In Scott Enterprises, Inc. v. City of Allentown, the Supreme Court of Pennsylvania reversed precedent and held that an award of the statutory penalty and attorneys' fees under the prompt payment provisions of the Commonwealth's Procurement Code are not mandatory, and instead should be left to the discretion of the trial judge ( (July 19, 2016)).

The city of Allentown, Pennsylvania contracted with A. Scott Enterprises, Inc. (ASE) to construct a public road. The City suspended work on the project after discovering soil contaminated with arsenic at the worksite. However, the City instructed ASE to proceed with the project. ASE declined to proceed, explaining that it would be responsible for the significant additional costs because of the contaminated soil. ASE then sued the City for violations of the prompt payment provisions of the Procurement Code (62 Pa.C.S. §3935).

Section 3935 of the Procurement Code governs prompt payment on public contracts and provides in instances of bad faith by the government for the award to the contractor of:

At trial, the jury found that the City acted in bad faith in breaching its contract with ASE. However, the trial judge did not award the statutory penalty and attorneys' fees to ASE, arguing that the statute gave it discretion to deny the award. Both parties appealed to the Commonwealth Court. On appeal, the Commonwealth Court agreed with ASE's reading of Section 3935 requiring a mandatory penalty and attorneys' fees. The City appealed to the Supreme Court of Pennsylvania.

The Supreme Court of Pennsylvania considered whether an award of the statutory penalty and attorneys' fees under the prompt payment provisions of the Procurement Code is mandatory. The court looked to the plain language of the statute in its analysis, focusing in particular on the use of the word "may", in finding that the penalty and attorneys' fees should not be mandatory when bad faith has been established. In making its determination, the court distinguished between the word "may" in the Procurement Code and the use of the word "shall" in the statute governing private prompt payments.

The court stressed that its holding does not mean that a trial court can arbitrarily decline to issue an award because the trial judge's determination is subject to review for abuse of discretion.

The Supreme Court held that Section 3935 of the Procurement Code allows, but does not require, the court to order the award of attorneys' fees and the statutory penalty when the jury determines that payments have been withheld in bad faith in public construction projects.

The Supreme Court of Pennsylvania's decision will have a significant impact on public construction projects in Pennsylvania, and may influence decisions on similarly worded statutes in other states where those courts have not ruled on the issue. As a result of this decision, a trial court judge has the power to award or refuse to award penalties and attorneys' fees, even when a jury has found that the government acted in bad faith.

Although this decision has no effect on the private construction industry in Pennsylvania, it creates uncertainty for contractors engaging in public works projects in the state. Conversely, it creates an avenue for the government to avoid the costly prompt payment penalties in limited instances.

For more information on prompt payment acts for public projects, see Prompt Payment Acts (Public Projects): State Comparison Chart.

And for information on prompt payment for private projects, see Prompt Payment Acts (Private Projects): State Comparison Chart.