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.

Construction Law 2013: A Year in Review

Construction Law 2013: A Year in Review

As a service to its clients and prospective clients, the law firm of Babst Calland will provide a complimentary “year in review” breakfast seminar which will cover an overview of 2013’s significant developments (both statutory and case-law) in the area of construction law. This year’s topics include:  CASPA, mechanics’ liens, payment bonds, pipeline construction, the Procurement Code and Public-Private Partnerships (“P3”). The seminar will be held on Tuesday, February 18, 2014 at the Doubletree Hotel in Greentree, beginning with a continental breakfast at 7:30 a.m., followed by the seminar at 8:00 a.m. For more information, please email Matt Jameson.  Speakers will include Kurt Fernsler, Matt Jameson, Rick Kalson, Dave White, Nino Legeza, and Dave McKenery.

 

 

PA Court Casts Doubt on Safe Harbor Provision of Procurement Code

PA Court Casts Doubt on Safe Harbor Provision of Procurement Code

A recent decision by the Pennsylvania Commonwealth Court casts doubt on the “safe harbor” provision of Pennsylvania’s Procurement Code. Section 3939(b) of the Commonwealth Procurement Code provides, “Once a contractor has made payment to the subcontractor according to the provisions of this chapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.” The clear language of this section of the Procurement Code has provided a complete defense to contractors and their sureties on projects to which the Procurement Code applies when payment can be established. However, in Berks Products Corp. v. Arch Ins. Co., No. 1457 C.D. 2012, the plaintiff-claimant on the payment bond issued by defendant-surety claimed that the language of this particular bond was broad enough to effectively waive the protection of section 3939 of the Procurement Code. The Commonwealth Court found that while the “safe harbor” provisions of the Procurement Code are incorporated by operation of law into the bond, the bond language can waive the protection of that statute. In this case the operative language of the bond provided that the bond will remain “in force and effect” until such time as both the principal and any of its subcontractors makes full payment for any labor or materials supplied for the school project at issue. Based on that language the Commonwealth Court concluded that the principal and surety had waived the “safe harbor” protection of section 3939 of the Procurement Code.

Qualifying Statements in a Proposal Rendered the Proposal Non-responsive

Qualifying Statements in a Proposal Rendered the Proposal Non-responsive

In Pepco Energy Services, Inc. v. Department of General Services, 49 A.3d 488 (Pa. Commw. Ct. 2012), the Commonwealth Court held that the Department of General Services (“DGS”) properly declared Pepco Energy Services, Inc.’s (“Pepco”) proposal to DGS non-responsive based on certain qualifying statements contained in its bid. DGS had issued a Request for Proposal for a Design-Build Contractor for a Combined Heating, Cooling, and Power Plant project to serve the State Correctional Facility in Montgomery County (SCI-Phoenix). In its proposal, Pepco conditioned its proposal on having the opportunity to negotiate certain terms of the agreement with DGS prior to being selected. After seeking clarification of these qualifications from Pepco, DGS rejected Pepco’s proposal as being non-responsive. Pepco pursued a bid protest and ultimately appealed to the Commonwealth Court based on the language in section 513(g) of the Procurement Code, which states that the “responsible offeror” that submits the proposal that is determined “to be the most advantageous” to the owner “shall be selected for contract negotiation.” 62 Pa. C.S. § 513(g).

The Commonwealth Court agreed with DGS and ruled that Pepco’s attempt to negotiate terms of contract prior to selection rendered its proposal non-responsive. This decision represents another step by the Commonwealth Court to fairly implement the request for proposal process contemplated by the Procurement Code.