Payment Bond Does Not Cover Major Repairs to Heavy Construction Equipment Akin to Capital Improvements

Beckwith Machinery Company v. Asset Recovery Group, Inc.
2005 Pa. Super. 429, 2005 Pa. Super. LEXIS 4276 (Pa. Super. Ct. 2005)

In Beckwith Machinery Company v. Asset Recovery Group, Inc., et al., 2005 Pa. Super. 429 (Pa. Super. Ct. 2005), the Court held that invoices for major repairs in the nature of capital improvements to heavy construction equipment were not covered by the terms of a payment bond. The Court reasoned that the repairs referenced in the invoices at issue could not be classified as ordinary maintenance performed for consumption over the course of the project, but rather were services which a contractor would retain the benefit of on the completion of work to be used by him in a like manner on subsequent projects.

The matter arose out of the University of Pittsburgh’s plan to demolish its football stadium in 1999, so that a new convocation center could be built. In connection with the planned demolition, the Department of General Services (“DGS”) contracted with Dore & Associates Contracting, Inc. (“Dore”) to act as general contractor on the matter, performing all work on the project and supplying all necessary materials to complete the project in a timely manner. In accordance with Pennsylvania statutory requirements, Dore was required to post both payment and performance bonds on the project. Dore contracted with National Union Fire Insurance Co. (“National Union”), to provide both the payment and performance bonds required for the project.

Dore entered into a subcontract with Asset Recovery Group, Inc. (“ARGI”), for certain work, to be completed by April 1, 2001. ARGI in turn contracted with Beckwith Machinery Company (“Beckwith”), to provide service and repairs to the heavy construction equipment to be used on the project. Dore eventually terminated its subcontract with ARGI in mid-April 2001 because the project was still incomplete.

After Dore terminated AGRI, Beckwith made a written claim with National Union under the terms of Dore’s payment bond for work which Beckwith already completed, but had not yet been paid for. National Union denied Beckwith’s claim, and Beckwith sued ARGI and National Union. Beckwith’s action focused on fifteen specific invoices totaling approximately $52,000, all of which National Union disputed. Each of the invoices related to the installation and/or replacement of an engine and various engine components for the heavy construction equipment used at the project site.

The Court of Common Pleas of Allegheny County, Civil Division, concluded that pursuant to the terms of the payment bond, National Union was obligated to pay Beckwith the full amount of the challenged invoices, and entered judgment to that effect. On appeal, the Superior Court determined that the threshold question was whether Beckwith furnished material and labor “in the prosecution of the Work,” as contemplated by the terms of the bond.

National Union argued that its obligation as surety did not extend to work that largely constituted capital improvements to ARGI’s equipment. Beckwith argued that its work did not constitute capital improvements, but rather service and repairs necessary to keep the equipment operational during the time that it was used on the project.

Relying on the 1939 holding of the Pennsylvania Superior Court in Philadelphia School District ex rel. Crow v. B. A. Shrages Co., Inc., 134 Pa. Super. 533 (Pa. Super. Ct. 1939), the Court decided that all of the disputed invoices involved major repairs in the nature of capital improvements to heavy construction equipment which a contractor would be expected to retain the benefit of on completion of the work, and thus outside the terms of the payment bond.

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