Source: https://bcm.nacm.org/index.php/archives/23-uncategorised/enews-archive/416-enews-september-20-2018
Timestamp: 2019-03-23 00:58:40
Document Index: 36319792

Matched Legal Cases: ['§ 501', '§ 515', '§ 509', '§ 506', '§ 506', '§ 506', '§ 506', '§ 512', '§ 508']

eNews September 20, 2018
30-Day Warning: Major Changes to Pennsylvania’s Contractor and Subcontractor Payment Act, Part I
Amazon Business Platform Entices Corporate Buyers, Frustrates Sellers
Does a ‘Flow-Down’ Clause Supersede Specific Language in a Subcontract?
DSO Increase Expected in Eastern Europe
Political Risk in Asian Countries Dampens Economy
We are less than 30 days away from the effective date of significant amendments to Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA)1 that will profoundly impact rights relating to the timing of payments for work on construction projects. The amended act will apply to construction contracts entered into, on or after Oct. 10, 2018.2
Generally, CASPA governs downstream payments on private construction projects in Pennsylvania. The amended act will provide downstream entities—like contractors, subcontractors or suppliers—with more robust protections to better ensure prompt payment for completed work. There are five significant additions; however, like any new statute, application of the amended act will continue to be refined as courts interpret the new additions. Part I explains two additions related to withholding and invoice errors. Part II will explain the other three additions related to suspension, retainage and waiver.
Withholding. Currently, CASPA permits upstream entities—typically a project owner or prime contractor—to withhold payments in good faith for deficiency items, but only if they timely notify the downstream entities of the deficiency items. The current act provides no meaningful recourse for failure to provide this notice. The amended act makes four key changes to strengthen protections for downstream entities against over-withholding and, most importantly, even against good-faith withholding without timely notice. These significant changes in favor of downstream entities apply to withholding of progress payments and also to withholding of retainage.3
The amended act clarifies that the amount an owner withholds must be “reasonable.”4 This is consistent with the explicit requirement to remit payment for any non-deficient items satisfactorily completed.5 In other words, an entire invoice cannot be withheld for a single deficiency item; rather, all undisputed amounts must be paid.
The amended act clarifies that an upstream entity’s notice of deficiency must include a written explanation of its good-faith reason to withhold.6
The amended act extends the time to provide the required written notice from seven to 14 days.7
The amended act imposes strict consequences on upstream entities that fail to provide the required written notice within 14 days, as failure to do so results in waiver of the basis—and thus the right—to withhold.8 The upstream entity must then pay the invoice in full, which means that instead of withholding money to incentivize repair work, punch list work, etc., the downstream entity is entitled to receive payment even though it may still be contractually obligated to perform such work. If an upstream entity decides to withhold payment without providing proper notice, the amount withheld—even if for a legitimate reason—will now be subject to the applicable CASPA penalties. On the other hand, compliance with the withholding requirements now explicitly cannot be subject to CASPA’s penalty interest for wrongful withholding.9
Upstream entities should carefully examine contractual withholding provisions to determine if they are enforceable because CASPA’s provisions cannot be waived by agreement. Downstream entities should be prepared to submit a claim in writing 15 days after any unpaid invoice to confirm that any basis for withholding has been waived and to continue to develop documents to support payment claims under CASPA.
Invoice Errors. The current statute requires that the recipient of an incorrect or incomplete invoice provide written notice of the error to the person who sent the invoice within 10 working days. The amended act clarifies that even after proper notice of alleged errors is provided, the correct amount of the invoice remains due on the same date as if the original invoice was correct.10 Thus, a contractor is not penalized for submitting an invoice with errors.
Upstream entities should review contract provisions that adjust the payment date based on resubmitted invoices, as the amended act may render such provisions unenforceable. On the other hand, downstream entities may relax negotiations regarding incorrect invoicing and, instead, rely on the protections of the amended act.
30-Day Warning: Major Changes to Pennsylvania’s Contractor and Subcontractor Payment Act is a two-part article. Part II will be published in next week’s eNews, Thursday, Sept. 27.
Kenny A. Cushing, of Cozen O’Connor, focuses his practice on construction law. He counsels and represents project owners, developers, contractors, and design professionals in all phases of public and private construction projects, agency appeals, and the dispute resolution process. The article can be found in its entirety here.
1 73 P.S. § 501 et seq.
