It is universally accepted that a payment and performance bond surety’s liability is coextensive with that of its principal, the contractor.
A recent case in Georgia reinforces this view, but highlights how facts might nevertheless be construed more harshly against sureties than their principals. The case also shall serve as a reminder that when sureties lose, their contractors lose as well.
In February 2004, APAC-Southeast Inc. (APAC) entered into a subcontract with Bruce Albea Contracting Inc. to perform asphalt paving on a Georgia Department of Transportation (GDOT) project. The subcontract expressly prohibited APAC from assigning the subcontract without Albea’s written consent. Albea posted with GDOT a payment bond, which made the two sureties underwriting the bond “jointly and severally liable to all persons doing work or furnishing skill, tools, machinery or materials under or for the purposes of the project.”
During the project, a dispute ensued over asphalt quantities installed, and Albea withheld from APAC approximately $1.2 million. Subsequently, and for no reason associated with the dispute, APAC sold and assigned most of its assets, including its asphalt plant and its current subcontracts, to C.W. Matthews Contracting Co. Inc. However, APAC retained the right to payments for work it performed before the assignment.
Although Albea neither signed nor acknowledged the assignment document APAC forwarded to it, Matthews performed work for Albea, and Albea made payments to Matthews for such work. Albea’s president admitted that it “acquiesced” to the assignment, but contended he did so because Albea could not find an alternative subcontractor, and it sought to avoid breaching its GDOT contract.
In spring 2007, Matthews informed Albea that due to monumental oil price increases it could no longer perform for the prices contained in the subcontract. After once again failing to find an alternative subcontractor, Albea entered into a new subcontract with Matthews at higher prices, but reserved its right to pursue legal remedies against Matthews.
As a result of circumstances unrelated to the project, Albea’s finances deteriorated and the two sureties began making payments to subcontractors. They paid Matthews more than $2.7 million in excess of the value of the original subcontract, but refused APAC’s demand for the $1.2 million Albea owed to it for work performed prior to the assignment. Consequently, APAC filed suit against the sureties under the payment bond and against Albea for breach of contract. The trial court entered summary judgment for APAC for the entire amount; the sureties and contractor appealed.
The Georgia Court of Appeals acknowledged the validity of contract clauses prohibiting assignments, but, unlike the trial court, concluded that Albea had not waived the right to object to the assignment by continuing to deal with Matthews. Rather, it emphasized the testimony of Albea’s president regarding the absence of legitimate alternatives and its concern for not breaching the GDOT contract. Thus, the Court held that by making an assignment without first obtaining Albea’s approval, APAC breached its subcontract, forfeiting its right to bring suit against Albea. The Court was not as lenient with the sureties.
The Court acknowledged that the sureties were entitled to assert the same breach of contract defense against APAC as Albea did, but ruled that they consented to the assignment by making progress payments to Matthews and by entering into a new subcontract to finish the project.
The Court’s decision is difficult to reconcile. On one hand, the Court held that the prime contractor did not consent to APAC’s assignment to Matthews even though it failed to object; continued dealing with Matthews just as it previously did with APAC; and entered into a subsequent subcontract with Matthews containing different asphalt pricing. Yet, on the other hand, it construed nearly identical facts against the sureties.
At first glance, one might conclude that the prime won and the sureties lost in this case. However, the real loser is the contractor and/or its principals, who are ultimately liable to the sureties for their losses paid under payment and/or performance bonds. In Georgia at least, a contractor might very well be faced with a scenario under which it is totally free of liability to a subcontractor under the terms of its subcontract, yet is nevertheless liable to cover losses sustained by the surety to the same subcontractor.