“Litigation is the New Game of Kings”

The Commonwealth Court of Pennsylvania recently issued an important opinion in the municipal construction field: F. Zacherl, Inc. v. Flaherty Mech. Contrs., LLC, 2016 Pa. Commw. LEXIS 22 (Pa. Cmwlth. 2016). Zacherl is a trip down the rabbit hole of construction litigation on public projects.

In 2009, West Allegheny School District (“District”) sought bids for additions and alterations to West Allegheny High School. Id. at 2. Flaherty Mechanical Contractors, LLC (“Flaherty”) won the bid to become the prime contractor under the Separations Act, 53 P.S. § 1003, and Flaherty subcontracted sheet metal work to F. Zacherl, Inc. (“Zacherl”) under the terms of the prime contract. Zacherl, 2016 Pa. Commw. LEXIS 22 at 2. Work on the project commenced and the District made timely payments to Flaherty for work performed, “but Flaherty failed to make timely payments to its subcontractors, including Zacherl.” Id. at 3. Because of this failure, the District terminated Flaherty’s contract. Id. The following day, Flaherty terminated its contract with Zacherl. Id.

In an effort to move forward with the project, the “District requested that Zacherl return to the Project to complete the sheet metal work that it originally agreed to perform under its subcontract with Flaherty.” Id. at 4. Before returning to the project, Zacherl demanded payment equal to the outstanding invoices for the work it had already performed. Id. The District agreed to these terms, and issued payment of $147,591.90, while representing that payment for subsequent work would be forthcoming. Id.

Zacherl returned to the project and completed the work. Id. at 5. However, when Zacherl submitted for payment, the District argued that there was no contract and, pursuant to § 508 of the Public School Code, the District could not pay Zacherl, as “[p]ersons relying on agreements with an agent of the school district without first obtaining approval by a vote of the majority of the members at a public meeting do so at their own peril.” Id. at 12, citing Berkheimer Assocs. Ex rel. N. Coventry Twp. v. Norco Motors, 842 A.2d 966, 971 (Pa. Cmwlth 2004). In effect, the District argued that, because Zacherl did not formally enter into a new contract – approved by a public meeting as contemplated by the Public School Code – with the District, it could not collect on the work already performed.

In response, Zacherl filed suit under the Prompt Pay Act, seeking payment and attorney’s fees.

Both the trial court and the Commonwealth Court held that “separate school board approval of Zacherl’s oral contract was unnecessary [under the Public School Code] because the oral contract was for work already approved by the school board.” Id. at 13. Further, the District had to approve Zacherl’s subcontract prior to Flaherty engaging Zacherl to perform the subcontracted work. Id. In other words, the Commonwealth Court was utterly incredulous that the District would attempt to avoid payment for work actually performed by means of a technical legal argument. As the Court stated, “it would seem highly unlikely that the District expected Zacherl to perform the additional work for free.” Id. at 22.

Of particular interest is the Commonwealth Court’s treatment of the attorney’s fees issue. The trial court found that the District acted in bad faith and awarded over $100,000 in attorney’s fees to Zacherl pursuant to the Prompt Pay Act, 42 Pa. C.S. § 2503. The majority opinion in Zacherl remanded to the trial court the attorney’s fee issue, finding that “the trial court’s finding of bad faith is based entirely upon the District’s behavior prior to the institution of this lawsuit.” Id. at 28-29. The Court goes on to note that § 2503 is designed to compensate an innocent litigant for post-filing bad faith. Id., citing Carlson v. Ciavarelli, 100 A.3d 731, 745 (Pa. Cmwlth. 2015).

President Judge Leavitt was not completely satisfied with this outcome and filed a concurring opinion. As she points out, one of the goals of the Prompt Pay Act is to “‘level the playing field’ between a government agency, which can use its taxing power to fund litigation, and a private contractor, which lacks this resource.” Id. at 34; citing A. Scott Enterprises, Inc. v. City of Allentown, 102 A.3d 1060, 1070 (Pa. Cmwlth. 2014). In a keen turn of phrase, President Judge Leavitt notes: “Litigation is the new sport of kings. The damages awarded to Zacherl will not make Zacherl whole because the monies will be used to pay attorney fees and costs. The Prompt Pay Act was designed to address this unfortunate result.” Id. at 35 (emphasis provided).

There appears to be a legitimate battle regarding the extent to which the Prompt Pay Act ought to provide for the award of attorney’s fees. As President Judge Leavitt astutely points out, the Prompt Pay Act was specifically designed to even the playing field between contractors and state-funded government entities. It remains to be seen whether, upon remand, the trial court will again award attorney’s fees under § 2503, but it does seem that there is at least some momentum toward greater protection for contractors under the Prompt Pay Act.

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