BACK TO THE FUTURE:
Middle District of Pennsylvania Determines That
Sureties Not Liable Under The Procurement Code
Joshua C. Quinter

Construction lawyers have long considered it to be the rule that surety companies are not required to cover interest and attorneys’ fees imposed on contractors through statutorily created schemes. The federal district court for the Middle District of Pennsylvania has now become one of the first courts to confirm this long standing principle by its decision in Structural Group, Inc. v. Liberty Mutual Insurance Company.

In the case, Structural Group was a subcontractor for the construction of a recreation center at Shippensburg University. It made a claim against the payment bond issued by Liberty Mutual when it was not paid for its work. The allegations included claims that Structural was entitled to recover attorneys’ fees and interest from Liberty Mutual under the Commonwealth Procurement Code. Liberty Mutual argued that the payment bond did not cover these damages.

Because there has not been extensive appellate court consideration of this issue and the Pennsylvania Supreme Court has not yet ruled on it, the district court reviewed available law and predicted the Supreme Court’s position. It concluded that the Supreme Court would exclude Procurement Code damages from coverage under payment bonds.

In issuing its decision, the district court relied on Pennsylvania’s Statutory Construction Act and used the plain meaning approach. The Court reviewed the Procurement Code extensively and reasoned that the statute specifically names the actors it intends to cover. It noted that sureties were not specifically named and considered the omission to be of importance. In the over 14,000 words in the statute, sureties are mentioned once. Since the legislature could have identified sureties as covered “actors” and did not, the Procurement Code does not permit the recovery of attorneys’ fees and interest from the surety.

In reviewing the limited relevant case law to make its decision, the Middle District also found no cases to suggest its interpretation of the statute was incorrect or that the Pennsylvania Supreme Court would rule in a different fashion. Rather, it looked to its sister court’s holding in R.W. Sidley, Inc. v. U.S. Fidelity & Guaranty Co., for the proposition that the statute fails to specifically permit the entry of awards for interest, penalties, or attorneys’ fees against the surety. Relying on this decision from the Western District of Pennsylvania, the Middle District adopted the position as the one more likely to be taken by the Pennsylvania Supreme Court.

This decision is particularly important for contractors in the current economic environment. Sureties serve as a backstop when contactors are unable to compensate those entitled to payment for completed work. Statutorily created damages for non-payment provide some of the most potent weapons in an unpaid subcontractor’s arsenal. For this reason, contractors should be diligent in pursuing claims. Sitting on rights to these statutorily imposed damages may result in the loss of them if the surety is the only economically viable option for payment.

About The Author

Joshua C. Quinter is a principal in the law firm of Kaplin Stewart in Blue Bell, PA in the Construction Law and Commercial Litigation groups. Mr. Quinter represents both private and public entities and handles a wide range of issues, including litigation, alternative dispute resolution, contract drafting and review, and general business planning. He represents a number of different entities involved in construction projects, including owners, general contractors, subcontractors and sureties. Mr. Quinter has successfully represented his clients in cases involving claims for breach of contract, perfection and enforcement of liens, enforcement of surety bonds and various construction related statutes. Mr. Quinter can be reached at jquinter@kaplaw.com (610.941.2521).

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