Legal Insights

Pennsylvania Appellate Court Holds "Labor" Under Payment Bond for Design/Build Contract Excludes Off-Site Engineering Design Services

October 8, 2017
By: Gary A. Wilson

On March 13, 2017, a unanimous panel of the Commonwealth Court of Pennsylvania in an unreported memorandum opinion by Judge Renée Cohn Jubelirer, addressed the open question in Pennsylvania: whether off-site engineering and design services constitute “labor” under the Pennsylvania Bond Law (and Pennsylvania Procurement Code); such services were held to not be covered under a payment bond. The Pennsylvania Supreme Court denied Widmer Engineering, Inc.’s Petition for Allowance of Appeal on September 8, 2017. Widmer Eng’g, Inc. v. Five-R Excavating and The Pa. Nat. Mut. Cas. Ins. Co., Inc., No. 257 C.D. 2016 (Pa. Commonw. Ct.  March 13, 2017)

This decision is instructive to the surety industry nationally since it provides sureties with insight on how a court may resolve similar coverage disputes under both state bond laws and the federal Miller Act.  Further, this case addresses the unique issue of coverage under a payment bond for a design/build contract. There has been limited precedent to date on exclusion of engineering and design services as not constituting “labor” under a payment bond where design/build contracts are bonded by sureties.

In the case, Widmer Engineering sought to recover for unpaid design and engineering work provided to Five-R Excavating, as a subcontractor in a design-build contract, under the payment bond Five-R Excavating received from The Pennsylvania National Mutual Casualty Insurance Company (“Penn National”). Widmer Engineering acknowledged that its off-site engineering design services for Five-R Excavating did not include either physical labor or onsite supervision. 

While the question had not been resolved in Pennsylvania, Penn National provided the Commonwealth Court extensive and consistent precedent, both in similar contexts in Pennsylvania and from other jurisdictions across the country, to support the exclusion of coverage for Widmer Engineering’s design services. The Commonwealth Court agreed, finding that Penn National properly denied Widmer Engineering’s claim under the payment bond based on the interpretation of “labor” under the federal Miller Act, the Pennsylvania Bond Law, the Pennsylvania Mechanics’ Lien Law, and the Pennsylvania Procurement Code. Indeed, the Court found that these statutes are intended to overlap and provide similar coverage. This was especially true for the federal Miller Act, as Pennsylvania follows the Act as to the form and coverage. The Court also explained that for private work in Pennsylvania, the Pennsylvania Mechanics’ Lien Law applies. For public work in Pennsylvania, the Pennsylvania Procurement Code governs coverage under payment bonds. Regardless, the outcome remained the same: no cover under the definition of “labor.”

This decision is an important one for surety companies operating in Pennsylvania and throughout the United States:

• First, there was no Pennsylvania precedent on the definition of “labor” under the Pennsylvania Bond Law or Pennsylvania Procurement Code and no cases on point where engineering and design services were held to not be covered under a payment bond. Further, the Court reached its decision in the context of a design/build project in which the design fees were included in the calculation of the contract and payment bond penalty. 
• Second, after reviewing all the arguments, the Court agreed with Penn National that the design/build nature of the project did not change the national precedent that engineering and design services do not constitute “labor” under a payment bond. “Labor” is clearly interpreted as covered under a payment bond only if it is on-site physical labor or a skilled professional who is actually on-site and superintends the work. Off-site engineering design services are excluded from payment bond coverage even if the fees are included in the design/build contract’s value and the bond penalty.
   

The case is Widmer Eng’g, Inc. v. Five-R Excavating and The Pa. Nat. Mut. Cas. Ins. Co., Inc., No. 257 C.D. 2016 (Pa. Commonw. Ct.  March 13, 2017). Penn National was represented by Construction, Government Contracts & Surety Law Group Co-Chair Gary A. Wilson and Principal Jason L. Reimer and Commercial Litigation Principal Jason G. Benion.

A copy of the Commonwealth Court of Pa. decision is available here.