E. Steel Constructors, Inc. v. Int'l Fid. Ins. Co.

• Citation: 282 A.3d 827
• Decision Date: 01 September 2022
• Docket Number: 998 MDA 2020, No. 1034 MDA 2020
• Parties: EASTERN STEEL CONSTRUCTORS, INC., Appellant v. INTERNATIONAL FIDELITY INSURANCE COMPANY, Appellee Eastern Steel Constructors, Inc., Appellee v. International Fidelity Insurance Company, Appellant
• Court: Superior Court of Pennsylvania

282 A.3d 827

EASTERN STEEL CONSTRUCTORS, INC., Appellant

v.INTERNATIONAL FIDELITY INSURANCE COMPANY, Appellee

Eastern Steel Constructors, Inc., Appellee

v.International Fidelity Insurance Company, Appellant

No. 998 MDA 2020

No. 1034 MDA 2020

Superior Court of Pennsylvania.

Argued June 8, 2021

Filed September 1, 2022

Reargument Denied November 9, 2022

Brian S. Jablon, Severna Park, MD, for Eastern Steel, appellant.

Avrum Levicoff, Pittsburgh, for International Fidelity, appellee.

BEFORE: LAZARUS, J., STABILE, J., and MUSMANNO, J.

OPINION BY STABILE, J.:

In this suretyship action, Appellant/Cross-Appellee, Eastern Steel Constructors, Inc. ("Eastern" or "Claimant"), and Appellee/Cross-Appellant, International Fidelity Insurance Company ("IFIC"), appeal and cross-appeal, respectively, from the July 23, 2020 judgment entered in the Court of Common Pleas of Centre County ("trial court"). Following the prime contractor Ionadi Corporation's ("Ionadi") failure to pay Eastern for work Eastern performed under a subcontract, Eastern sought to recover the outstanding payments from IFIC, Ionadi's surety. Eastern secured an arbitration award against Ionadi that was subsequently confirmed and reduced to a judgment. Thereafter, Eastern unsuccessfully attempted to collect the judgment from IFIC. Eastern filed suit and the case eventually proceeded to a jury trial, at the conclusion of which the jury returned a verdict in favor of Eastern and against IFIC. We now are called upon to decide, inter alia , whether a surety, who had notice of and an opportunity to participate in arbitration proceedings against its principal, is bound by an arbitration award rendered against the principal and, separately, whether a surety is subject to the bad faith statute, 42 Pa.C.S.A. § 8731. After careful review, we have concluded, inter alia , that IFIC, as surety, was bound by the arbitration award, but not subject to a bad faith action under Section 8731. Accordingly, we affirm in part, reverse in part, vacate in part, and remand for further proceedings.

I. BACKGROUND

In 2008, the Pennsylvania State University ("PSU") entered into a prime contract (the "Construction Contract") with Ionadi for the erection of steel on a project for the construction of the Millennium Science Center Complex at PSU's University Park Campus in Centre County, Pennsylvania (the "Project").

On October 29, 2008, IFIC issued a $10,125,000.00 payment bond ("Payment Bond") for Ionadi in connection with the Project.¹ To do so, IFIC utilized The American Institute of Architects ("AIA") standard form AIA Document A312, which the parties modified to suit their needs. In particular, the Payment Bond provided:

1. The Contractor² and the Surety³ , jointly and severally , bind themselves, their heirs, executors, administrators, successors and assigns to the Owner⁴ to pay for labor, materials and equipment furnished for use in the performance of the Construction Contract⁵ , which is incorporated herein by reference.

2. With respect to the Owner, the obligation shall be null and void if the Contractor:

2.1 Promptly makes payment, directly or indirectly, for all sums due Claimants ....

3. With respect to Claimants , this obligation shall be null and void if the Contractor promptly makes payment, directly or indirectly, for all sums due .

4. The Surety shall have no obligation to Claimants under this Bond until:

4.1 Claimants who are employed by or have a direct contract with the Contractor have given notice to the Surety (at the address described in Paragraph 12) and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim.

....

6. When the Claimant has satisfied the conditions of Section 4, the Surety shall promptly and at the Surety's expense take the following actions:

6.1 Send an answer to the Claimant, with a copy to the Owner, within 60 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.

6.2 Pay or arrange for payment of any undisputed amounts.

6.3 The Surety's failure to discharge its obligations under this Section 6 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a claim. However, if the Surety fails to discharge its obligations under this Section 6, Surety shall indemnify the Claimant for the reasonable attorney's fees the Claimant incurs to recover any sums found to be due and owing to the Claimant.

