Q If a payment is not made on time to a contractor on a project, does the party withholding payment have any exposure to claims beyond the amount owed?

A Yes, and depending on the state in which the project is located, the risk to the non-paying party may be significant. For example, in Pennsylvania there are two statutes, the Contractor and Subcontractor Payment Act (private projects) and the Commonwealth Procurement Code (public projects) which provide for penalties for untimely payments. While the two laws differ slightly, they basically provide that an Owner that does not pay a Contractor, or a Contractor that does not pay a Subcontractor within seven days of the date payment is due (or within twenty days of invoice if the contract is silent on payment terms), must pay interest on the balance owed at the rate of 12% per year. 

In addition, if arbitration or litigation is commenced, and if it is determined that payment was withheld without a reasonable basis, these laws provide that the non-paying party will be required to pay a further penalty at the rate 12% per year. Further, the substantially prevailing party in any claim for payment can recover its reasonable attorney's fees. Therefore, in Pennsylvania, a party improperly withholding payment is potentially subject to sanctions at the rate of 24% per year plus attorney's fees. 

A recent decision in the Pennsylvania Superior Court, Zimmerman v Harrisburg Fudd, holds that the attorney's fee provisions of these statutes includes fees generated in the collection on a judgment in which attorney's fees were awarded. This increases the damage exposure to a non-paying party. New Jersey's prompt pay statute contains similar, but less stringent terms. It provides that payment by an Owner made within 30 days of the billing date, and by a Contractor to a Subcontractor within 10 days of the billing date, unless otherwise agreed. Late payments are subject to interest at a floating rate of 1% plus prime, and attorney's fees to the prevailing party are recoverable. 

The decision to withhold payment from a Contractor or Subcontractor is an important one. It should be made only where there are reasonable, justifiable and provable grounds for holding payment or reducing a payment. Decisions made to hold payments which are not supportable with evidence and reasoned argument may trigger application of these prompt payment acts, and subject the non-paying party to substantial liability, in addition to the amount owed under contract. 

This article originally appeared in the June 11-24, 2010 edition of the Mid Atlantic Real Estate Journal, and is being reprinted with permission of the author: Andrew B. Cohn, a principal of Kaplin Stewart in Blue Bell, PA, who practices construction law, litigation, and arbitration of construction disputes.