Commonwealth Court Rules That Award Of Fees And Penalty Is Mandatory On Finding Of Bad Faith

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[NOTE: The Commonwealth Court decision reported in this post has been overruled by the Supreme Court. See my new post on the Supreme Court’s July 2016 ruling that a finding of bad faith does not mandate an award of fees and penalties.]

In a recently published opinion, the Commonwealth Court has held that a finding of bad faith by a public entity in refusing to make payment to a public contractor mandates the award of attorney’s fees and the statutory penalty of 1% per month.

In 2009, the City of Allentown (Allentown) awarded a road paving contract to A. Scott Enterprises (Scott).  After mobilization, the job was suspended when a pile of contaminated dirt was discovered at the job site.  Scott resumed some of its work and then left the job site while the parties negotiated Scott’s costs.  The parties were unable to agree on payment for the additional costs to deal with the job suspension and the contaminated soil.

Scott then filed suit to recover its losses on the project, and was awarded damages of $927,299.  The jury also found that Allentown breached the contract and acted in bad faith in refusing to make payment to Scott for its contract damages and suspension costs.  However, despite the finding of bad faith, the trial court refused to award Scott attorney’s fees, the statutory penalty of 1% per month, and pre- and post-judgment interest.  Scott appealed to the Commonwealth Court.

On appeal, Allentown argued that an award of fees and penalties was discretionary with the trial court.  The Commonwealth Court rejected Allentown’s arguments, and held that the jury finding of bad faith mandated an award of fees and penalties to Scott:

The purpose of the Procurement Code is to “level the playing field” between government agencies and contractors. See Pietrini Corp. v. Agate Construction Co., 2006 PA Super. 140, 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. We conclude that 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. See City of Independence v. Kerr Construction Paving Company, Inc., 957 S.W.2d 315, 321-23 (Mo. Ct. App. 1997) (holding that Missouri’s procurement code’s use of “may” regarding penalty interest and attorney’s fees means “shall” and upon finding of bad faith by jury, trial court must award such damages, even though the extent of damages is a matter for the discretion of trial judge).

On the question of when the public agency must make payment to the contractor, the Commonwealth Court had this to say:

There was conflicting evidence on the exact amount the City owed Contractor.  However, the City had an obligation to make a good faith effort to pay for Contractor’s suspension costs and to pay those invoices it did not challenge. 62 Pa. C.S. §3932. If the City disputed the amount of a suspension invoice, it was required to so notify Contractor, withhold the disputed amount and pay the remainder of the invoices. Instead the City paid nothing.

While the Commonwealth Court held that an award of fees and penalties was mandatory, the amount to award is within the trial court’s discretion.  The case was remanded to the trial court for a hearing to determine the award of reasonable attorney’s fees.

The takeaway from this decision is that public agencies have a clear duty to determine what is owed to a contractor and to pay that amount.  They cannot simply throw up their hands and refuse to make any payment because there is a dispute over some items of work.  The Commonwealth Court’s holding strengthens the hand of public contractors in Pennsylvania, and puts public agencies on notice that the Procurement Code has real teeth and that they will be held accountable for bad faith conduct in refusing to make proper and timely payment to their contractors

The Commonwealth Court’s opinion can be found here.

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Posted on by Christopher I. McCabe, Esq. in Court Decisions, Procurement Code, Public Works Payment Rules Leave a comment