Supreme Court of South Carolina Finds Public Owner’s Failure to Require General Contractor’s Compliance with Statutory Bond Requirements Supports Cause of Action by Subcontractor Against Owner under South Carolina Statute

Sloan Constr. Co. v. Southco Grassing, Inc.
2008 S.C. LEXIS 99 (S.C. Mar. 24, 2008)

The South Carolina Department of Transportation (SCDOT) contracted with general contractor Southco Grassing, Inc. in connection with state highway maintenance project and, in accordance with the applicable statutory bond requirements, Southco provided a payment bond for the benefit of its subcontractors and suppliers in the full contract amount. Subsequently, Southco entered into a subcontract with subcontractor Sloan to perform asphalt paving work. In June 2001, before the paving work was completed, Southco’s payment bond was cancelled when the bond’s issuer became insolvent. Notice of the insolvency and cancellation was provided to SCDOT and SCDOT requested in writing that the Southco provide a replacement bond within seven days. Southco did not reply. In the meantime, Sloan completed its work, but in January 2002 notified SCDOT that it still had not received payment from Southco for its subcontract valued at approximately $52,000 and that the payment bond had never been replaced. In March 2003, despite that it had not made full payment to Sloan, Southco advised SCDOT that it had made all payments on the project, and SCDOT released final retainage to Southco.

Sloan brought an action against SCDOT for negligence in failing to ensure that Southco was properly bonded in accordance with the applicable statutory bond requirements and for breach of contract under the theory that Sloan was a third-party beneficiary of the contract between SCDOT and Southco and therefore that SCDOT had an obligation to Sloan to ensure that Southco was properly bonded. The county circuit court granted SCDOT’s motion to dismiss the subcontractor’s claims and the Court of Appeals of South Carolina affirmed. The subcontractor filed a writ of certiorari which the Supreme Court of South Carolina granted to determine the issue of whether a subcontractor may bring a private right of action against a government entity for failure to ensure that general contractors on government construction projects are properly bonded. The Supreme Court reversed, answering the question in the affirmative.

In analyzing the issue before it, the Supreme Court observed that South Carolina’s “Little Miller Acts” require that general contractors obtain both a performance bond to ensure the timely performance of the contract by the general contractor and a payment bond to cover payment to subcontractors and suppliers in the event of the general contractor’s default. Going a step further, in 2000, South Carolina’s legislature enacted the Subcontractors’ and Suppliers’ Payment Protection Act (SPPA) which contains a detailed bonding scheme and expands the protections afforded by the Little Miller Acts. The SPPA provides that when the government is party to a contract in excess of $50,000 to improve real property, that “the owner of the property shall require the contractor to provide a labor and material payment bond in the full amount of the contract…” and “it is the duty of the entity contracting for the improvement to take reasonable steps to assure that the appropriate payment bond is issued and is in proper form.”

The Supreme Court found that the SPPA was enacted for the purpose of providing protections to subcontractors and suppliers on government projects stronger than those contained in the Little Miller Acts and that although the SPPA does not specifically provide for a right of action against the contracting government body, such a right is implied by the inclusion of an affirmative duty on the part of the government. Accordingly, the Supreme Court found that an implied private right of action against the government exists under the SPPA for failure to ensure that a contractor is properly bonded.

The Supreme Court further found that Sloan’s breach of contract claim as a third party beneficiary was valid, relying on precedent in its reasoning that the SPPA’s bonding requirements are incorporated into public works construction contracts. The Court made clear, however, that the government’s liability under either theory is not unlimited. Like a subcontractor’s ability to recover under lien statutes, the subcontractor’s right to recovery against the government is limited to the remaining unpaid balance on the contract with the general contractor at the time the government is given notice of nonpayment by the general contractor. In so finding, the case was remanded to the trial court for a determination of SCDOT’s liability to Sloan.

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