Awards of Attorneys’ Fees and Statutory Penalties are “Discretionary” even when the Government acts in Bad Faith

Awards of Attorneys’ Fees and Statutory Penalties are “Discretionary” even when the Government acts in Bad Faith

In A. Scott Enterprises Inc. v. City of Allentown, the Pennsylvania Supreme Court held that an award of statutory interest and attorneys’ fees under Section 3935 of the Procurement Code is not automatic even where a jury finds the public owner to have withheld payment in bad faith. Rather, the decision to issue such an award is within a judge’s discretion.

This case arose out of a contract awarded by the City of Allentown to A. Scott Enterprises (ASE) to build a public road in 2009. After the discovery of arsenic contamination on site threatened ASE with additional substantial costs to continue with the project, and attempts to negotiation a continuation of the project failed, ASE sued the city to recover its losses. At trial, ASE presented evidence Allentown was aware of possible contamination when it entered a contract with ASE, and failed to disclose this to ASE or incorporate terms regarding this possibility into the parties’ contract. At trial a jury found the city breached its contract and withheld payments in bad faith, awarding ASE $927,299. When ASE motioned the court for an award of statutory interest and attorneys’ fees, the trial court denied ASE’s request outright, without analysis, stating such an award was unwarranted because ASE’s evidence on damages was “conflicting.”

ASE then prevailed on appeal to the Pennsylvania Commonwealth Court, which had held in 2014 that a bad faith finding automatically entitled a contractor to recover its attorney’s fees and the 1% penalty, because, otherwise, “the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith.” But the Supreme Court ultimately disagreed.

In reversing the Commonwealth Court’s decision, the Supreme Court held “Section 3935 of the Procurement Code allows—but does not require—the court to order an award of a statutory penalty and attorney fees when payments have been withheld in bad faith. The court’s determinations in this regard are subject to review for an abuse of discretion.” The Court also noted “the instances where a finding of bad faith is deemed not to require a Section 3935 award at all presumably will be rare.”

Ultimately, in this case, the trial court’s reliance on the presence of “conflicting” evidence concerning the contractor’s damages alone was insufficient to support its denial of a Section 3935 award outright. For this reason, the case was remanded to the trial court for reconsideration of ASE’s original motion.

Therefore, although an award of attorneys’ fees and/or the 1% penalty under Section 3935 is not “automatic,” a court still must have a reasonable basis for denying such an award against an agency that withheld payment in bad faith. In A. Scott Enterprises, the Supreme Court declined to articulate a test for lower courts to apply in determining whether to enter an award under Section 3935; thus, trial courts are without guidance to determine whether attorneys’ fees and/or penalties must be assessed.

Authorized Agents of a Property Owner Are Not Subject to Individual Liability Under CASPA

Authorized Agents of a Property Owner Are Not Subject to Individual Liability Under CASPA

It is not uncommon for contractors and subcontractors to be verbally directed to perform extra work on construction projects without written change orders. Construction attorneys frequently deal with payment claims for such work if payment for that extra work is not made voluntarily. The individual directing the change, however, generally does not think that they will be held individually liable for directing a contractor/subcontractor to perform extra work. Nevertheless, that issue was recently addressed in Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, No. 2493 EDA 2012 (Pa.Super. November 20, 2014).

In Scungio, 410 Shurs Lane Developers, LLC (“410 SLD”) hired  Scungio Borst & Associates (“SBA”) as the general contractor to construct SLD’s condominium project in Philadelphia, Pennsylvania (the “Project”). SBA performed the work under the contract, as well as $2.6 million in extra work at the direction of 410 SLD and its President and fifty percent shareholder, Robert DeBolt.  When SBA was not paid approximately $1.5 million incurred due to the extra work, it filed suit against 410 SLD (the company) and DeBolt (the individual). DeBolt subsequently filed a motion for summary judgment as to all claims pending against him individually, which included a claim for the alleged violation of the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”). The trial court granted DeBolt’s motion.

SBA appealed, challenging the grant of summary judgment in favor of DeBolt on the CASPA claim.  The issue before the Superior Court of Pennsylvania was whether SBA can maintain a CASPA claim against DeBolt, individually, based upon 410 SLD’s failure to pay SBA. SBA’s theory of liability was that DeBolt, as an authorized agent of 410 SLD who authorized the extra work, is an “owner” as that term is defined under CASPA.  Alternatively, SBA argued that DeBolt was individually liable under CASPA for failure to pay pursuant to all written and verbal change orders. The Court rejected both arguments.

