Scott Enters., Inc. v. City of Allentown, 2016 Pa. LEXIS 1503 (Pa. July 19, 2016)

The Supreme Court of Pennsylvania reversed an order of the Commonwealth Court and held that the prompt payment provisions of the Commonwealth Procurement Code, 62 Pa. C.S. §3931-3939 (the “Prompt Payment Act”), do not mandate an award of penalty interest and attorneys’ fees upon a finding that the government withheld payments from the contractor in bad faith.

The City of Allentown (“City”) awarded a contract to A. Scott Enterprises, Inc. (“ASE”) to construct a new public road (the “Project”). After the Project commenced, arsenic-contaminated soil was discovered onsite and the City ordered the work on the Project to be suspended while the soil was tested.

After it was determined that construction could proceed, the City instructed ASE to obtain new permits and proceed with Construction. However, ASE declined to continue working on the basis that it would incur substantial additional costs as a result of the contaminated soils. The parties were unable to reach an agreement relating to those additional costs, and ASE sued the City under a breach of contract theory to recover payments that ASE claimed the City withheld in bad faith, along with penalty interest and attorneys’ fees under the Prompt Payment Act. ASE’s claims proceeded to trial, and a jury found that the City had breached the contract and withheld payments from ASE in bad faith. In its post-trial motion, ASE sought an award of penalty interest and attorneys’ fees under the Prompt Payment Act as a result of the jury’s finding of bad faith. The trial court denied ASE’s post-trial motion.

ASE appealed to the Commonwealth Court, arguing that the trial court had abused its discretion in failing to award penalty interest and fees under the Prompt Payment Act. The Commonwealth Court agreed with ASE and reversed the order of the trial court. Specifically, the court reasoned that the Prompt Payment Act’s purpose “is to level the playing field between government agencies and contractors” and consequently where bad faith is established, an award of penalties and attorneys’ fees is mandatory.

The Supreme Court of Pennsylvania granted the City’s petition for an appeal to address whether “a jury finding of bad faith require[s] the trial court to impose a statutory penalty and award attorney fees” under the Prompt Payment Act. The Supreme Court held in the negative, reversing the decision of the Commonwealth Court, and finding that the penalty and attorneys’ fee provisions of the Prompt Payment Act are discretionary. The Court reasoned that the plain language of the statute “is unambiguous and permissive in nature[.]” In particular, the statute provides that “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” and “the prevailing party in any preceding to recover any payment under this subchapter may be awarded a reasonable attorney fee[.]” While Pennsylvania courts have sometimes interpreted the word “may” to mean “shall,” the Supreme Court reasoned that “we have done so usually where the ends of justice or constitutional requirements so dictate.” The Court found that neither circumstances to be applicable here. With respect to constitutional requirements, the Court determined that no such concerns were at issue, and indeed, ASE raised no such arguments. Similarly, the Court held that the ends of justice do not require a mandatory interpretation of the word “may.” In that respect, the Court rejected the Commonwealth Court’s conclusion that such a reading is necessary to “level the playing field.” Instead, the Court determined that “the playing field has been established by the General Assembly”, whose decision to utilize permissive language should be granted deference.

The Supreme Court’s decision was further supported by contrasting analogous language in the Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (“CASPA”), which the court described as “the prompt payment statute for private parties.” The Court noted that CASPA treats the award of penalties and attorneys’ fees as mandatory by using the word “shall.” To the Court, the use of contrasting words in otherwise analogous provisions “suggests a deliberate intention” to treat penalties and fees as discretionary under the Prompt Payment Act.

On the basis of this rationale, the Court held that the word “may” in the Prompt Payment Act must be interpreted as discretionary. The Court stressed, however, that its holding “does not mean a tribunal can arbitrarily decline to issue an award.” Rather, the trial court’s decision is reviewable for abuse of discretion and, indeed, “given the extreme conduct necessary to support a finding of bad faith [under the Prompt Payment Act], the instances where a finding of bad faith is deemed not to require [an award of penalties and attorneys’ fees] at all presumably will be rare.”

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