Bad Faith Violation of Procurement Code Does Not Require Sanctions

The Pennsylvania Supreme Court has held, over a sharp dissent, that a public authority’s bad faith violation of the PA Procurement Code payment sections does not require imposition of sanctions or attorneys’ fees. The decision focused on use of the word “may” in the statute. The majority held that award of sanctions and attorneys’ fees is not mandatory even when the trial court determines that the authority has acted in bad faith. A dissent argued that legislative history supports the opposite conclusion, and that a finding of bad faith calls for imposition of sanctions despite use of the word “may.”

The project was for construction of a road for the City of Allentown; work was suspended due to presence of contaminated soils, and never resumed after much back and forth about handling of the contaminated materials. The contractor sued to recover for work performed. The trial court found that the City had acted in bad faith, essentially attempting to strong-arm the contractor on the additional costs being quoted.

The prompt payment provisions of the PA Procurement Code are at 62 Pa.C.S. § 3935, and include:

(a) Penalty.--If arbitration or a claim with ... a court of competent jurisdiction is commenced to recover payment due under this subchapter and it is determined that the government agency, contractor or subcontractor has failed to comply with the payment terms of this subchapter, ... the court may award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was withheld in bad faith …

(b) Attorney fees.--Notwithstanding any agreement to the contrary, the prevailing party in any proceeding to recover any payment under this subchapter may be awarded a reasonable attorney fee ... together with expenses, if it is determined that the government agency, contractor or subcontractor acted in bad faith ...

The court majority accepted the City’s argument that the word “may” should be interpreted as permissive. It further distinguished language in the procurement code from the PA Contractor and Subcontractor Payment Act, 73 Pa.C.S. § 512, which uses the word “shall” in reference to sanctions for violation of that law by private parties. To the majority, this distinction was intentional, and indicated the legislature’s intent to provide for permissive but not mandatory sanctions under the Procurement Code.

One justice dissented. She noted:

Unfortunately, the Majority does not attempt to ascertain the legislature's purpose for section 3935, and instead relies exclusively on the General Assembly's use of the word "may" rather than "shall." The purpose of section 3935 is easily identified upon review of the surrounding provisions in the Procurement Code.

These provisions of the Procurement Code plainly demonstrate that the legislature's intent and purpose in enacting section 3935 is to supply an enforcement mechanism to ensure compliance with the strict payment requirements ... In the absence of the specter of having to pay attorneys' fees and interest penalties, the multiple requirements under the Procurement Code demanding that government agencies pay on time and in accordance with contractual obligations would have no "teeth," and could fairly be ignored if useful to achieve other purposes.

As the Procurement Code defines what constitutes bad faith, the dissent argued that once such a finding had been made, allowing the court to decline to award sanctions would, in effect, allow it to insert additional considerations not included in the statute. The dissent concludes: “If and when the trial court determines that the government agency acted in bad faith, it must then award interest penalties and attorneys' fees as specified in section 3935, as the statute identifies no other factors to be considered before doing so.”

Thus, awarding authorities – or even contractors – on Pennsylvania public projects will be able to act in bad faith but not necessarily suffer sanctions as a result. Why would a statute purport to address bad faith actions but then allow relief to be discretionary? The majority decision may have been an appropriate exercise in statutory interpretation, but it misses the bigger picture of how to address parties – and particularly public authorities – who act in bad faith. The case is A. Scott Enterprises, Inc. v. City of Allentown, 2016 Pa. LEXIS 1503 (July 19, 2016).