Contractor Non-Payment Case Filed With Texas Supreme Court

An appeal in April, requesting the reversal of a lower court's ruling that had found that the McGregor Act was a supplier's only remedy to recoup a loss on a public work contract, has been filed with the Texas Supreme Court. Organizations such as the American Subcontractors Association (ASA)filed briefs, urging the court to overturn the court of appeals' decision. The organizations argued that the purpose of the McGregor Act is to provide an additional remedy to subcontractors and suppliers seeking payment for work they perform on public construction projects, not an exclusive remedy.

In the case, Dealers Electrical Supply Company v. Scoggins Construction Company, Inc., the court concluded that a joint check agreement did not provide grounds for a supplier to circumvent the remedy provided by the payment bond provision of the McGregor Act.

The McGregor Act was intended to provide subcontractors and suppliers involved in public work contracts a basis for recovery because a subcontractor or a supplier may not place a lien against a public building. The act requires that prime contractors, such as Scoggins Construction Company, Inc. (SCC), execute a performance bond to the governmental entity if the public work contract exceeds $100,000. The performance bond is solely for the protection of the governmental entity awarding the public work contract. The act also requires a payment bond for public work contracts exceeding $25,000 to be paid to the governmental entity awarding the public work contract. The payment bond is solely for the protection and use of payment bond beneficiaries who have a direct contractual relationship with the prime contractor or a subcontractor to supply public work labor or material.

While the recourse for remedy is disputed, the facts of the case are not.

Scoggins Construction Company, Inc. (SCC) had been hired as the general contractor under a public work contract with a Texas school district to build a school. In accordance with the McGregor Act, Scoggins executed performance and payment bonds with Colonial American Casualty and Surety and Fidelity and Deposit Company of Maryland for the full contract amount of $5,751,000.

Scoggins in turn hired Arturo Bujanos DBA Diamond Industries as the electrical subcontractor for the project. Dealers Electrical Supply Co. served as the supplier of the electrical component parts used in the project.

Subsequently, SCC, Diamond Industries and Dealers Electrical Supply entered into a "joint check" agreement in an effort to arrange for Dealers to extend credit to Diamond. The record reflects that the joint check agreement required SCC to issue joint checks to Diamond for labor supplied and to Dealers for materials supplied when Diamond completed its work and submitted a draw. The underlying dispute arose in May 2002, when Diamond failed to complete its electrical subcontract with SCC.

SCC claims that Diamond walked off the elementary school project and absconded with materials that were to be incorporated in the elementary school project.

SCC claims that it paid $107,440.27 to other subcontractors to complete the electrical work on the elementary school project and to complete the alarm system--both tasks were part of Diamond's subcontract with SCC.

In March 2003, Dealers sent notice to SCC demanding payment for $78,123.59 in supplies provided to Diamond for the elementary school project. SCC refused to pay because the items were never incorporated into the school project and because Diamond did not complete the project to the satisfaction of the school district.

On June 10, 2003, Dealers filed suit against SCC, Diamond and the bond companies alleging violations of the McGregor Act, the Trust Fund Act and chapter 53 of the Texas Property Code. However, Dealers had to drop its McGregor Act and Texas Property Code claims and amend its original petition to allege solely violations of the Trust Fund Act and the joint check agreement as grounds for recovery after missing statutory notice deadlines.

The trial court awarded Dealers $135,910.08 in damages.

However, the Texas Court of Appeals reversed the judgment, concluding that the McGregor Act was Dealers' exclusive and mandatory remedy on the public work contract, thus rendering the Trust Fund Act inapplicable in this matter. The Trust Fund Act controls the use of construction funds used to pay supplier and subcontractors. Furthermore, the court concluded that the joint check agreement did not provide grounds for Dealers to circumvent the remedy provided by the payment bond provision of the McGregor Act and that the joint check agreement did not provide an alternate remedy for Dealers, considering SCC executed a valid payment bond.

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