.  My posts on DBE fraud are some of my most read posts and the ones that generate the most questions from readers and inquiries.  Many of the posts cover the increased pace of criminal prosecutions involving DBE fraud. One case I blogged about involved the indictment of the steel erection contractor on the new World Trade Center project, DCM Erectors, Inc.

Earlier this month, a federal jury found the defendant in that case and DCM’s owner, Larry Davis, guilty of one count of wire fraud and one count of conspiracy to commit wire fraud for allegedly operating a DBE pass-through scheme for steel erection services on the WTC project.  Then, in a remarkable (to say the least) turn of events, the Judge granted the defense’s motion for acquittal and overturned the jury’s guilty verdict against Mr. Davis.

The Judge’s decision to acquit Mr. Davis hinged on the nuisances required to prove a wire fraud and conspiracy to commit wire fraud.   The case also cast doubt on the ability to prosecute individuals for DBE fraud not involving federally funded projects, like DOT, FTA, FAA, and VA projects.

I.  The Background

The scheme Davis was alleged to have engaged in was a fairly straightforward DBE pass through scheme.  As I have talked about before, a pass through scheme is where a certified DBE does not perform any commercially useful function and the work is actually performed by a non-DBE firm.  That is what prosecutors alleged Davis did.

The WTC project was subject to the New York and New Jersey Port Authority’s DBE program.  Like most DBE programs, the Port Authority’s program had a goal of seeing that DBE firms performed a certain percentage of the overall dollar value of the prime contract.

DCM executed two separate steel erection subcontracts for two different buildings at the project.  DCM was not a DBE firm.  However, on one contract it certified that it had subcontracted with a DBE firm to perform its payroll and survey services.  On the other contract, it entered into a joint venture with a DBE firm.

According to the indictment, no employees of the DBE firm performed work on the JV project.  On the other project, the indictment alleged that the DBE firm performed no survey work and the work and DCM employees actually performed the work.

The indictment alleged DCM and Davis defrauded the Port Authority by “fraudulently claimed MBE credit for One WTC and the WTC Hub in excess of $70 million based on the value of work Solera/DCM purportedly performed” on the World Trade Center project; and b) “fraudulently claimed WBE credit for $6.3 million of surveying and payroll management work GLS purportedly was performing as a subcontractor to DCM on One WTC and the WTC Hub.”

II.  The Wrinkle

There are some critical wrinkles in case that ultimately were important in the Judge acquitting Davis.  First, unlike the DOT’s program, the Port Authority’s DBE program was not the law, i.e. a legislative mandate.  Rather, the Port Authority’s program was its own self-created independent program.  Second, unlike many DOT contracts, compliance with the DBE program was not expressly made a material term of DCM’s contract.  The consequences of a contractor’s failure to comply with the program were apparently limited to potentially not being invited to bid on future projects or having its bid rejected as non-responsive.

III.  The Decision

The Court began its analysis by laying out the elements of a wire fraud claim: “(1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme.”  The Court focused on what Courts have determined amounts to a “scheme to defraud” that satisfies the first element and its nuisances. The Court concluded that “where the purported victim received the full economic benefit of its bargain, an essential element of the bargain is not implicated, and thus the wire fraud statute does not apply.”  Therefore, the Court’s decision hinged on is whether DCM’s compliance with the Port Authority’s DBE requirements “was an essential element of the contracts.” 

The Court then stated that wire fraud goes to an essential element of the contract when (a) the fraud causes economic harm, or (b) where defendant fails to comply with an underlying law.  The Court cited several cases where the defendant’s conduct violated a law independent of the mail and wire fraud statues and where compliance with that law was incorporated into the contract.  The Court also cited several cases where the counter party “did not get what they paid for.”

The decision in U.S. v. Davis is interesting in two regards.  First, it provides one of the most thorough analysis of wire fraud as it related to DBE fraud that I have seen.  Second, it is a bit of an outliner.   Indeed, it is in opposite to Circuit Court opinions that have concluded that non-compliance with a DBE program, by itself, can satisfy the essential element prong of a wire fraud count.  However, those cases provide a much less detailed discussion than Davis.  And, those cases involved DBE programs that fell under the DOT’s DBE program, which, unlike the Port Authority’s program, is the law or where the contracts made compliance a material term of the contract.  Then again, those cases conclude “you used deceit to obtain the contract and payment and therefore the evidence is sufficient for a conviction.”  But, as Davis makes clear the analysis is more nuisanced.

While the Davis decision is significant, it still is only a District Court opinion.  So, it has no precedential value. Furthermore, it would appear to be limited to cases alleging DBE fraud involving a independent DBE program administered by a regional transportation authority, like the Port Authority, a county government, or local municipal government.  Those programs are not typically the result of some legislative action requiring them.

Also, even where program is not the result of a legislative mandate the contract language itself is important because the contract may still made compliance with a DBE program an essential element of the contract.  Many contracts do make compliance a material term.  Also, most construction contracts contain some general duty clause that states the contractor will perform its work according to all applicable codes, laws, and regulations.  It would be interesting to see if the Davis Court would reach the same decision if the DBE fraud were pursuant to a contract which made compliance mandatory (I think it would) or if the prosecution raised a the contract’s general duty clause, which I am sure existed.

It is nonetheless important for attorneys representing defendants in DBE fraud cases to (a) understand the legislative scheme (or lack thereof) giving rise to the program; and (b) to understand whether the contract or subcontract makes compliance with the program a material term.

It is also important, perhaps, more important, for appellate lawyers arguing that a conviction under for wire fraud is not supported by sufficient evidence where the defendant provided the essential services that were bargained for, which in mostly what happens in DBE fraud cases.