Pennsylvania Department Of General Services’ Conduct In Withholding Memorandum Disclosing Unsuitable Soil Conditions From Bidders Was Vexatious, Entitling Contractor To Recover Penalty Interest And Attorney Fees Under Prompt Payment Act

DGS v. Pittsburgh Building Co.
2007 Pa. Commw. LEXIS 160 (Pa. Commw. Ct. April 5, 2007)

The Pennsylvania Commonwealth Court held that a contractor was entitled to recover penalty interest and attorney fees under the Pennsylvania Prompt Payment Act from the Department of General Services (“DGS”) when DGS had engaged in arbitrary and vexatious conduct by withholding payment for costs associated with a five-month suspension and unsuitable soil conditions when DGS was aware of, yet failed to disclose, problematic soil conditions.

DGS entered into a contract with the Pittsburgh Building Company (“PBC”) for the construction of a one-story armory building on a 22-acre site in Pennsylvania. PBC issued a subcontract to Fire-R Excavating, Inc. (“Fire-R”) to perform site work pursuant to DGS specifications. DGS issued a Notice to Proceed with a ten-month completion time on October 10, 2003. According to the bid documents, including a geotechnical survey provided by DGS, the Project consisted of a balanced site, where materials from higher elevations could be used to fill lower elevations without the need for borrowing fill outside the site for excavation purposes.

Shortly after PBC and Fire-R commenced work, they encountered soil with excessive moisture. After two-weeks of unsuccessful attempts to dry out the soil, PBC notified DGS that they were delayed due to “weather and soil conditions.” The design professional proposed suspending the Project or utilizing shale or other imported crushed stone to use as fill at the site.

Due to cost concerns, DGS suspended work effective November 19, 2003. DGS notified PBC that it was suspending work pursuant to Article 12.1 of the General Conditions of the Contract, permitting the suspension of work when a contractor unduly risks damage to a structure or installation. DGS stated that while it would grant an extension of time, it would not pay any additional costs to PBC.
DGS ended the suspension on April 9, 2004 and directed PBC to recommence work by April 15, 2004 with a revised completion date of January 10, 2005.

Upon restarting work, PBC and Five-R continued to encounter problems with the wet soil. In May 2004, when the soil conditions worsened, PBC ordered a study of the soil and discovered that it contained a large amount of clayey soils that were unsuitable for fill pursuant to the Project specifications. On June 18, 2004, PBC was directed to use soil from an adjacent hillside for fill. On June 28, 2004, PBC and Five-R restarted the excavation work under protest, using the acceptable material from the adjacent hillside. As a result, the Project suffered an eleven-month delay to all subsequent work.

After DGS refused to pay PBC additional compensation, PBC filed a claim with the Board of Claims seeking to recover costs for the Project suspension and for increased costs due to unsuitable soil and concealed subsurface conditions. The Board awarded PBC $867,171.00 in damages for the five-month suspension and the unsuitable soil conditions. The Board found that DGS’ suspension of the work was for its own convenience, and was not justified under Article 12.1 as PBC was not causing undue risk to a structure or installation, thus entitling PBC to recover damages.

The Board also found that PBC properly relied upon DGS’ geotechnical report of the soil conditions, provided as part of the bid documentation, as PBC did not have time during the bid process to conduct its own investigation. DGS’ geotechnical report failed to accurately reveal the extent of the clayey soils and the subsurface seeps and springs.

The Board also found that DGS failed to disclose an August 1999 memorandum that incorporated a report identifying a significant presence of clayey materials and concluded that “the site is unsuitable for earthwork in winter and early spring.” Based on the withholding of the August 1999 memorandum, the Board found that the geotechnical report, by itself, was a material misrepresentation. The Board held that DGS engaged in constructive fraud, breach of contract, and active interference with PBC’s performance of its contractual duties. The Board found that the contractual provisions relieving DGS of its liability for additional costs and damages were unenforceable due to DGS’ constructive fraud and active interference.

The Board declined, however, to award PBC penalty interest and attorney fees under the Prompt Payment Act, holding that (1) penalty interest and attorney fees are only available when a progress payment is withheld and (2) DGS’s conduct did not rise to the level of arbitrary and vexatious.

On appeal, the Commonwealth Court affirmed the Board’s findings except for the denial of penalty interest and attorney fees under the Prompt Payment Act. Recognizing that the Prompt Payment Act provides for the recovery of penalty interest and attorney fees upon a showing of bad faith, the Court held that DGS engaged in vexatious conduct when it withheld payment for costs associated with the five-month suspension and the unsuitable soil conditions.

The Court found that since DGS knew of the soil conditions as confirmed by the August 1999 memorandum, yet directed PBC to proceed with work on the Project regardless, DGS’ conduct was in bad faith. The court also found that DGS’ conduct was vexatious when it claimed that PBC’s conduct put the Project at risk and thus justified the Project suspension in the first place. Further, the Court noted that withholding the August 1999 memorandum was a material misrepresentation of the site conditions.

The court emphasized that the findings of constructive fraud and active interference confirmed that DGS did not have sufficient grounds to withhold payment for costs related to the suspension of the work and the soil conditions. The Court remanded the case for a proper determination of penalty interest and attorneys fees due to PBC.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

This entry was posted in Arbitration, Payment dispute, Prompt Payment Act and tagged , , , . Bookmark the permalink.