In an opinion issued on July 19, 2016, the Supreme Court of Pennsylvania held that an award of a statutory penalty and attorney fees under the prompt payment provisions of the Procurement Code, 62 Pa.C.S. §3935 is not mandatory upon a finding of bad faith in the case of A. Scott Enterprises, Inc. v. City of Allentown, 2016 WL 3908965 (Pa. 2016). In that case the City of Allentown contracted with the plaintiff to construct a new public street. The contractor, A. Scott Enterprises, Inc., encountered arsenic contaminated soil. Failing to reach an agreement with the city to recover losses resulting from the undisclosed contamination, A. Scott Enterprises, Inc. filed suit under theories of quantum meruit and unjust enrichment, as well as interest and a statutory penalty and attorney fees under the prompt pay provisions of the Procurement Code. At trial, a jury found that the city breached its contract and withheld payments in bad faith. The trial court failed to award a statutory penalty and attorney fees despite the finding of bad faith.

On appeal to the Commonwealth Court, A. Scott Enterprises, Inc. argued that the trial court erroneously set the jury’s finding of bad faith aside, and that under §3935 such an award is mandatory upon a finding of bad faith. The City argued that the language of the statute regarding the award is discretionary and that the statute does not vest a jury with the ultimate power to issue an award. The statute specifically states, in pertinent part:

(a) Penalty.—If arbitration or a claim with the Board of Claims or a court of competent jurisdiction is commenced to recover payment due under this subchapter and it is determined that the government agency ... has failed to comply with the payment terms of this subchapter, ... the arbitrator, the Board of Claims or 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. An amount shall be deemed to have been withheld in bad faith to the extent that the withholding was arbitrary or vexatious ...[.]

(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 in an amount to be determined by the Board of Claims, court, or arbitrator, together with expenses, if it is determined that the government agency ... acted in bad faith. An amount shall be deemed to have been withheld in bad faith to the extent that the withholding was arbitrary or vexatious.

62 Pa.C.S. § 3935 (emphasis added). The city argued that the word “may” as used in section 3935 is properly interpreted as permissive, not mandatory, and that the statute makes no mention of a jury.

The Supreme Court held that the statute’s plain language is unambiguous and permissive in nature in its use of the term “may.” The Court noted that “although ‘may’ can mean the same as ‘shall’ where a statute directs the doing of a thing for the sake of justice, it ordinarily is employed in the permissive sense.” 2016 WL 3908965 at *6, citing Commonwealth v. Garland, 142 A.2d 14 (Pa. 1958). The Court reasoned that the General Assembly has used the term “shall” in the similar Contractors and Subcontractors Payment Act, 73 P.S. §§ 501­516, which applies to private parties.

The Court held that a tribunal can arbitrarily decline to issue an award on a finding of bad faith, and that its decision to do so would be subject to review for abuse of discretion and would depend upon the persuasiveness of the explication for the reasons for denial. 2016 WL 3908965 at *10.

The case did not end there. The Supreme Court remanded the case to the trial court to fully support its reasoning, which the Supreme Court noted did not occur in the post-trial procedural developments in the case.

Litigants should be aware that the Supreme Court noted that “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.” Id.