Commonwealth Court Holds That Award of Attorney's Fees and Penalties is Mandatory Under the Procurement Code Upon a Finding of Bad Faith
In a decision regarding a payment claim by a highway contractor against the City of Allentown, the Commonwealth Court of Pennsylvania has held that an award of attorney's fees and penalties is mandatory under the terms of the Pennsylvania Procurement Code, 62 Pa.C.S. § 3901 et seq., upon a finding of bad faith by the non-paying government agency, even though the statute only states that a court “may” award such fees and penalties.
In A. Scott Enterprises, Inc. v. City of Allentown, Cmwlth. Ct. No. 2163 C.D. 2013, the plaintiff, A. Scott Enterprises, Inc. (Scott), won a contract with the City of Allentown (City) to construct a one mile roadway. Several weeks after commencing work, Scott learned that soil at the construction site was potentially contaminated with arsenic, and was instructed by the City to suspend its work. Because of the soil contamination, additional work would be required to complete the project and Scott submitted proposals for the additional work plus its suspension costs. However, the City never approved the additional work and the project was never completed. The City never paid Scott for costs incurred due to the suspension of the work and Scott filed suit to recover its losses. The jury found that the City had breached the contract with Scott and had acted in bad faith in violation of the Procurement Code, and awarded damages to Scott for its unreimbursed suspension costs. However, the trial court denied Scott’s request for an award of attorney's fees and penalty interest. Both Scott and the City appealed the final judgment to the Commonwealth Court, which reversed the trial court’s refusal to award attorney's fees and penalties.
Under the Procurement Code, a government agency must pay a contractor in compliance with the payment terms of the contract and the Code where the contractor’s performance conforms to the contract. 62 Pa. C.S. §§3931(a), 3932(a). The government agency may, in good faith, withhold payment where the contractor’s performance is deficient in some respect, but must make payment on all other items that are completed. 62 Pa. C.S. §3934(a). The government must notify the contractor of the deficiency item within the time period stated in the contract or 15 days after the application for payment is received. 62 Pa. C.S. §3934(b). Where the government’s withholding of a payment is “arbitrary or vexatious,” it is deemed to have withheld the payment in bad faith. 62 Pa. C.S. §3935. As to a penalty, §3935(a) of the Procurement Code provides that a court “may award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was withheld in bad faith.” Moreover, the Code also provides that “the prevailing party in any proceeding to recover any payment under this sub-chapter may be awarded a reasonable attorney fee in an amount to be determined by the Board of Claims, court or arbitrator, together with expenses, if it is determined that the government agency, contractor or subcontractor acted in bad faith.” 62 Pa.C.S. §3935(b).
In the A. Scott Enterprises case, the Commonwealth Court found that there was sufficient evidence presented at trial for the trial court to submit the issue of bad faith to the jury. The trial court was in error, however, in refusing Scott’s request for attorney's fees and penalty interest upon the jury’s finding of bad faith. The Court noted that the Procurement Code states that the trial court “may”award a penalty or attorney fees, but found that the use of the word “may” in the statute could convey a mandate to the lower court, as opposed to simply granting the lower court permission to award attorney fees and penalties. It examined the legislative intent of the Procurement Code and held that:
[t]he purpose of the Procurement Code is to “level the playing field” between government agencies and contractors. See Pietrini Corp. v. Agate Construction Co., 901 A.2d 1050, 1055 (Pa. Super. 2006). It advances this goal by requiring a government agency that has acted in bad faith to pay the contractor’s legal costs, as well as an interest penalty. Otherwise, the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith.
The Court held that an award of attorney's fees and penalty interest was not discretionary with the trial court, but that instead “Section 3935 of the Procurement Code requires the imposition of attorney's fees and the statutory penalty upon a jury’s finding of bad faith.” However, the amount of attorney’s fees and interest penalty was discretionary with the trial court, whose decision would not be overturned absent an abuse of discretion. The Commonwealth Court remanded the case for a determination of the appropriate amount of fees and interest to be awarded.
The Procurement Code deals solely with government construction contracts. Its equivalent for the private construction sector, the Pennsylvania Contractor and Subcontractor Payment Act (CASA), 73 P.S. §501 et seq., also provides for an award of penalty interest and attorney's fees in an action to collect unpaid construction invoices. See 73 P.S. §512. However, unlike the Procurement Code, CASA has no requirement for a finding of bad faith before attorney's fees and penalties can be awarded.
An in-depth understanding of the Pennsylvania Procurement Code and the Contractors and Subcontractors Payment Act is essential for all owners, contractors, subcontractors, suppliers and sureties working with construction contracts in Pennsylvania. The attorneys of the Construction and Surety Practices Group of White and Williams can assist clients on all the legal facets of the construction industry. Please contact the group’s co-chairs, Bill Taylor (215.864.6305 | firstname.lastname@example.org)or Jerry Anders (215.864.7003 | email@example.com) for assistance.
 The trial court and Commonwealth Court noted that the facts that supported a finding of bad faith were the City’s failure to direct Scott to demobilize or resume work on a force account basis, failure to make payment for Scott’s suspension costs, and failure to investigate the site for the presence of contaminates before the project was bid.