Under CASPA, “Owner” means a “person who has an interest in real property that is improved and who ordered the improvement to be made. The term includes successors in interest of the owner and agents of the owner acting with their authority.” 73 P.S. § 502 (emphasis added).  “Person” means a “corporation, partnership, business trust, other association, estate, trust, trust foundation or a natural individual.” Id.  The term “Agent,” however, is not defined under CASPA.

After a detailed analysis of selected sections of CASPA and statutory construction principles, the Court held CASPA liability lies against “contracting parties” only.  The Court recognized, “Performances by a contractor or a subcontractor …shall entitle the contractor or subcontractor to payment from the party with whom the contractor or subcontractor has contracted.” Id. § 504 (emphasis added). Since 410 SLD contracted with SBA, not DeBolt, DeBolt was not liable to 410 SLD under CASPA.  The Court added, “The reference to authorized agents in the definition of owner merely reinforces that their conduct is imputed to and binding upon the owner. Since the term ‘agent’ is not defined in the statute, conceivably that term could include architects, project managers, and designated representatives who are acting on behalf of the owner in dealing with the contractor.”

Additionally, the Court held that DeBolt was not individually liable under CASPA because there were no allegations that his dealings with SBA created a new contract with him personally.  The Court reasoned that DeBolt’s verbal authorizations were part of the construction contract between SBA and 410 SLD.  Accordingly, the Court found no basis to subject DeBolt to personal liability based on his verbal authorizations and change orders.

Judge Bender filed a Dissenting Opinion, which Judges Mundy and Wecht joined. Judge Bender’s characterization of the facts is as follows:  The parties entered into a construction contract on September 2, 2005, in which SBA was to receive $3.8 million for the labor and materials it supplied to the Project. SBA claimed it was directed to submit all bills to 410 SLD and DeBolt. However, at the end of June 2006, SBA stopped receiving payments, but was assured by DeBolt that payment would be forthcoming. Based upon these assurances, SBA continued its performance until November 8, 2006, when SBA was informed that the contract was terminated. At that time, SBA was owed $1,544,161, plus interest and costs, which related to change orders authorized by DeBolt.  Finally, 410 SLD’s position was that oral change orders were not valid.  Nevertheless, SBA asserted that it was often the practice that DeBolt would verbally authorize change orders and would not sign them.  SBA argued that that because DeBolt had an active role in decision making and authorizing change orders, he should be considered an agent of the owner and subject to liability pursuant to CASPA.  Judge Bender agreed.  As such, Judge Bender concluded that genuine issues of material fact existed and that granting summary judgment in DeBolt’s favor was improper.

The take-away from this case is that this “agent of owner” argument could be used again if, for example, a corporate constituent or member of a limited liability company, representing an owner, makes first-person and informal statements to a contractor regarding payment from the owner.  In fact, the Superior Court held that there was sufficient evidence to establish that a managing member of a limited liability company which constructed new homes assumed personal responsibility when the managing member assured the purchasers of one of the homes that he would take care of their concerns regarding problems that arose during construction and that he personally guaranteed the final quality of the home. See Bennett v. A.T. Masterpiece Homes at Broadsprings, LLC, 40 A.3d 145, 150 (Pa.Super. 2012) (“person acting as an agent may assume personal liability on a corporate contract where he executes a contract in his own name or voluntarily undertakes a personal responsibility”) (emphasis added).

 

Pennsylvania Supreme Court Holds that Sovereign Immunity Prohibits Challenge to Procurement Cancellation

Pennsylvania Supreme Court Holds that Sovereign Immunity Prohibits Challenge to Procurement Cancellation

In the recent Pennsylvania case, Scientific Games Int’l, Inc. v. Commonwealth, the plaintiff filed its Complaint with the Commonwealth Court and sought an injunction to prevent DGS from cancelling a contract that the plaintiff claimed it had entered into with DGS.  In response, DGS argued that this case involved either (1) the cancellation of a procurement, in which case DGS was afforded sovereign immunity can could not be sued anywhere, or (2) a breach of contract claim for which the Board of Claims has exclusive jurisdiction.  On appellate review, the Supreme Court agreed with DGS, and indicated that in the event of a cancellation of a solicitation under Section 521 of the Procurement Code, an aggrieved bidder or offeror has no available remedy based on the sovereign immunity granted to Commonwealth agencies.  The practical effect of this ruling will be that there is now no judicial oversight to a Commonwealth agency’s decision to cancel a solicitation under the Procurement Code.