The Pennsylvania Supreme Court recently held that when a jury finds that a municipality is not only in breach of contract, but also has acted in bad faith towards a contractor, the trial judge still retains the ultimate discretion to determine whether to award penalty and attorney’s fees under the Procurement Code.

In A. Scott Enterprises, Inc. v. City of Allentown, 142 A.3d 779 (Pa. 2016), the contractor discovered contaminated soil while excavating to construct a new road, and the work was suspended. The city knew that there might be contamination, but did not disclose that knowledge in the bid documents. The city also knew that soil testing was recommended, but did not perform the testing. The city refused to authorize the contractor to perform on a force account basis and the work never re-commenced.

Instead, the contractor sued to recover its losses, and the jury found that the city had breached the contract and acted in bad faith. As a result, the contractor requested an award of penalty and attorney’s fees under Section 3935 of the Commonwealth Procurement Code. Section 3935(a) indicates that a court “may award” a 1% per month penalty on “the amount that was withheld in bad faith,” while Section 3935(b) indicates that the prevailing party “may be awarded a reasonable attorney fee” if the government “acted in bad faith.”

In this case, the trial judge examined the same evidence heard by the jury, as well as the language of Section 3935. She determined not only that she had the discretion to decide whether to award attorney fees and penalty, but decided not to issue such an award. The contractor appealed, and the commonwealth court decided that such an award was mandatory, stating:

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.

With this finding, the commonwealth court remanded the case back to the trial judge to calculate and award the appropriate penalty and attorney’s fees to the contractor. In the meantime, however, the Pennsylvania Supreme Court reviewed the decision and overruled the commonwealth court by agreeing with the trial judge’s original ruling. More specifically, after a lengthy analysis of precedent and after closely examining the language of Section 3935, five members of the court agreed with the trial judge, while one member issued a dissenting opinion.

As a result, barring action by the state legislature to amend the Procurement Code, contractors must now overcome two hurdles to establish entitlement to a penalty and attorney’s fees, and to make a finding of bad faith something more than the “meaningless exercise with no consequence” as described by the commonwealth court.   First, they must convince the jury that a municipality has acted in bad faith. Second, the contractor must also convince the trial judge not that penalty and attorney fees “may” be awarded, but that they should be awarded.