The Pennsylvania Public Works Bond Act permits unpaid second tier subcontractors and supplier (i.e. sub-subcontractors) to make payment bond claims.  However, the “safe harbor,” provision of the Pennsylvania Prompt Pay Act bars payment bond claims by second-tier subcontractors and suppliers once a general contractor makes payment to a subcontractor in privity with those second-tier subcontractors.  The policy behind this is simple – a general contractor should not have to pay twice.

However, according to a recent Commonwealth Court decision, Berks Products Corporation v. Arch Insurance Company, 2013 WL 3753971, sureties effectively waive the safe harbor protections by utilizing standard bond claim language in their payment bonds.  Berks Products is a straight-forward bond claim case.  Arch issued a payment bond on behalf of its general contractor principal, Skepton Construction, for a school construction project.  Berks Products was a supplier to one of Skepton’s subcontractors, R.A. Tauber.  Tauber became insolvent and filed for bankruptcy and failed to pay Berks Products for $52,679.26 worth of materials.  Berks Products, therefore, brought a payment bond claim against, Arch Insurance Company.  Arch claimed that Skepton, the principal, had paid Tauber in full, and, therefore, the “safe harbor” provisions of the Prompt Payment Act barred Berks Product’s bond claim.  The trial court disagreed and entered summary judgment in favor of Berks Products.  Arch appealed and the Commonwealth Court affirmed.

The Commonwealth Court started by quoting from the language of Arch’s payment bond noting which stated”

 “[T]he terms and conditions of this Bond are and shall be that if the Principal and any subcontractor of the Principal to whom any portion of the work under the Agreement shall be subcontracted, and if all assignees of the Principal and of any such subcontractor, promptly shall pay or shall cause to be paid, in full, all money which may be due any claimant supplying labor or materials in the protection and performance of the work in accordance with the Agreement and in accordance with the Contract Documents … for material furnished or labor supplies or labor performed, then this Bond shall be void; otherwise, the Bond shall be and shall remain in force and effect.”

As Arch correctly pointed out, this language is standard in all public works payment bonds.  The Commonwealth Court held, however, that this standard language effectively waives the safe harbor protections because the above cited language stated the bond would remain in effect until Skepton “and any of [its] subcontractors” made full payment for labor and materials provided.  The Commonwealth Court also concluded that its decision was not at odds with its oft cited Trumbull decision and not in conflict with the Bond Law.

It is not clear if Arch filed a writ of cert with the Supreme Court of Pennsylvania asking it to review the Commonwealth Court’s decision.  If not and this decision stands, sureties would be wise to change their standard payment bond language for Pennsylvania public works payment bonds.

Looking for last minute CLE credits?  Please join me on August 30, 2011 for at 12:30 p.m. for a 2 credit CLE “A Primer on Mechanics’ Liens and Bond Claims.”

We will address:

•Who can file a mechanics lien claim?

•What projects are subject to a mechanics lien claim?

•What are the specific requirements for filing a mechanics lien claim?

•Common mistakes made that caused mechanics lien claims to be stricken.

•When are payment and performance bonds required?

•Who can make a claim on a performance or payment bond?

•What are the requirements for making a performance or payment bond claim?