A recurring, and often frustrating situation for a general contractor on a public project in Pennsylvania, is when a claim is made by a lower-tier subcontractor against the general contractor’s payment bond, which arises when a subcontractor fails to complete its work or goes out of business, and leaves unpaid balances owed to its lower-tier subcontractors and suppliers. In this situation, lower-tier subcontractors often attempt to invoke the security provided by the payment bond as a means of recovering the money they are owed by the debtor subcontractor. However, under Pennsylvania law, a general contractor and its surety’s liability under the bond is not automatic. In fact, claims by lower-tier subcontractors, against a general contractor or its surety, are barred when the general contractor has paid its subcontractor the balance owed under the subcontract, taking into account any backcharges assessed for deficiencies in the subcontractor’s work. Good news for the general contractor, but bad news for the lower-tier subcontractor or vendor.
Section 3939(b) of the Procurement Code states that “[o]nce a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.” In short, a general contractor will not be required to pay twice (once to its subcontractor and again to satisfy the claims of lower-tier subcontractors). As such, a general contractor and its surety are protected from liability for claims of lower-tier subcontractors where the contractor has paid its subcontractor in accordance with the terms of its subcontract and the prompt payment provisions of Pennsylvania’s Procurement Code.
The court in Trumbull Corp. v. Boss Construction, Inc. relied on Section 3939(b) of the Procurement Code to bar a lower-tier subcontractor’s bond claim against the general contractor and its surety. During the performance of the project, one subcontractor failed to perform in accordance with its subcontract and experienced financial difficulties. As a result, the general contractor assessed backcharges and issued joint checks to some of its lower-tier subcontractors. Some of the lower-tier subcontractors who were not paid in full brought claims against the general contractor and its surety. Because the subcontractor at issue had received payments in accordance with the requirements of the Procurement Code, the general contractor and surety were not held liable for the bond claims of the lower-tier subcontractor.
Importantly, the Trumbull Court acknowledged that this defense is available even if a general contractor has assessed backcharges against its subcontractor and, as a result, has not paid the full amount of the subcontract. This is because the Procurement Code permits a general contractor to “withhold payment from any subcontractor responsible for a deficiency item,” which is defined as “[w]ork performed but which the design professional, the contractor or the inspector will not certify as being completed according to the contract.” Accordingly, if a general contractor has assessed backcharges against a subcontractor for a “deficiency item” but has otherwise paid the subcontractor in full, its payment obligations under the Procurement Code are fulfilled and any bond claims of lower-tier subcontractors are barred.
Every general contractor working on public projects should be familiar with the Trumbull case, and make sure that their surety is familiar with that case as well. On the other hand, lower-tier subcontractors working on public projects in Pennsylvania must be mindful of any backcharges assessed against the party with whom they have contracted. Even if those backcharges have nothing to do with your work, they could impact your ability to receive payment and your bond rights.