Because a lien cannot be filed against public property, subcontractors and suppliers furnishing goods and services on public projects are forced to rely on the contractor's payment in the event the contractor fails to pay for the goods and services. What happens, however, if the contractor fails to post a payment bond? Is the subcontractor or supplier left without any recourse other than to file a lawsuit against a possibly insolvent contractor? Maybe not.
Contractors performing work on federal, state and local public projects are generally required by law to furnish payment and performance bonds to protect both the public agency requesting the work, as well as the contractor's subcontractors and vendors. The payment bond, specifically, serves as a substitute for lien rights that would otherwise exist if the project were not public. The responsibility is usually on the public agency to assure that adequate bonds are furnished by the contractor. Consequently, a public agency's failure to obtain these bonds may subject it to liability to subcontractors and suppliers. In Georgia, for example, if a local government agency fails to obtain a proper payment bond, the agency may be liable to all persons furnishing labor, skill, tools, machinery or materials to the contractor for any loss incurred by these persons from the agency's failure to obtain the bond. O.C.G.A. sec. 36-82-102.
In determining whether a bond is proper, O.C.G.A. sec.36-82-102 mandates that any bond required for public works projects be approved by the agency as to form and as to the solvency of the surety. This approval must be obtained prior to the bid being accepted by the agency. If the public agency fails to property investigate the surety's solvency, then the agency can be held liable to subcontractors and vendors that are not paid by the contractor. A public body's liability for failing to investigate the surety's solvency, however, is not always clear as recently seen in Hall County School Dist. V. Beals & Assoc., 231 Ga.App. 492, 498 S.E.2d 72 (1998).
In Beals, the Hall County Board of Education ("Board") awarded a contract to construct a new elementary school. The Board required the contractor to post performance and payment bonds as a condition to the contract award. The contractor obtained the bonds from a surety, and the Board accepted the bonds without verifying their validity or the solvency of the surety issuing the bonds. As the project neared completion, the Board learned that the surety was under investigation by the Insurance Commissioner, was no longer authorized to issue bonds, and was in an unsound financial condition. The Board, therefore, placed the contractor in default and demanded that it obtain valid bonds from an acceptable surety. The contractor, however, failed to do so and the Board, thereafter, terminated the contractor for default.
At the time of termination, there were several subcontractors and vendors owed money for their services, but the balance owed to the subcontractors and vendors exceeded the balance owed to the contractor by the Board. Although the Board paid claims from certain subcontractors and vendors, several other claims went unsatisfied. Consequently, some of the subcontractors and vendors filed suit against the Board alleging that the public agency failed to obtain an appropriate payment bond from the contractor because the Board failed to investigate the surety's solvency as required by Georgia law.
The Board readily admitted it failed to investigate the surety's solvency, but argued that even if it had done so, it still would not have discovered that the surety was insolvent or the bonds invalid. The Board relied on the fact that as part of its investigation into a surety's solvency, it generally contacts the Insurance Commissioner; but, in this case, because the surety was under formal investigation by the Commissioner and because the Commissioner will generally not disclose information to the public about matters under investigation, the Board would have learned nothing of the surety's financial condition from the Commissioner.
The court rejected this argument. The court acknowledged that the statute at issue does not prescribe the type of investigation a public agency must conduct when determining the solvency of a contractor's surety, but this fact does absolve the agency from its clear responsibility to perform an investigation. The court concluded that the Commissioner might, in fact, have shared valuable information with the Board (a public agency itself) had the Board merely asked. Moreover, the Board should have at least requested a copy of the surety's corporate financial reports, which might also have revealed valuable information concerning the surety's financial stability. Based upon these facts, there was sufficient evidence that the Board did not fulfill its statutory obligations, and it was for the jury to determine whether the Board was liable to the unpaid subcontractors and vendors.
Although the decision does not provide a clear path to public funds by an aggrieved subcontractor or supplier, it does give some hope in situations where the public agency fails to carry out its legal duties. The court also noted that the subcontractors and suppliers who were not paid by their contractor could have an equitable lien against money owed by the Board to the contractor to the extent the Board held funds earned by the contractor but that were not yet paid to the contractor. If such were the case, the subcontractors' and suppliers' equitable liens gave them a priority over the contractor's other creditors with respect to these funds.