No, You May Not Agree to Waive Your Right to Attorneys’ Fees and a Penalty Fee in a Construction Dispute in Pennsylvania

A Pennsylvania appellate court, in E. Allen Reeves, Inc. v. Old York, LLC, has confirmed that arbitrators in a prompt pay act dispute must award attorneys’ fees and a penalty fee to the prevailing party even when the parties’ agreement expressly forecloses such awards. The court also held that challenges to the enforcement of an arbitration award must be made in the petition to vacate the award or else they are waived.

By way of background, prime contractor E. Allen Reeves (“Reeves”) entered into a contract with Old York, Inc. in which Reeves would serve as general contractor to construct a building. The contract mandated that disputes be arbitrated and that: “no arbitrator(s) shall have the authority to enter an award of punitive damages or attorneys’ fees to either of the parties.” 

Reeves completed its work on the project, but Old York refused to make a final payment. Reeves prevailed at arbitration. The arbitrator awarded Reeves not just the amount due plus interest but also its attorneys’ fees and a penalty fee.

Old York was unsuccessful in its challenge to the attorneys’ fee award and penalty fee. With respect to attorneys’ fees, Old York argued that the arbitrator had no authority to award them because the parties’ contract precluded them. But Section 512(b) of Pennslyvania’s Contractor and Subcontractor Payment Act (“CASPA”) provides that “[n]otwithstanding any agreement to the contrary, the substantially prevailing party in any proceeding to recover any payment under this act shall be awarded a reasonable attorney fee in an amount to be determined by the court or arbitrator, together with expenses.” And in Pennsylvania, “attorneys’ fees under CASPA cannot be waived by contract.” “Thus, the trial court did not err in finding the arbitrator had the authority to award Reeves attorneys’ fees notwithstanding the language in the parties’ contract.”

Old York challenged the penalty fee on similar grounds, arguing that the parties’ contract foreclosed the penalty fee by precluding an award of punitive damages. The court rejected this argument for two reasons. First, by “provid[ing] mandatory penalties that ‘shall’ be imposed in arbitration against a party who has failed to comply with CASPA’s payment terms” and “not contain[ing] any language allowing the parties to waive CASPA’s penalties,” “CASPA does not allow parties to contractually waive the[se] penalties.” Second, and in any event, the parties’ agreement to waive punitive damages was irrelevant to Reeves’s penalty fee award because CASPA’s penalty fees are not punitive damages. The parties waived their entitlement to punitive damages—not to a penalty fee. While CASPA “provides for a penalty equal to 1% per month of the amount that was wrongfully withheld pursuant to CASPA’s terms,” punitive damages “are penal in nature and are proper only in cases where the defendant’s actions are so outrageous as to demonstrate willful, wanton or reckless conduct.” “Accordingly, we conclude that the trial court did not abuse its discretion or commit an error of law in upholding the arbitrator’ award of attorneys’ fees and penalties pursuant to CASPA.”

Old York’s argument that Reeves lacked standing to enforce the contract also failed. Although Reeves filed a petition to vacate the arbitration award, that petition did not challenge Reeves’ standing to enforce the contract. Old York instead made this argument only in its opposition to Reeves’ petition to enforce the arbitration award. The court held Old York waived its challenge to Reeves’ standing because “a challenge to the validity of an arbitration award asserted for the first time in opposition to a petition to confirm is procedurally inadequate to preserve claims for judicial review.”  For this reason, “Old York’s challenges to Reeves’s standing, raised in response to Reeves’s petition to confirm the arbitration award, are untimely and waived.”

Reeves confirms that parties cannot contractually waive remedies that arbitrators are statutorily required to award, at least in Pennsylvania. It is important to have a lawyer familiar with the remedies to which you may be entitled. Reeves also demonstrates the importance of timely raising objections to an arbitration award and doing so in the correct format. It is critical to have a lawyer who understands how and when to raise issues pertinent to your claims and defenses.