Wednesday, October 2, 2013

Surety of Payment Bond

Frank Kosir, Jr.
Berks Products Corporation v. Arch Insurance Company, 2013 Pa. Commw. LEXIS 254 (2013)

This matter addressed the issue of whether the surety of a payment bond issued for a construction project was liable for amounts owed to a supplier of materials provided to a subcontractor.  Skepton Construction, Inc. (“Skepton”) entered into a contract with the Wilson Area School District whereby it agreed to serve as general contractor for the construction of a new intermediate school building.  Pursuant to the contract, Skepton secured a payment bond from Arch Insurance Company (“Arch”), and executed a subcontract with R.A. Tauber, Inc. (“Tauber”) for the completion of concrete work on the project.   Thereafter, Tauber entered into a contract with Berks Products Corporation (“Berks”) for the provision of the concrete materials needed to complete the subcontracted concrete work.  Although Berks provided the contracted for materials, Tauber failed to remit $52,679.26 of the amounts invoiced, and subsequently filed for bankruptcy.  Thereafter, Berks commenced a civil action against Arch seeking to recover the amounts owed under the surety bond.  In response, Arch asserted that Skepton had made full payment to Tauber for all amounts owed for the materials provided by Berks and that Berk’s claims were barred by Section 3939(b) of the Commonwealth Procurement Code (“Code”) (62 P.S. §3939 (b)) (the “safe harbor” provision), which provides that, once a contractor has made full payment to a subcontractor, any subsequent claims against that contractor or its surety by a party to whom that subcontractor owes payment shall be barred.  The trial court entered summary judgment for Berks, and Arch appealed.

On appeal, our Commonwealth Court affirmed.  In issuing its ruling the court noted that, while the “safe harbor” provision would typically protect a surety against such claims, the specific language of Arch’s bond (which required Skepton to assure that all material men and suppliers were paid) served as a waiver of the “safe harbor” provision, thereby exposing Arch to liability under the surety bond for any such unpaid amounts.  Furthermore, a review of the record found that a factual dispute existed as to whether Skepton had in fact paid Tauber all of the amounts owed for the materials in question.  For these reasons, Arch was unable to rely upon the protections of the “safe harbor” provision, and was properly held liable under the surety bond.

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