2 See id. § 515.
3 See id. § 509(d) (as amended).
4 See id. § 506(b)(1) (as amended).
5 See id. §§ 506(b)(3), 511(c) (as amended).
6 See id. §§ 506(b)(1), 511(b)(1) (as amended).
8 See id. §§ 506(b)(2), 511(b)(2) (as amended).
9 See id. § 512(a)(2) (as amended).
10 See id. § 508(c) (as amended).
Please submit ideas by Sept. 28, 2018. Any proposals that are incomplete or are received after this date will not be considered.
The duel between online retailers and brick-and-mortar stores is growing intense as both parties attempt to outperform each other and achieve maximum customer satisfaction. Amazon’s latest endeavor to simplify business-to-business (B2B) transactions, the “Pay By Invoice” platform, launched earlier this year and gives buyers more time to pay. Not everyone is satisfied with the platform though, especially sellers who rely on steady cash flow.
Amazon first emerged in the mid-90s as an online bookstore and later expanded to more consumer-based retail, which rose from $1 billion to $10 billion in sales in seven years, CNBC reported. Amazon Web Services (AWS) then crossed the $10 billion sales mark a decade after it was founded. Today, the online giant’s most significant milestone comes from Amazon Business: the B2B eCommerce unit struck $1 billion in sales within a year and $10 billion in only four years.
According to an Amazon blog post on Sept. 11, Amazon Business currently sells a wide range of products, including office supplies and lab equipment, and provides goods to educational organizations, Fortune 100 companies, hospital systems and local governments.
“Our focus is on improving suppliers’ ability to reach more customers, and to make it easier for customers to buy from suppliers,” the post states. “Wholesale suppliers and distributors are just as much our customer as the end buyer. Today, our third-party sellers make up more than 50% of the $10 billion in global sales, allowing customers to find and purchase from new suppliers they might not have discovered.”
The “Pay By Invoice” service broadened sellers’ eligibility for invoiced purchasing, ultimately lengthening the payment period from a week or two to 30 days. CEO Jerry Kavesh, of 3P Marketplace Solutions consulting firm, told CNBC the service becomes problematic for sellers because “they may not be able to pay suppliers and employees.” Slower payments impact future inventory purchases and, worst-case scenario, could put small companies out of business.
Amazon addressed sellers’ concerns and noted it will credit payment “as soon as the customer payment is processed and no later than the seventh day past the due date of the customer’s invoice.” Sellers can also choose to receive faster payment by paying 1.5% of the total invoiced amount.
Competition is very much alive between online retailers and traditional stores, said NACM Economist Chris Kuehl, Ph.D., but companies still have a choice of which business venture they’d like to pursue. To the surprise of many economists, there was a retail hiring surge in August, which Kuehl said demonstrated brick-and-mortar stores’ willingness to compete against its counterparts.
“The vast majority of retailers are still working hard to reduce the number of employees as they seek to cut costs, but there are now some that have decided hiring is the only way to successfully compete against the online giants like Amazon,” he said. “Consumers have been stating for some time that they would return to the brick-and-mortar store if they were really going to encounter people who could help them with a purchase.”
Like traditional stores, the Amazon Business service is part of the evolution of competition to attract more corporate buyers, CNBC reported.
The language of the subcontract provided that it would control unless the prime contract imposed a greater requirement. The court found that the open-ended liability of the subcontract imposed a greater burden on the architect, and therefore controlled. Centex/Worthgroup, LLC v. Worthgroup Architects, L.P., 365 P. 3d 37 (2015). The subcontractor architect was left exposed for almost $7 million in redesign and repair damages.
The lessons learned from this case are:
Don Gregory, of Kegler Brown Hill + Ritter, is well known for his experienced and pragmatic advice and is highly rated as one of Ohio’s very best construction lawyers. He maintains a Band 1 ranking by Chambers USA, the highest ranking possible for his practice. Don stays abreast of cutting-edge developments in the industry by serving many of the leading national construction trade associations as their general counsel.
Days sales outstanding (DSO) in Eastern Europe is expected to increase in the near future. According to the latest Payment Practices Barometer from Atradius, a quarter of respondents in the region predict a higher DSO in the coming 12 months. Only 13% said they expect a decrease in DSO.
The report is based on more than 1,400 domestic and export suppliers in Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey. A longer DSO increases the risk to business-to-business (B2B) trade credit and impacts businesses’ liquidity positions, stated the credit insurer.
