Engineer with flag on background series - PennsylvaniaContractors doing work on publicly-owned projects in Pennsylvania may find it more difficult to recover statutory penalties and attorneys’ fees if the owner withholds funds in bad faith. Pennsylvania’s Procurement Code, which governs bidding on public projects and payment to prime contractors and subcontractors, is intended to “level the playing field” between government and contractor. Similar, but not identical to the private prompt payment act, the statute provides for the award to the contractor of interest, a penalty in the amount of 1% of the unpaid balance per month, and attorneys’ fees if the public entity acts in bad faith by refusing payment that is due to the contractor. Pennsylvania courts previously interpreted this statute to mean that if a jury determined that the public entity acted in bad faith, then an award of penalties and attorneys’ fees was required.

The award of penalties and attorneys’ fees can be significant and has resulted in substantial awards to our clients – sometimes equaling or even exceeding the amount of the withheld contract balance. The government’s risk of having to pay these additional costs can help to resolve a payment dispute before it develops into costly litigation. The power of a jury to make this determination has been effectively removed by the Supreme Court of Pennsylvania. Now, the power to render a decision over the government’s bad faith liability has been placed into the hands of the government itself – in the person of the trial judge presiding over the matter.

The Supreme Court of Pennsylvania, in the case of A. Scott Enterprises, Inc. v. City of Allentown, held that a jury’s finding that the public owner acted in bad faith by withholding payment does not mandate the award of penalties or fees. Instead, the award of penalties and fees is now left to the discretion of the trial court judge regardless of the jury’s finding.

The dispute in the A. Scott Enterprises case involved a contract for the construction of a public road. During trial, evidence was presented showing that the City knew that contaminated soils likely existed at the project site, but failed to either provide for testing of the soils or even to inform the contractor that the soil was likely contaminated. The contractor incurred additional costs as a result of the contaminated soil and ultimately refused to proceed with the project when the City failed to fully compensate the contractor for the additional work. After hearing the evidence at trial, the jury made a specific finding that the City acted in bad faith by withholding payments to the contractor.

This finding of bad faith ultimately proved meaningless because the trial court judge refused to award penalties or attorneys’ fees to the contractor. The Supreme Court upheld the trial judge’s right to make that decision despite the jury’s finding of bad faith. Based on the Supreme Court’s interpretation of the Procurement Code, when a jury finds that a public entity acted in bad faith, a judge can ignore that finding and has almost unrestrained power to award, or refuse to award, penalties and attorneys’ fees. In order to overturn a trial judge’s decision, a contractor would have to prove that the judge abused his or her discretion – an extremely difficult standard to overcome.

Notably, the Court’s decision does not impact construction projects with a non-public owner. For private projects, the Contractor and Subcontractor Payment Act provides for the award of interest, penalties, and attorneys’ fees in the event money is “wrongfully withheld” from the contractor. Under this statute, penalties and attorneys’ fees must be awarded to the substantially prevailing party, and the trial court judge does not have discretion to prevent such an award.

The A. Scott Enterprises case eliminates a party’s perceived certainty in its recovery of penalties and attorneys’ fees from a public owner in Pennsylvania. In doing so, not only does it create additional considerations when litigating, but it also has the effect of making the playing field between government and contractor uneven.

Lane F. Kelman is a Partner in the Firm’s Construction Group and the Chair of the Firm’s Green Building Practice. With an active and diverse construction litigation practice, Lane represents developers, general contractors, construction managers and different trades in complex
construction matters.

Matt Gioffre is an Associate in the Firm’s Construction Group. Matt advises clients on legal matters and litigates complex construction law claims on behalf of general contractors and subcontractors, as well as owners, design-builders, and material suppliers.