A. Scott Enters., Inc. v. City of Allentown

• Decision Date: 19 July 2016
• Docket Number: Nos. 55 MAP 2015,s. 55 MAP 2015
• Citation: 142 A.3d 779
• Parties: A. SCOTT ENTERPRISES, INC., Appellee v. CITY OF ALLENTOWN, Appellant A. Scott Enterprises, Inc., Appellee v. City of Allentown, Appellant.
• Court: Pennsylvania Supreme Court

142 A.3d 779

A. SCOTT ENTERPRISES, INC., Appellee

v.CITY OF ALLENTOWN, Appellant

A. Scott Enterprises, Inc., Appellee

v.City of Allentown, Appellant.

Nos. 55 MAP 2015

Supreme Court of Pennsylvania.

Argued Nov. 18, 2015.

Resubmitted Jan. 20, 2016.

Decided July 19, 2016.

James T. Huber, Huber and Waldron, Allentown, for City of Allentown, Appellant.

Paul Aloysius Logan, Frank Stewart Nofer, Powell, Trachtman, Logan, Carrie & Lombardo, P.C., King of Prussia, for A. Scott Enterprises, Appellee.

SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, JJ.

OPINION

Justice DOUGHERTY.

In this discretionary appeal, we consider whether an award of a statutory penalty and attorney fees under the prompt payment provisions of the Commonwealth's Procurement Code, see 62 Pa.C.S. § 3935, is mandatory upon a finding of bad faith, irrespective of the statute's permissive phrasing. We hold such an award is not mandatory, and therefore reverse the order of the Commonwealth Court and remand the case to the trial court for proceedings consistent with this Opinion.

Appellant City of Allentown (City) contracted with appellee A. Scott Enterprises, Inc. (ASE), to construct a new public road.¹ After arsenic-contaminated soil was discovered at the worksite, the City suspended work on the project. Following testing, it was determined construction could resume if precautions were taken. Accordingly, the City instructed ASE to obtain revised permits and proceed with the project. However, the existing contract did not include terms regarding the potential for contaminated soil, despite the fact the City was aware there might be contamination prior to entering into the contract, and ASE declined to proceed, explaining it would incur substantial additional costs due to the contaminated soil. The parties made several attempts to reach an agreement in which ASE would continue the construction, but to no avail. Consequently, ASE sued the City to recover its losses on the project, alleged breach of contract, and sought compensation under theories of quantum meruit and unjust enrichment, as well as interest and a statutory penalty and fee award for violations of the prompt pay provisions of the Procurement Code.

After a trial, a jury found the City breached its contract with ASE and also withheld payments in bad faith. Trial Court Opinion at 28 & n. 5.² Both parties filed post-trial motions. The City requested the trial court to enter judgment in its favor or grant a new trial with respect to ASE's breach of contract claims, as well as enter judgment in its favor or grant a new trial with respect to ASE's Procurement Code claim. The City argued there was insufficient evidence of bad faith to pose that issue to the jury, while ASE's motion sought a statutory penalty and attorney fees for bad faith pursuant to Section 3935 of the Procurement Code. Section 3935 provides, in relevant part:

(a) Penalty. —If arbitration or a claim with the Board of Claims or a court of competent jurisdiction is commenced to recover payment due under this subchapter and it is determined that the government agency ... has failed to comply with the payment terms of this subchapter, ... the arbitrator, the Board of Claims or the court may award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was withheld in bad faith. An amount shall be deemed to have been withheld in bad faith to the extent that the withholding was arbitrary or vexatious ...[.]

(b) Attorney fees. —Notwithstanding any agreement to the contrary, the prevailing party in any proceeding to recover any payment under this subchapter may be awarded a reasonable attorney fee in an amount to be determined by the Board of Claims, court, or arbitrator, together with expenses, if it is determined that the government agency ... acted in bad faith. An amount shall be deemed to have been withheld in bad faith to the extent that the withholding was arbitrary or vexatious.

62 Pa.C.S. § 3935 (emphases added).³ The court did not rule on the post-trial motions within 120 days and, on praecipe filed by ASE on November 22, 2013, judgment was entered on the jury's verdict of $927,299.00. See Pa.R.C.P. 227.4(1)(b) (prothonotary shall, upon praecipe of party, enter judgment upon jury verdict if post-trial motions are filed and court does not dispose of all motions within 120 days of first motion; judgment entered is final).⁴ Both parties appealed to the Commonwealth Court.

