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Pennsylvania Public School Code Does Not Bar Claim By Completion Contractor

2/19/2016 | Construction Blog

A recent Pennsylvania Commonwealth Court opinion indicated a possible change in how the Court’s view certain construction related claims under the Public School Code in Pennsylvania. In F. Zacherl, Inc. v. Flaherty Mechanical Contractors, LLC, the Court ruled that an agreement with a completion contractor to finish the original prime contractor’s scope of work did not require separate approval from the School Board.

The project at issue in Zacherl involved additions and alterations to the West Allegheny High School in the Pittsburgh area. By virtue of the Pennsylvania Separations Act, the project was built using multiple prime contractors. Flaherty Mechanical won the mechanical package bid and was the prime mechanical contractor. It then subcontracted a portion of its work to Zacherl. Work proceeded and Flaherty was paid timely on its applications for payment. Unfortunately, Zacherl was not being paid by Flaherty.

Despite successful interventions by the School District to ensure Zacherl was paid on several prior occasions, the payment problems persisted and Zacherl was forced to file a claim against the payment bond posted by Flaherty. Zacherl also notified the required parties that there may be a work stoppage. The School District eventually reacted by terminating Flaherty’s contract; and Flaherty in turn terminated Zacherl.

The School District subsequently asked Zacherl if it would return to the project and complete the sheet metal work it had originally agreed to perform under its subcontract with Flaherty so that the School District could avoid unwanted delays in project completion. Zacherl indicated a willingness to consider it if a sizeable amount of its overdue contract balances were paid. A verbal agreement was reached by which Zacherl agreed to come back and complete its previously agreed to scope of work in exchange for the payment.

The School District and bonding company subsequently failed to pay Zacherl for the work it performed after agreeing to return to the project. A lawsuit followed with breach of contract, unjust enrichment, breach of the payment bond, and violation of the prompt pay act claims among others. The case went to the Commonwealth Court after summary judgment was granted for Zacherl; but the trial court was subsequently reversed and the matter was remanded. The breach of contract and unjust enrichment claims were then decided by a jury trial and the case was appealed a second time.

While there were other issues before the Court, the heart of the decision focused on the School District’s position that there was no valid and binding contract between the School District and Zacherl under Section 508 of the Public School Code. Specifically, the School District argued that the oral contract had to be approved by a formal vote of the School Board and that an agreement with an agent of the District was insufficient to make the contract enforceable. The Court held – albeit in what could be considered a narrow exception – that work previously approved did not have to be approved again.

In this instance, the Court determined that the School District required that Flaherty provide a list of subcontractors for approval before it started work. The School District had already approved Zacherl as part of this process. Secondarily, the School Board had previously approved the scope of work that Zacherl had agreed to come back and complete after it was initially terminated by Flaherty. The scope was unchanged and, therefore, did not require subsequent formal approval by the Board. As a result, the Court declined to literally interpret Section 508 and affirmed that the oral contract was enforceable.

This decision runs contrary to some prior holdings in the Commonwealth regarding the necessity of School Board approval of contracts for completion contractors and certain change order situations. It is yet to be determined whether it marks a large change in the Court’s approach or a “bump in the road”. Construction litigants involved in cases relating to school projects should be aware of this case though.