Pennsylvania’s Prompt Payment Act states that “once a contractor has made payment to the subcontractor . . . claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor . . . shall be barred.” The Contractor and Subcontractor Payment Act provides similar (but slightly different) language. This is referred to as the “safe harbor” clause.
In 2001, to the pleasure of the bonding industry, the Pennsylvania Commonwealth Court opined that the general contractor’s payments to the subcontractor barred a claim by the sub-subcontractor on the payment bond. Trumbull Corp. v. Boss Const. Inc., 768 A.2d 368. The court held that the Prompt Payment Act’s language absolved both the contractor and the surety of liability. Even though the subcontractor failed to pay a sub-subcontractor, the claim on the bond was dismissed.
But in 2013, under similar circumstances, the Pennsylvania Commonwealth Court held that the general contractor’s payments to the subcontractor did not afford protection, and the Prompt Payment Act did not shield the contractor and the surety from liability. Berks Products Corp. v. Arch Ins. Co., 72 A.3d 315.
The 2013 Berks Products case was widely seen as abrogating the Trumbull decision, and taking away the “safe harbor” provided by the Prompt Payment Act. But a close reading of Berks Products indicates that the Prompt Payment Act’s barring of claims will still be enforced—so long as the bond language is carefully written:
[T]he payment bond drafted by [Surety] . . . provided that the bond shall remain in full force and effect until such time as both [General Contractor] and any subcontractor . . . make full payment for any labor and/or materials . . . .
* * *
[Sub-subcontractor] was entitled to seek recovery under the Bond Law, and the “safe harbor” provision would generally be applicable to [General Contractor]. However, an issue arose as to whether the language of the payment bond . . . waived this provision.
Point being: the Prompt Payment Act’s “safe harbor” clause is still effective. But the bond should be written carefully, to reflect that payment from the Contractor will extinguish the bond obligations. If the bond states that payment by the Contractor and all Subcontractors will extinguish the bond, then, the court might treat it as a Berks Products bond, and hold that it waived the “safe harbor” provision.
When issues pertaining to payment bonds arise, it is best to seek legal advice early and often.
What’s Happening Now . . .
Residential Construction
- Indicators of new residential construction were improved, comparing Feb. 2016 to Feb. 2015.
- Building Permits: Feb. 2016 is 6.4% above Feb. 2015.
- Housing Starts: Feb. 2016 is approx. 30.9% above Feb. 2015.
- Housing Completions: Feb. 2016 is 17.5% improvement.
Source: U.S. Census Bureau News, New Residential Construction in February 2016, U.S. Dept. of Housing (Mar. 16, 2016).
Newsletter written by Jeffrey C. Bright, Esq. , an attorney licensed in Pennsylvania and Maryland. For more information, contact an attorney at Harmon & Davies, P.C.
