Payment bonds on public projects are intended to provide a means of redress to unpaid subcontractors who cannot otherwise file mechanic’s liens against public property.
The procedures and case law that have developed around payment bonds have actually elevated the payment bond to the preferred method of recovery over breach-of-contract lawsuits and mechanic’s liens. For example, a prime contractor cannot escape liability to a second-tier subcontractor by merely asserting that it paid the first-tier subcontractor in full. Thus, you can imagine the disappointment when a subcontractor intending to file a payment bond claim learns that, due to oversight by the public entity, it failed to secure a payment bond from the prime or the bond is defective in some manner. This month, I highlight a case that addresses the liability of a public entity to a subcontractor when the public entity either fails to procure a payment bond or permits the bond to lapse. This case also is interesting because it represents a rare example of a court reversing itself and likely left the South Carolina Department of Transportation (SCDOT) wondering when a “win” really is a “win.”
Sloan Constr. Co., Inc. v. Southco Grassing, Inc., 2011 S.C. Lexis 355 (October 31, 2011), involves a lawsuit filed by a subcontractor against a prime contractor and SCDOT in connection with a maintenance contract. This case went up on appeal to the Supreme Court of South Carolina—twice. The trial court determined that the prime contractor had failed to pay the subcontractor for work that was complete and free of defects. The court also determined that the SCDOT failed to procure a substitute payment bond when it learned that the prime contractor’s surety had been placed in receivership. Nevertheless, the trial court ruled that SCDOT owed no duty to the subcontractor and thus the SCDOT was not liable to the subcontractor for its oversight.
On appeal, the Supreme Court of South Carolina sided with the subcontractor and held that subcontractors possess a private right of action against public entities that fail to “ensure that a prime contractor is properly bonded.” The Supreme Court remanded the case back to the trial court to determine the amount of damages.
After the trial court awarded damages to the subcontractor, the SCDOT appealed the case back to the Supreme Court of South Carolina. This time, however, the Supreme Court embarked on an analysis of court decisions on this issue in other states. The court acknowledged that while most states refuse to grant a private cause of action against public entities for failure to procure a prime contractor payment bond, South Carolina should continue to do so for the same reasons it set out in the first appeal—namely, that the South Carolina statute contained strong language favoring subcontractors. However, the court distinguished the failure of a public entity to procure a bond from the outset from those instances where the bond—for whatever reason—becomes void due to subsequently occurring events like insolvency. The court reasoned that to hold public entities liable in the latter instance is too onerous of a requirement. The court essentially overruled its previous decision and held that governmental entities in South Carolina have no duty to a subcontractor to continuously maintain a bond once a valid bond is acquired.
When the SCDOT filed the second appeal, the existing law—as set out in the first appeal—was that public entities are liable for both the failure to procure a bond and the failure to ensure a valid bond existed throughout the project. The court, in essence, honored its previous decision, but changed the law for future cases.
Most courts across the country that have addressed this issue rule that subcontractors have no private cause of action against a public entity for their failure to procure or to ensure maintenance of valid bonds.
Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.