In American Rock Mechanics, Inc. v. N. Abbonizio Contractors, Inc. and Fidelity and Deposit Company of Maryland, 2005 Pa. Super. 390 (Pa. Super. 2005) the Superior Court held that the terms of the subcontract between a contractor and subcontractor, not the “pay-when-paid” provision of the Commonwealth Procurement Code, controlled the rights and obligations of the parties with respect to time for payment.

Plaintiff, American Rock Mechanics, Inc. (“AMROC”) entered into a subcontract with Defendant, N. Abbonizio Contractors, Inc. (“Abbonizio”) for drilling and earth removal services on a sanitary sewer project for Whitemarsh Township in Montgomery County, Pennsylvania.  Pursuant to the parties’ subcontract, Abbonizio agreed to make progress payments to AMROC on a weekly basis during the life of the project, and the remaining amounts due within thirty days of the completion of the project.  When Abbonizio failed to make weekly payments to AMROC as required by the subcontract, AMROC commenced a lawsuit in the Court of Common Pleas seeking payment and interest.  
           

Abbonizio defended the lawsuit by arguing that the “pay-when-paid” provision of the  Commonwealth Procurement Code, not the terms of the subcontract, governed Abbonizio’s payment obligations to AMROC.  Specifically, under the Procurement Code, a contractor must pay the subcontractor within 14 days of receipt of the progress payment from the public owner.  Apparently, the Township failed to pay Abbonizio for certain work performed on the project.  Accordingly, Abbonizio argued that it was permitted to withhold payment to AMROC until Abbonizio was paid by the Township.  The trial court entered judgment on the pleadings in favor of AMROC for $41,150 plus contract interest of 2% per month.

On appeal, the Superior Court held that the parties’ subcontract concerning time for payment took precedence over the “pay-when-paid” provision of the Procurement Code.  In the absence of appellate decisions interpreting the Procurement Code, the Superior Court reasoned that clear purpose of the statute is to protect subcontractors and to assure that subcontractors are paid in a timely manner.  More specifically, the statute is intended to assure that no contractor can wrongly withhold payment from a subcontractor for work completed in accordance with the parties’ contract.  The Court found no legislative intent to defeat the payment terms negotiated in a contract or to condition the subcontractor’s payment upon the contractor’s own receipt of payment from the public owner responsible for the project.  

Of equal significance, while the language of the statute only addresses timely payment of progress payments, the Superior Court stated that nothing in the Procurement Code or the 14-day payment window appears to limit a subcontractor’s right to collect full payment in accordance with the terms of its contract upon completion of contracted work.

The AMROC case emphasizes the importance of carefully negotiated and drafted subcontracts, especially with respect to payment on public projects.  However, of even greater concern to the Court in AMROC was the notion that contractual payment provisions will not be defeated by the “pay-when-paid” provision of the Procurement Code, a statute that was specifically designed to protect subcontractors during the pendency of government projects.

In the realm of private construction projects, the Contractor and Subcontractor Payment Act (“Payment Act”) is the counterpart to the Commonwealth Procurement Code.  Section 507 of the Payment Act contains language similar to the Procurement Code and provides that a contractor must pay a subcontractor “14 days after receipt of each progress or final payment or 14 days after receipt of the subcontractor’s invoice, whichever is later.”  The courts have not weighed in on whether Section 507 of the Payment Act would supercede specifically negotiated  payment provisions in a contract.

For more information about this case or any related issues, Ms. Decker can be reached at (717) 237-6735 or kdecker@rhoads-sinon.com.