Pennsylvania Supreme Court weighs whether good faith refusal to pay is a factor in awarding attorneys’ fees under state Contractor and Subcontractor Payment Act

Pennsylvania Supreme Court weighs whether good faith refusal to pay is a factor in awarding attorneys’ fees under state Contractor and Subcontractor Payment Act

May 1, 2015

Pennsylvania’s Contractor and Subcontractor Payment Act

The Act is designed to protect contractors and subcontractors. It provides that a contractor who has performed under a contract is entitled to prompt payment, and it establishes rules to discourage unreasonable withholding of payments. The Act authorizes courts to impose a 1 percent monthly penalty against owners or contractors who “wrongfully withh(o)ld” payment. A good faith withholding is not subject to the penalty. The Act also provides that the “substantially prevailing party …shall be awarded” reasonable attorneys’ fees. The Act does not state, however, whether “good faith” is relevant to the attorneys’ fee issue, as it is to the statutory penalty.

The Waller case

This issue arose in Waller Corporation v. Warren Plaza, Incorporated in the context of the owner’s refusal to pay two unapproved change orders. The contractor sued, asserting claims for breach of contract and violation of the Act. After trial, judgment was entered for the contractor, including an attorneys’ fee award. The court, however, did not impose the statutory penalty because it found that the owner had a good faith – albeit incorrect – basis for withholding payment. The owner appealed, contending that the good faith finding should preclude an attorneys’ fee award. 

The Pennsylvania Superior Court, however, held that the Act does not provide a “good faith” exception to the attorneys’ fee award to a “substantially prevailing party.” The court found that while good faith is relevant to the penalty determination, there is no statutory language supporting an exception to the award of attorneys’ fees.

The Court’s decision conflicts with a 2009 decision issued by a different panel of the Superior Court in Zimmerman v. Harrisburg Fudd I, L.P. That court ruled that if the owner did not wrongfully withhold payment, the contractor could not be the “substantially prevailing party.”

The owner in Waller appealed to the Pennsylvania Supreme Court asking the court to resolve the split between Zimmerman and Waller and determine that a good faith refusal to pay is a factor to be considered in deciding whether to award attorneys’ fees under the Act. The appeal is in the briefing stage, and the court is expected to issue a decision later this year.

Industry Impact

The Pennsylvania Supreme Court’s decision will have important implications for the way that owners, contractors and subcontractors handle payment disputes. If the court rules that non-paying parties can be responsible for attorneys’ fees even though they withheld payment in good faith, non-paying parties may be more motivated to resolve those disputes before litigation or pay disputed amounts under a reservation of rights.

Alternatively, if the court rules that attorneys’ fees may not be assessed under the Act where payment was withheld in good faith, non-paying parties may be more likely to take a hard line and litigate such disputes.