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Public Entity Must Pay Sub, Court Says

Tuesday, May 24, 2011

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Government entities cannot duck a subcontractor’s payment claim by pleading either lack of funds or sovereign immunity, the Maryland Court of Appeals has ruled.

The court rejected a claim by a public school board that it did not pay a subcontractor because it lacked funds and, as a government entity, had “sovereign immunity” from the subcontractor.

The April 27 ruling orders a new trial in Board of Education of Worcester County v. BEKA Industries, Inc.

At Stake: $1.1M

The case arises from a written contract dispute between BEKA Industries Inc., of Baltimore, and the Worcester County Board of Education. Between 2004 and 2006, BEKA was one of 20 trade contractors awarded a lump-sum contract to contribute to the construction of a new public school. 

 ASA President Timmy McLaughlin
ASA president Timmy McLaughlin said the ruling would avert chaos in the Maryland public works market.

Due to circumstances acknowledged by the board as beyond the contractor’s control, BEKA’s work was delayed for almost six months. Later, disputes arose over the amounts owed to the contractor. Owed more than $1.1 million in outstanding debts, BEKA sued the school board to recover damages.

At trial, the school board argued that:

  • School boards are “state agencies,” entitled to sovereign immunity under Maryland state law and exempt from judgments in excess of $100,000; and
  • The $1.1 million BEKA was seeking qualified as unrecoverable delay damages.

Business ‘Disincentive’ Cited

On Feb. 26, 2010, the Court of Special Appeals rejected the sovereign-immunity defense, citing in part a “friend of the court” brief filed by the American Subcontractors Association’s Baltimore Chapter and the D.C. Metropolitan Subcontractors Association.

The associations argued that “the disincentive created by the government’s ability to invoke the doctrine of sovereign immunity to avoid its contractual obligations would harm private industry … and would significantly impact a public entity’s ability to efficiently conduct the business of government, to the ultimate detriment of the taxpayers.”

The brief cited a state law waiving claims of sovereign immunity, and the Court of Special Appeals agreed that “there has been a legislative waiver of a county board of education’s defense of sovereign immunity in contract actions."

The court held, however, that the subcontractor had to prove that the school board had, or could raise, the “funds available to satisfy the judgment” in order to collect the payment for its work.

The case then went to the Maryland Court of Appeals, which rejected the argument that the school board couldn’t be obligated to pay the subcontractor’s claim. The court noted that the board was a local entity whose budget was determined at the county—not state—level.

Statutory Funding Noted

The associations noted in their brief that state law “provides a funding mechanism to satisfy a judgment entered against counties, their agencies or boards.” The Court of Appeals agreed and ruled that the subcontractor could not be denied payment “because funding is provided by statute.”

ASA’s Subcontractors Legal Defense Fund paid the fees associated with its filings in this case.

ASA President Timmy McLaughlin cheered the ruling.

“Sovereign immunity should not be cited as a reason not to pay subcontractors,” said McLaughlin. “Imagine if a public entity could sign a contract promising to pay for work, but then backtrack and not pay on the grounds of ‘sovereign immunity.’ The Maryland Court of Appeals’ decision was correct and averted creating chaos in the Maryland public works market.”

   

Tagged categories: Contracts; Laws and litigation; Lawsuits; Subcontractors

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