When a contractor, sub, or supplier works on a public project, a traditional mechanics lien is unavailable to enforce payment. Generally speaking, private parties cannot encumber public property. For this reason, the Miller Act was passed requiring performance and payment bonds when the prime contract exceeds $100,000 on a federal project. Under the Act, when a supplier or subcontractor goes unpaid, they are able to make a claim on surety bonds that have been secured by the prime contractor. For more information, here’s a recent article on the Miller Act from the blog.
While the Miller Act provides for federal projects, states have passed what are referred to as Little Miller Acts. Here is a collection of Little Miller Act statutes. In a recent Georgia case, a subcontractor went unpaid. The sub naturally turned to protection under Georgia’s Little Miller Act, but problems arose due to an insolvent surety. Meanwhile, the City of Atlanta was off the hook.
The City of Atlanta hired Scott and Sons Holdings to serve as prime contractor on a sewage project. Scott and Sons then hired the claimant, J. Squared Plumbing, as subcontractor. In an all too familiar turn of events, the contractor failed to pay J. Squared for work done. As a result, the subcontractor went to the surety, First Seaford Surety, in order to recover. Though Scott and Sons had obtained a bond for $200,000 with First Seaford Surety, the insurer had since become insolvent. The subcontractor then filed suit against the City of Atlanta as well as Scott and Sons seeking $140,000 for work completed on the project.
Trial Court and Appeal
Unfortunately for J. Squared, the trial court found in favor of the City of Atlanta. The court found that because the city complied with payment bond requirements, the subcontractor’s only recourse was through Georgia’s payment bond statutes. Naturally, J. Squared appealed the judgment.
On appeal, the subcontractor argued that the Georgia payment bond statutes did not bar recovery from the City of Atlanta. Though it hardly seems like an equitable result, the appellate court disagreed. The court found that the City had taken the statutory measures provided for in OGCA § 36-91-40. This includes OGCA § 36-91-40 (a)(2) which states,
“Any bid bond, performance bond, or payment bond required by this Code section shall be approved as to form and as to the solvency of the surety by an officer of the governmental entity negotiating the contract on behalf of the governmental entity. In the case of a bid bond, such approval shall be obtained prior to acceptance of the bid or proposal. In the case of payment bonds and performance bonds, such approval shall be obtained prior to the execution of the contract.”
The bond was approved by the Associate City Attorney as well as Atlanta’s Chief Financial Officer and Atlanta’s Risk Analyst. According to the court, the payment bond was approved by the books- they had First Seaford Surety provide proof of bonding capacity and made sure the surety was certified with the U.S. Department of Treasury. The entire approval process was in line with statutory requirements. Because the City of Atlanta had followed procedure, it was off the hook for J. Squared’s claim. The subcontractor’s recovery was restricted to exclusive remedy under Georgia’s payment bond statutes.
Does that decision feel a little weak to you? It probably should. While the subcontractor’s claims against the prime contractor were not eliminated, the City of Atlanta got off scot-free after a city approved surety went belly-up. Anytime a supplier or subcontractor goes unpaid, it’s unfair. When they go unpaid on a public project, especially due to what may have been a foreseeable issue by the governmental authority, it’s that much worse. While the Miller Act and Little Miller Acts were created to provide more protection to subcontractors and suppliers, it appears Georgia’s statutes may need to be revisited.