9. The Surety shall not be liable to the Owner, Claimants or others for obligations of the Contractor that are unrelated to the Construction Contract....

....

11. No suit or action shall be commenced by a Claimant under this Bond other than in a court of competent jurisdiction in the location in which the work or part of the work is located or after the expiration of one year from the date (1) on which the Claimant gave the notice required by Subparagraph 4.1 ..., or (2) on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the Construction Contract, whichever of (1) or (2) first occurs.

....

15. DEFINITIONS

15.1 Claimant : An individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the contract. The intent of this Bond shall be to include without limitation in the terms "labor, materials or equipment" that part of [all utilities] ... or rental equipment used in the Construction Contract, ... and all other items for which a mechanic's lien may be asserted in the jurisdiction where the labor, materials or equipment were furnished.

Payment Bond, 10/29/08, at 5-6 (emphasis added).

On November 11, 2008, Ionadi subcontracted (the "Subcontract") with Eastern, a family-owned commercial subcontractor, for installation services relative to the steel reinforcing material. Specifically, Eastern agreed to, among other things, "supply labor and trade hand tools for installation of prefabricated reinforcing steel." Subcontract, 11/11/08, at ¶ 1. For the reinforcing steel installation, the Subcontract set the unit price of structure rebar at $0.33/per pound. Id. The Subcontract also provided in pertinent part:

18. Payment schedules to [Eastern] will be made on or before the calendar 25^th of each month, of an amount equal to 90% of the total value of work placed or performed during the preceding month. There will be a 10% retention holding. Retention release shall occur no later than 60 days after [Eastern's] reinforcing completion.

....

19. [Eastern] shall receive a copy of all delivery tickets for all material which [Eastern] will be installing. With each delivery, a copy will immediately be issued to [Eastern] for its records, and all weights will be shown on delivery tickets from reinforcing suppliers.

.... 21. Rebar weights for payment to [Eastern], regarding installation, shall be actual bar weights as shipped, providing such weights are shipped for installation.

....

23. [Eastern] reserves the right to charge interest at one and one-half percent (1-1/2%) monthly on delinquent debt or payments, and to decline to perform any work except upon receipt of payment or security; or upon terms and conditions satisfactory to [Eastern]. [Eastern] shall be considered a direct obligee of [Ionadi's] bond assuring this [Subcontract]. Any costs incurred, direct and indirect, for which [Eastern] is subjected in pursuing any money, or consequential damages, legal fees, and costs of any kind to [Eastern] for nonperformance, will be [Ionadi's] and [IFIC's] responsibility .

....

25. If any filing of claim, dispute, or legal actions are pursued and/or initiated against [Ionadi], such will occur and take place through means of the American Arbitration Association [("AAA")] by means of binding arbitration within the nearest local jurisdictional boundaries, or city, in which the [P]roject is located.

Id. at ¶¶ 18-19, 21, 23, and 25 (emphasis added).

Thereafter, on November 25, 2008, Eastern separately entered into a written agreement with Tinney Rebar Services, Inc. ("Tinney"), a reinforcing supplier, for the fabrication and supply of the reinforcing steel for the Project. The Tinney agreement also contained an AAA arbitration provision.

A. Payment Dispute

On February 28, 2009, pursuant to the Subcontract, Eastern began handling and installing reinforcing steel, supplied to Ionadi by Tinney, at the Project. Eastern concluded its work at the Project on September 4, 2010. Eastern submitted requests for payment to Ionadi monthly by completing an AIA Application and Certification for Payment ("Payment Requests"). Each of the Payment Requests submitted by Eastern to Ionadi contained an invoice number, identified the amount of work performed within the covered time period, and listed the weight of reinforcing steel, among other things.

Ionadi paid Eastern on the first five Payment Requests for work performed at the Project through June 30, 2009. Thereafter, however, Ionadi either failed to pay the Payment Requests at all, or paid them only partially and late, citing cash flow problems.

On April 27, 2010, while work at the Project was ongoing, Eastern notified IFIC in writing of a claim under the Payment Bond for nonpayment of $622,182.90 by Ionadi. Eastern stated:

[Ionadi] is in default of payments due and owing to [Eastern], which Eastern is demanding payment by you as the surety co-obligor[.] ... [Ionadi] has admitted they have received payments that should have been forwarded to Eastern, however, due to their financial problems they have not. [Eastern] demand[s] prompt payment plus legal and statutory interest paid to Eastern.

Letter, 4/27/10. On April 29, 2010, IFIC notified Eastern that IFIC did not have sufficient information to determine whether all or any portion of the alleged amounts due was undisputed or disputed...