Bulgaria’s average DSO was 79 days, the highest in the region and well above the region’s average of 59 days. Turkey saw a nine-day decline in DSO this year to 64 days. Slovakia respondents reported a DSO of 43 days, slightly higher than in 2016 and 2017. Romania’s figure was only modestly worse than Slovakia at 45 days. Poland’s DSO number saw a sharp decline of 13 days in 2018 to 75 days. Meanwhile, Hungary saw the opposite, a 12-day jump in DSO to 49 days. The Czech Republic had the second-shortest DSO at 44 days.
Overall, respondents reported fewer late payments, yet 45% of businesses are still affected by payment delays. Roughly 18% of respondents said they postponed payments to suppliers, and over 14% had revenue loss. The main reason behind payment delays in Eastern Europe is insufficient availability of funds both on the domestic and foreign side.
Turkey is the most-plagued country when it comes to past due invoices. More than half of respondents reported having overdue invoices. Turkey is also home to the longest payment duration in Eastern Europe. The country offers the most lenient payment terms as well, while the Czech Republic offers the shortest—28 days on average.
B2B sales on credit decreased on average from more than 40% in 2017 to almost 37% in 2018. This is in part due to the sharp drop in Hungary and smaller declines in Turkey and the Czech Republic. Despite this, businesses in Hungary are the most inclined to offer credit terms. Romania is least likely to offer terms. “Credit sales help us win new customers and brought our company a sales increase of 30%,” said one respondent. This is due to the belief that offering credit can attract new business and stimulate local expansion, noted the report.
“A slowdown of the global economy may expose some structural issues peculiar to Eastern European economies, weighing on their growth,” said Andreas Tesch, chief market officer of Atradius N.V., in a release.
“Against this backdrop, it is essential to pay close attention to the payment behaviour of buyers and limit payment default risks through credit insurance protection. This can enable businesses trading with Eastern Europe to expand growth opportunities, improve cash flow and protect profitability,” he added.
The economic health of Asian countries has improved over the past year, but the just-as-quick rise of political risk and social fragility may stunt economic growth in the long term. According to a recent report by Coface, Asian countries now rank above the world average for political risk, falling just behind the Middle East and North Africa. While economic growth remains on the rise, Asia may see a dip in the future, with South Asia showing the most distressing signs.
Across history and economic studies, the status of an economy and its political risk are often intertwined. As a country’s economy deteriorates, so does its political landscape. This may be a result of tinkering with questionable laws and policies in order to get the economy back on its feet or higher unemployment contributing to inflation and income inequality.
“Outflows from an economy may lead to falling equity markets and rising bond yields, which worsens financing conditions, making it costlier for agents in the economy (households, companies and the state) to repay their debt and make new investments,” the Coface report states. “Higher debt servicing costs also reduce levels of corporate and household confidence, prompting delays or cancellations in investment and spending decisions.”
Although South Asia showed the most risk in the report, this region’s economic and political instability has remained relatively consistent over the last few years. East Asia, alternatively, has shown the biggest spike in political risk since 2007, meaning the economy of that region may show signs of failure soon.
Of all the countries in East Asia, China exhibited the most political risk, rising 7.2 percentage points over the past 10 years. China has been looking to reach a form of stability in its economy, which has led to social fragility and political erraticism. In order to kickstart the economy, China has restricted access to information to its citizens, imposed travel restrictions on some minorities, heightened internet surveillance and more, as a part of an “anti-corruption campaign.”
Should China continue its campaign—which is expected—the economy’s growth may be undermined by its political chaos. This will make trading with China and other East Asian countries more difficult as some companies may struggle to pay on time.
“Suppressing social instruments has been an important part of managing social pressures in a Chinese context, something other countries in the region have noticed,” the report states.
Terrorism in other Asian regions also contributed to political risk. India, Myanmar, the Philippines and Pakistan were found to have higher risks of terrorism, which has threatened the economy and political outlook of these nations. The conflict over borders in Kashmir still rattles both India and Pakistan as the fight for territory continues; Pakistan remains at the highest risk for terrorism, with India falling just behind. The Rohingya crisis in Myanmar has displaced hundreds of thousands of predominantly Muslim Rohingya people, causing friction and political instability to match economic trouble.
As these countries work through political changes to improve the economy or vice versa, the overall health of the nations may suffer. Asian countries present the most risk and may continue to be risky moving into the rest of the year.