The Pennsylvania Commonwealth Court recently issued an opinion that significantly impacts the scope of payment bond coverage by changing the application of what is commonly known as the “safe harbor” provision. The decision in Berks Products v. Arch Insurance Co., is already drawing fire from several quarters of the construction industry.
The Public Prompt Pay Act contains a provision which provides protection for sureties when the contractor pays its subcontractors in full for their work. Specifically, the statute states that when “a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid in full shall be barred”. In other words, there is no claim for the material supplier if the contractor pays the subcontractor who owes that material supplier in full.
For years, bonding companies have used standard language in the bonds they issue to reflect this statutory provision and protect themselves. The Commonwealth Court has turned this commonly understood principal upside down by effectively deciding that a bonding company can take on a larger obligation and, simultaneously, negate the statutory “safe harbor” protection based on the language in its bond.
The relevant language in Arch’s bond was as follows:
The 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 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 full force and effect.
In Berks Products, the general contractor maintained that it paid its subcontractor for labor and materials performed in full. It was undisputed that the subcontractor, which went bankrupt, did not pay its material supplier in full. Accordingly, Berks made a claim on the payment bond issued by Arch and argued that the “safe harbor” provision of the statute and as mirrored in the bond was waived.
The Commonwealth Court determined that the above quoted language went further than the bond law required and was enforceable. In so doing, the Court decided that the bond statute sets a floor from which a surety can set an even larger obligation. It adjudged that the surety had done so here by committing to have the bond stay in effect until the subcontractor paid in full too. The Court determined, as a result, that Arch had waived the “safe harbor” the statute provided by agreeing to do more.
This decision seems to run contrary to the Court’s prior holding in Trumbull Corp. v. Boss Construction. Commonwealth Court attempted to take this argument head on by differentiating the cases factually and arguing that Trumbull considered a different legal issue. Notably, it described the Trumbull decision as akin to an evidentiary ruling as opposed to a substantive law question.
This opinion certainly changes the landscape of surety law in Pennsylvania. Some are predicting an end to the safe harbor provision. However, it seems more likely that the decision will cause sureties to make adjustments in the language of their bonds to avoid the trap the Commonwealth Court unwittingly set. The issue is also subject to further review at the state supreme court if Arch decides to appeal, so stay tuned.