Excessive Withholding Prompts Award of Interest, Attorney’s Fees and Penalties under Pennsylvania’s Prompt Payment Act

Imperial Excavating and Paving, LLC v. Rizzetto Constr. Mgmt., Inc., 935 A.2d 557 (Pa. Super. Ct. 2007)

Pennsylvania’s Prompt Payment Act (the “PPPA”) is intended to protect contractors and subcontractors by providing guidelines for prompt payment on construction projects.  Under the PPPA, every subcontractor working on a project subject to the PPPA is entitled to payment, according to the proportion of the subcontract completed, within 14 days of the date when the contractor receives a progress payment on the project.  73 PA.STAT. §507(c).  The contractor is, however, entitled to withhold such payment if it has a good faith claim for deficient performance.  73 PA.STAT. §511.  If a contractor unreasonably withholds payment to the subcontractor, the contractor can be assessed interest on the payment (73 PA.STAT. §509) plus a penalty of 1percent per month of the amount that was wrongfully withheld.  73 PA.STAT. §512.  The amount a contractor may withhold is proper if it “bears a reasonable relation to the value of any claim held in good faith.”  See Ruthrauff, Inc. v. Ravin, Inc., 914 A.2d 880 (Pa. Super. Ct. 2006).

The Imperial Excavating case involved the construction of two soccer fields located at a high school.  The grading subcontractor completed its work on the project and submitted an application for payment to the contractor.  The contractor submitted its own application for payment to the owner for the subcontractor’s work, certifying that the sub’s work was completed in accordance with the contract documents.  The owner paid the contractor’s application less retainage, and the contractor paid the subcontractor.

More than two years later, the owner (Southern Lehigh School Distr.) discovered problems with the project when it began using the fields.  (N.b. the school had left the two soccer fields lie fallow for two years after the subcontractor completed its grading and compacting work.)  The problems included ponding of water, excessive rocks, lack of consistent growth of grass, etc.  The owner notified the contractor of the problems and withheld $120,000 from a payment for other services.  The contractor then withheld from the subcontractor $262,330.28 in other payments and retainage for other services as an offset against the owner’s claim.  The subcontractor sued the contractor under the PPPA to recover the payments due plus interest, penalties, and attorney’s fees.

After analyzing the relevant contractual provisions, the trial court determined that the work that was deficient was not in the subcontractor’s scope, but instead, was work that was required by a different follow-on subcontractor who was responsible for “lawns and grasses.”  The trial court thus found in favor of the subcontractor on the merits and awarded the subcontractor the withheld payments plus interest, penalties and attorney’s fees.  The contractor appealed.

On appeal, the Pennsylvania Superior Court affirmed the trial court on all points, noting that the contractor’s withholding of $262,330.28 from the subcontractor did not bear a “reasonable relation” to the $120,000 claim by the owner and was, accordingly, a violation of the PPPA.  On this basis, the Superior Court affirmed the trial court’s award of interest and penalties under the PPPA.  The Superior Court also affirmed the award of attorney’s fees because the subcontractor was a “substantially prevailing party” under the PPPA (see PA.STAT. §512(b)) and as such an award of attorney’s fees was mandatory.

The lesson to learn from this case is that caution must be exercised when withholding sums from contractors and subcontractors, and that any such withholding must be done in good faith and be reasonably related to the value of the claim.  In this case, the contractor’s withholding of a sum in excess of two times the amount of the claim was deemed to be unreasonable and a violation of the PPPA.

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