Second Tier Subcontractor Recovers On Payment Bond That Waived Safe Harbor Provision

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The Pennsylvania Commonwealth Court recently held in a published opinion that the “safe harbor” provision in the Pa. Procurement Code, which shields sureties from second-tier payment claims where the general contractor has made full payment to its subcontractor, can be waived by contrary language in a payment bond.  This is welcome news for second-tier subcontractors on public works projects.  It is not welcome news for sureties, and will likely result in an immediate revision to “deficient” payment bonds issued on Pennsylvania public projects.

In Berks Prods. Corp. v. Arch Ins. Co., Berks Products Corporation, a second-tier subcontractor, supplied materials on a Wilson Area School District project under a subcontract with a first-tier subcontractor.  Skepton Construction, Inc., the general contractor, paid the first-tier subcontractor in full for the materials in question, but Berks remained unpaid to the tune of $52,679.26.  Berks then sued Arch Insurance Company which had issued a payment bond to Skepton.

Arch’s defense was that, under the “safe harbor” provision found in section 3939(b) of the Pa. Procurement Code, full payment by Skepton to the first-tier  subcontractor was a complete bar to Berks’s claim.  The statutory “safe harbor” states that: “Once a contractor has made payment to the subcontractor according to the provisions of this subchapter, 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 “safe harbor” protects general contractors from having to pay twice – once to the subcontractor, and second to the sub-subcontractor.

In response, Berks argued that certain language of the payment bond waived the “safe harbor.” The specific language in question stated that the bond would remain in full force and effect if either the general contractor (the principal) or its subcontractor failed to pay for labor or materials. Because the first-tier subcontractor failed to pay Berks in full, the trial court found that the payment bond remained in effect and that the “safe harbor” had been waived by Arch.  On appeal, the Commonwealth Court upheld the trial court’s decision.  In its decision, the Commonwealth Court explained its holding as follows:

… the payment bond drafted by Arch herein provided that the bond shall remain in full force and effect until such time as both Skepton, the principal/general contractor, and any subcontractor, such as Tauber, make full payment for any labor and/or materials supplied for the school project. As the trial court noted, this language ensured that a third party such as Berks, which provided labor and/or materials for the project, would get paid in full.

This decision could tilt the playing field in favor of unpaid second-tier subcontractors, but only if the payment bond mirrors the language found in the Arch payment bond, or if there is other language that defeats the “safe harbor.” On the other hand, the ruling may be fleeting as sureties can easily overcome the holding by modifying any troublesome language in a payment bond.

If you are a second-tier subcontractor on a public project in Pennsylvania and remain unpaid, you should demand a copy of the payment bond and examine it carefully to determine whether the surety has waived the benefit of the “safe harbor.”  Better yet, contact experienced counsel for assistance in getting paid.

The Commonwealth Court decision can be found here.

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Posted on by Christopher I. McCabe, Esq. in Court Decisions, Surety and Bonding Leave a comment