In its Pa.R.A.P.1925(a) opinion, as relevant to this appeal, the trial court stated although there was sufficient evidence of bad faith to submit that question to the jury, the court nevertheless retained discretion to deny an award. The court explained its decision on both points as follows:

[T]he City admitted that it would not release or terminate the Contract with ASE until ASE came up with the right price. The City refused force accounts.^{[ 5 ]} The City did not direct ASE to demobilize or to resume work unconditionally on forced account. There was never a writing authorizing the additional work and compensation as required by the City's Contract. Furthermore, the City knew or should have known that the recommended soil testing was not performed. The City's Engineer, ... and Lehigh County Conservationist recommended the soil testing due to the likelihood of contaminated soil. Moreover, PennDOT agreed to do the test. Nevertheless, no one tested or verified testing prior to contracting with ASE. Furthermore, the City failed to include terms or conditions providing for contaminants in their contract. Additionally, the City never disclosed to ASE that soil testing was recommended, but never completed. [The suspension of work on the Contract] could have been avoided if the City had followed through with PennDOT, and accepted the recommendations of [the Engineer and Conservationist]. There was sufficient evidence to send the question of bad faith to the jury. At the same time, it is within the discretion of this [c]ourt to award penalty, attorneys' fees and interest. Given the conflicting testimony as to damages presented by ASE, the request for such award is denied.

Trial Court Opinion, 2/28/14, at 32–33.⁶

In the Commonwealth Court, each party raised multiple issues. As relevant here, the City claimed the trial court erred in submitting the Procurement Code bad faith issue to the jury because ASE failed to prove the claim. ASE disputed that assertion and, in its cross-appeal, claimed the trial court erred in failing to award a statutory penalty and attorney fees premised upon the jury finding of bad faith. Specifically, in ASE's view, such an award under Section 3935 is mandatory where a jury finds a government agency acted in bad faith. ASE argued the trial court improperly set the jury's finding of bad faith aside and substituted its own judgment; while acknowledging the amount of a Section 3935 award is discretionary, ASE asserted the trial court could not deny outright a penalty and attorney fees where bad faith was established.

The City responded by noting ASE's complaint about the denial of a Section 3935 award arose in an unusual procedural posture because the taking of judgment precluded the trial court from deciding the claim prior to appeal. The City then disputed ASE's view of the statute, stressing the discretionary nature of the statutory language. The City asserted ASE's issue, properly framed, was whether the trial court abused its discretion in failing to award a penalty and fees. In the City's view, ASE's contrary reading ignored the right to a Section 3935 award is created and controlled by the statute, and the statute does not vest a jury with the ultimate power to issue an award. The City also argued the trial court did not abuse its discretion in denying an award because the amount sought by ASE was, by ASE's own admission, incorrect; the City claimed it was within the court's discretion to conclude the non-payment of those amounts was neither arbitrary nor vexatious.

In a published decision, the Commonwealth Court agreed with ASE's reading of the statute, notably opining:

The purpose of the Procurement Code is to “level the playing field” between government agencies and contractors. It advances this goal by requiring a government agency that has acted in bad faith to pay the contractor's legal costs, as well as an interest penalty. Otherwise, the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith.

A. Scott Enterprises, Inc. v. City of Allentown, 102 A.3d 1060, 1070 (Pa.Cmwlth.2014) (internal citation omitted). Relying in part on Missouri case law, the court concluded Section 3935 “requires the imposition of attorney's fees and the statutory penalty upon a jury's finding of bad faith,” reversed the trial court's “refusal to consider” an award, and remanded to the trial court for a hearing to determine, within its discretion, the amount of the penalty and attorney fees to be awarded. Id., citing City of Independence v. Kerr Construction Paving Co., 957 S.W.2d 315 (Mo.Ct.App.1997).⁷ The City's application for reargument en banc was denied.

Upon petition by the City, this Court granted allowance of appeal to address whether “a jury finding of bad faith require[s] the trial court to impose a statutory penalty and award attorney fees under” Section 3935, while denying review of other issues raised in the City's petition for allowance of appeal. A. Scott Enterprises, Inc. v. City of Allentown, 117 A.3d 1277, 1277–78 (Pa.2015) (per curiam ).

The City argues that, when construed according to its common and approved usage, the word “may” as used in Section 3935 is properly interpreted as permissive, not mandatory. The City acknowledges there are instances when courts have deliberately interpreted permissive language like “may” to mean “shall,” but it claims such limited circumstances are not present here. The City also notes the text of the Contractor and...