Pennsylvania Commonwealth Court Interprets Payment Bond Language to Waive Bond Law “Safe Harbor” Against Double Payment

Berks Products Corp. v. Arch Ins. Co.
72 A.3d 315 (Pa. Commw. Ct. 2013)

Note: A petition for allowance of appeal from this decision has been filed with the Pennsylvania Supreme Court, but has not been acted upon as of January14, 2014.

This action arose from a payment bond secured by a general contractor for work performed on a public school building. Skepton Construction, Inc. (“Skepton”) entered into an agreement with the Wilson Area School District (the “District”) to be the general contractor for the construction of a new intermediate school (the “Project”). Under its agreement with the District, Skepton was required to secure a payment bond in order to guarantee its payment obligations. Skepton secured its payment bond through Arch Insurance Company (“Arch”). The payment bond (the “Bond”), in relevant part, stated: “[I]f the Principal and any subcontractor of the Principal to whom any portion of the work under the Agreement shall be subcontracted,…promptly shall pay or cause to be paid, in full, all money which may be due any claimant supplying labor or materials…, then this Bond shall be void; otherwise this Bond shall be and shall remain in force and effect.”

Skepton thereafter entered into a subcontract with R.A. Tauber, Inc. (“Tauber”) for the concrete work on the Project. Tauber subsequently contracted with Berks Products Corporation (“Berks”) to provide materials for its subcontract work. Tauber, however, failed to pay for $52,679.26 worth of materials. Skepton later terminated its subcontract with Tauber, and Tauber subsequently filed for bankruptcy. As a result, Berks filed suit against Arch seeking to recoup the money owed under the Bond for materials supplied and incorporated into the Project. In defense, Arch asserted that its principal, Skepton, had made full payment to Tauber for the materials, which acts as a complete bar to liability under section 3939(b) of the Commonwealth Procurement Code (the “Code”). Section 3939(b) of the Code, also known as the “safe harbor” provision, provides 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.” Berks moved for summary judgment with the trial court and argued that Arch waived the “safe harbor” provision based on the language of the Bond. The trial court agreed and entered summary judgment in favor of Berks. Arch appealed to the Pennsylvania Commonwealth Court.

On appeal, Arch argued that the safe harbor provision should apply and that the trial court’s ruling violated Pennsylvania’s Public Works Bond Law (the “Bond Law”). Arch contended that the terminology of the Bond is standard for all payment bonds posted for public works construction projects and essentially mirrors provisions found in the Bond Law. While the Court agreed that the safe harbor provision is applicable, it held that the specific language of the Bond provides greater protection than that called for in the Bond Law. The Court stated that “[w]hile the terminology utilized by Arch does serve the purpose of…the Bond Law, i.e., to protect claimants supplying labor or materials for a project, this terminology goes further to ensure that the payment bond will remain ‘in force and effect’ until such time as both the principal and any of its subcontractors makes full payment for any labor or materials supplied for the school project.” Accordingly, the Court found that based on the language of the Bond, the safe harbor provision of the Code could be waived and such waiver is not inconsistent with the Bond Law. Arch next argued that the trial court erred in concluding that the language of the Bond effectively waived the safe harbor provision of the Code. The Court noted that while the safe harbor provision would typically protect a surety against such claims, the specific language of the Bond, which required Skepton to assure that all material men such as Berks were paid, served as a waiver of the safe harbor provision, thereby exposing Arch to liability under the Bond for any such unpaid amounts. The Court concluded that the critical language in the Bond imposed an obligation upon Skepton and its subcontractors to ensure that any claimant supplying labor or materials was paid in full. Therefore, the Court held that the trial court committed no error in finding that the language of the Bond waived the protections of the safe harbor provision. Accordingly, the Court affirmed summary judgment in favor of Berks, finding Arch liable under the Bond.

Jeffery R. Mullen

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