Clipper Pipe & Service, Inc. v. The Ohio Cas. Ins. Co., 2015 Pa. LEXIS 1275 (PA  June 15, 2015)

The Supreme Court of Pennsylvania held that CASPA, 73 P.S. §§501-516, “does not apply to a construction project where the owner is a governmental entity.”  The decision once and for all resolved the issue of whether the Contractor and Subcontractor Payment Act (“CASPA”) applies to payment disputes between prime contractors and subcontractors on public works projects,  either instead of, or in addition to, the prompt payment provisions of the Commonwealth Procurement Code, 62 Pa.C.S. §§ 3931-3939 (commonly referred to as “the Prompt Payment Act”).

The decision is in line with what most practitioners understood, that the Pennsylvania legislature intended to establish two separate statutory payment schemes governing public and private projects.  As argued by the appellants in Clipper, it would seem untenable for both CASPA and the Prompt Payment Act to both apply to a public construction project, given that there are substantial differences in the required notices, the rate of interest on delayed payments and the burden of proof associated with penalty and attorneys’ fee awards.  Despite this seeming incongruence, subcontractors on public projects hoping to access the more advantageous provisions of CASPA have seized on the somewhat imprecise statutory definition of “Owner” to argue that it applied to public projects, as well.  After Clipper ,there is no longer any question that CASPA does not apply to disputes between contractors and subcontractors on public projects, which are governed exclusively by the Prompt Pay Act.

The case arose from a project for certain improvements to the Navy/Marine Corps Reserve Training Center in Pennsylvania’s Lehigh Valley.  In furtherance of the project, the United State Department of the Navy contracted with Contracting Systems, Inc. (“CSI”) as general contractor.  In turn, CSI subcontracted with Clipper Pipe & Service, Inc. (“Clipper”) to perform certain heating, ventilation and air conditioning work at the project.  Eventually, Clipper filed suit against CSI and its surety in the United States District Court for the Eastern District of Pennsylvania, alleging that CSI had failed to pay Clipper sums that were due under the parties’ subcontract.  Clipper further asserted a claim against CSI under CASPA.

CSI moved for summary judgment on Clipper’s CASPA claim, arguing that CASPA cannot apply in the context of a public works project.   The District Court denied the motion and, ultimately, Clipper prevailed on its CASPA claim after the subsequent jury trial.  Judgment was entered in favor of Clipper, and CSI appealed to the Court of Appeals for the Third Circuit.  During that appeal, the Third Circuit applied to the Supreme Court of Pennsylvania for certification of a question of law: “does [CASPA] apply to a project where the owner is a governmental entity, such as the federal government in this case?”  The Supreme Court granted certification.

At the outset of its analysis, the Supreme Court noted that CASPA establishes rights and duties among “owners”, “contractors”, and “subcontractors” as it relates to “construction contracts.”  To the Court, the definition of “owner” is crucial to determining CASPA’s scope because “owner” is a term that is used pervasively in the statute.  For example, as the Court pointed out, CASPA defines “contractor” as a “person authorized or engaged by an owner” to make certain improvements to property. 73 P.S. § 502.  Thus, unless there is an “owner” within the meaning of CASPA, there can be no “contractor.”

Accordingly, as it relates to a public works project, the central question was whether or not the government could be deemed an “owner.”  The Supreme Court held that it could not.

First, CASPA defines “owner” to mean a “person who has an interest in the real property that is improved and who ordered the improvement to be made.”  73 P.S. § 502.  In turn, “person” refers to a “corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.”  Id.  Under the doctrine of ejusdem generis, the Court determined that the government could not possibly be an “other association” within the meaning of CASPA because the term “other association” must take its meaning from the terms that precede it.  In this case, “other association”  could not be read to encompass the government because the government is “dissimilar to a ‘corporation,’ ‘partnership,’ ‘business trust,’ ‘estate,’ ‘trust foundation,’ and ‘natural individual,’ among which the term ‘association’ appears.”

Second, the Court was further convinced that the government could not be an “owner” within the meaning of CASPA based on the principle that “statutes in derogation of sovereignty should be construed strictly in favor of the sovereign.”  This approach is derived from the common law principle of sovereign immunity and is further “grounded on the assumption that non-specific statutes are most often directed to the affairs of the citizenry.”  Consequently, absent express textual authority, the Court would not construe “association” or “owner” to refer to the government for purposes of CASPA.

After concluding that the government is not an “owner” as that term is used in CASPA, the Supreme Court turned to the question of whether CASPA would nonetheless apply to a dispute between a contractor and subcontractor that did not directly involve the government.  In holding in the negative, the Court recognized the existence of dual statutory schemes established by CASPA and the Prompt Pay Act, and noted that the timing and penalty provisions for late payment under the Prompt Pay Act differed from those under CASPA.   In finding that both could not apply to public projects, the Court concluded that “the Legislature simply did not design CASPA to apply independently to subcontracts in scenarios in which the foundational contract resides outside its boundaries” (i.e., where the contract between the owner and general contractor was governed by the Prompt Pay Act).  Thus, the Court held that, even though CASPA’s policy of protecting contractors and subcontractors would be promoted if it were applied to the case before it, “such application is too disharmonious with the statutory mechanics to support the extension.”

To view the full text of the court’s decision, courtesy of Lexis ®, click here.