If a public owner breaches its payment obligations to a public contractor and acts in bad faith in doing so, is the public contractor automatically entitled to an award of its attorney’s fees and a 1% penalty under section 3935 of the Procurement Code?
In a recently published opinion, the Supreme Court of Pennsylvania has ruled that such an award is discretionary, not automatic, reversing a 2014 Commonwealth Court decision which had held that a bad faith finding entitled the contractor to recover its attorney’s fees and the 1% penalty.
In 2009, the City of Allentown (Allentown) awarded a 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. Despite the finding of bad faith, the trial court refused to award Scott attorney’s fees, the statutory penalty of 1% per month, and interest. Scott appealed to the Commonwealth Court which held that the jury finding of bad faith automatically mandated an award of fees and penalties to Scott under section 3935.
Allentown appealed to the Supreme Court where it argued that an award of fees and penalties was discretionary with the trial court, not mandatory, because the word “may” and not “shall” was used in section 3935. The Supreme Court agreed:
Accordingly, we hold 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.
However, the Supreme Court indicated in its opinion that, if bad faith is found, a non-award of fees and penalties would probably be a rare occurrence:
We stress our holding that Section 3935 does not mandate an award in every case where bad faith has been established does not mean a tribunal can arbitrarily decline to issue an award; its determination is subject to review for abuse of discretion, and the soundness of the decision no doubt will depend upon the persuasiveness of the explication of the reasons for denial. Furthermore, given the extreme conduct necessary to support a finding of bad faith, the instances where a finding of bad faith is deemed not to require a Section 3935 award at all presumably will be rare.
The takeaway from this decision is that a finding of bad faith on the part of a public owner should result in an award of attorney’s fees and/or the 1% penalty to the innocent public contractor unless there are very good reasons for declining to make such an award. A public owner still has a clear duty to determine what is owed to a contractor and to pay that undisputed amount. While Allentown prevailed in its appeal, it could still lose before the trial court which must now decide whether to award fees and the 1% penalty. The standard for such an award is unclear. Nonetheless, public owners should remember that the Procurement Code still has teeth and that they will likely be held accountable for bad faith conduct in to making proper and timely payment to their public contractors.
The Supreme Court’s opinion can be found here. If you need assistance on this topic, call or email me for a no-cost consultation.
Christopher I. McCabe, Esq.
