There have not been very many Pennsylvania appeal court cases on the payment provisions of the Pennsylvania Procurement Code since its passage in 1998. However, at the end of November, 2005, an important case interpreting the Procurement Code’s payment provisions in respect to subcontractors and suppliers was issued by the Pennsylvania Superior Court, the second highest appeals court in Pennsylvania. This decision concerns when a contractor has to pay its subcontractors or material suppliers on a public works job. Both Executive Director Brenda Reigle and the undersigned PUCA Legal Counsel felt this was a case to be promptly called to PUCA members attention.
Background and Previous interpretation of §3933 of the Procurement Code
When the Pennsylvania Procurement Code was passed, there was a lot of attention generated among contractors, subcontractors, and attorneys in respect to §3933 of the Code titled "Contractors’ and Subcontractors’ Payment Obligations." In this respect, it was interpreted that because of §3902 "Definitions" of the Procurement Code, material suppliers were also included under the payment provisions set forth in §3933. That is because "subcontractor" in the Act is defined as:
"A person who is contracted to furnish labor or materials to or has performed labor for a contractor or another subcontractor in connection with a contract."
As will be explained below, §3933 when passed was interpreted as a "pay-when-paid" provision. In this respect, the commonly-held interpretation under §3933 was that a general contractor was permitted to withhold payment to a subcontractor or a material supplier until the contractor itself is paid by the government agency for which the construction project was performed. However, this, in effect, would negate the payment terms agreed upon in the subcontractor or purchase order between the general contractor and the subcontractor or material supplier. It didn’t matter that such subcontracts and purchase orders provided that the subcontractor or materialman had to be paid by the general contractor within twenty, thirty, or forty-five days after performing the work.
Accordingly, as §3933 was interpreted as a "pay-when-paid" provision, it rendered meaningless payment provisions in agreements between the general contractor and subcontractors or material suppliers.
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In the new decision rendered in late November, the Pennsylvania Superior Court ruled that the fourteen day "payment window" in the Procurement Code and the provision that the money due to a subcontractor must be paid to the subcontractor only after the general contractor has received his payment from the government agency is subject to being "trumped" by the payment provisions in the subcontract between the parties. The "pay-when-paid" interpretation of §3933 was subject to the payment provisions in the subcontract or purchase order.
Again, the Superior Court stated that this alleged “pay-when-paid” provision does not supersede the payment terms agreed to in the parties’ contract, and that payment to the subcontractor (material supplier) must be paid according to the contract between the contractor and subcontractor regardless of whether the general contractor has received payment from the Authority, township or other governmental agency.
Facts of the Case Decided
The case decided by the Superior Court was American Rock Mechanics, Inc. v. N. Abbonizio Contractors, Inc. and F & D Company of Maryland (the bonding company). The contractor, Abbonizio Contractors (Abbonizio) failed to pay American Rock (AMROC) for its work on the West Mill Road Sanitary Sewer Project in Whitemarsh Township, Montgomery County. Abbonizio provided as a defense to payment that it had not been paid by Whitemarsh Township and further, AMROC’s claims were subject to an unspecified setoff. This was Abbonizio’s defense which was, in large, based upon the “pay-when-paid” provisions of §3933 of the Procurement Code.
On the other hand, AMROC contended that the parties (Abbonizio and AMROC) had entered into a written contract for drilling and earth removal services and in that written contract or subcontract, Abbonizio agreed to made progress payments on a weekly basis during the life of the project, with the remaining amounts due within thirty (30) days of the project completion.
Because Abbonizio had not been paid by Whitemarsh Township and did not pay AMROC, AMROC sued for the contract balance due together with an additional award of contract interest and attorneys’ fees. As explained below, Abbonizio lost and had to pay AMROC, even through they had not been paid by Whitemarsh Township.