Duty of Good Faith & Payment Act
2005

The Pennsylvania Superior Court has recently expounded on the duty of Good Faith in Pennsylvania between contracting parties and has further interpreted the Contractor and Subcontractors Payment Act ("Payment Act"). All owners, GCs and subs should be aware of these issues during their contract negotiations, when and how payments must be made, et cetera.

Duty of Good Faith

In the case of John B. Conomos vs. Sun Company Inc., the Superior Court noted that Pennsylvania has accepted the duty of good faith as set forth in the Restatement of Contracts (second), Section 205 "[e]very contract imposes a duty upon each party, a duty of good faith and fair dealing in its performance and enforcement." In the Conomos case, the defendant's inspector was unreasonable in implementing the specifications to the point that the Court determined that defendant was dealing in bad faith in their inspections and what the inspector required. This concept has been recognized at the Federal level, in particular, in the United States Court of Federal Claims, where the Decision found that the government breached its implied duty to cooperate through their improper inspections which resulted in increased work by the contractor. In the Federal case, the inspector required the contractor to adhere to tighter tolerances than what was required by the specifications. As a result, the Board of Claims, awarded damages for additional costs to the contractor to comply with the tighter tolerances. In the Conomos case, the Pennsylvania Court found that the defendant's inspection did, in fact, violate the duty of good faith inspections and, therefore, the contractor was entitled to damages.

Payment Act

In the second part of this decision, the Superior Court found that a Limitations of Damages clause in the contract between plaintiff and defendant did not limit the ability of the contractor (or sub or supplier) to receive penalties under the Payment Act. The penalties cannot be waived by a contract provision, therefore, if the contractor (or sub or supplier) is not paid by the owner (or GC) in accordance with the terms of the Contract/Payment Act, the contractor, etc., will be entitled to penalties as set forth in the attached memo. If the contractor is required to commence litigation to obtain payment improperly withheld, and the owner (or general contractor) withheld payments improperly, the Court shall award in addition to all other damages, a penalty equal to 1% per month of the amount wrongfully withheld. In addition, the "substantially prevailing party" shall be awarded reasonable attorney fees. It is important, therefore, that if any Owner or General Contractor withholds payment from a Subcontractor and/or Supplier, it must be withheld in accordance with the terms of the Payment Act. If it is wrongfully withheld, then the Owner/General Contractor will be subject to penalties 18% per annum interest and attorney fees, as set forth in the Act. The Superior Court was very clear on this issue to the point that these penalties can now be argued as mandatory if it is proven that the payments were wrongfully withheld.