If a subcontractor on a NC state construction project tells the state the prime contractor owes them money, does the state have to (or should it) withhold the prime contractor's payment until the dispute is resolved?
Plain-English summary
NCDOT Secretary James Lofton asked AG Lacy Thornburg whether a clause in the state's standard construction contract (Article 32 of the general contract conditions) was legally necessary. Article 32 directed the state to withhold the prime contractor's payment when a subcontractor served notice of an unpaid claim. The Department of Administration wanted to know if the clause served any purpose given that the prime contractor was already required to post a statutory payment bond under G.S. 44A-26.
The AG said no, the withholding clause was not legally required. The statutory payment bond was the subcontractor's remedy. No NC statute required the state to withhold prime contractor payments on subcontractor notice, and no NC case law imposed such a duty on the public owner.
The reasoning had to walk through some old case law. NC's mechanic's lien statutes (Articles 1 and 2 of Chapter 44A) protect subcontractors on private construction projects by giving them a lien on the property. But on public construction, the building cannot be subject to a lien (no one can sell a courthouse to satisfy a subcontractor's claim). So the General Assembly's 1973 enactment of Article 3 of Chapter 44A created a substitute: the prime contractor must post a payment bond, and subcontractors can sue the surety on the bond for amounts owed. G.S. 44A-34 makes clear that the lien provisions of Articles 1 and 2 do not apply to Article 3.
There had been a stray comment in Harrison Associates v. State Ports Authority (1972) suggesting that the state might have some lien-like exposure, but the AG dismissed that. The comment was dicta (not necessary to the holding), cited no authority, and was inconsistent with the earlier line of cases starting with Noland Company v. Trustees (1925), which expressly disapproved a similar dictum in Scheflow v. Pierce (1918). The 1973 enactment of Article 3 then settled the matter as a legislative choice: payment bonds, not lien-like withholding, are the subcontractor's remedy on public projects.
So the practical answer was that the state could (and should) drop or stop enforcing Article 32's withholding clause. Continued use exposed the state to risk (a prime contractor whose payment was withheld might sue for breach when the bond was the proper remedy), and added administrative complexity to disputes that the payment bond was designed to handle.
The opinion does not specifically address what happens if no bond was posted (a serious problem on a project where the bond requirement was overlooked) or if the bond is inadequate (insolvent surety, exhausted limits). Those edge cases would require separate analysis, but the general rule the AG set out is that the bond, not fund withholding, is the remedy.
Currency note
This opinion was issued in 1988. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Article 3 of Chapter 44A has been amended since 1988 with technical changes to bond requirements, claim procedures, and statute-of-limitations rules. The federal Miller Act parallels for federal projects have also evolved. Anyone with a current question about subcontractor remedies on public construction in NC should consult the current Article 3 of Chapter 44A and current case law.
Background and statutory framework
Mechanic's liens have a long history in NC. The basic theory is that a person who contributes labor or material to a real property improvement should have a security interest in the improved property until paid. NC's lien statute (Articles 1 and 2 of Chapter 44A) implements this for private construction.
Public construction does not fit the lien model. The lien remedy depends on the ability to force a sale of the improved property if the debt is not paid. Public buildings cannot be force-sold (the courthouse, the highway, the school): sovereign immunity, public-purpose constraints, and statutory protections all prevent a private lien creditor from realizing on public property. So historically, subcontractors on public projects had no security interest at all and could be left holding the bag if the prime contractor went bankrupt or refused to pay.
The General Assembly's 1973 enactment of Article 3 of Chapter 44A solved this gap. The statute now requires the prime contractor on a public construction or repair contract to post a statutory payment bond and a performance bond. The payment bond runs to subcontractors, materialmen, and laborers; if they are not paid by the prime contractor, they can sue the surety on the bond.
G.S. 44A-26 sets the threshold (contracts above a certain dollar amount) and the form of the bonds. G.S. 44A-34 makes the boundary explicit: "The lien provisions of Articles 1 and 2 of this Chapter shall not be construed as applying to this Article." So the bond is the subcontractor's exclusive remedy under the Chapter 44A framework on public projects.
The case law before Article 3 was clear: no lien on public buildings, no withholding remedy at the public-owner level. Noland Company v. Trustees (1925) is the workhorse case: subcontractors on a public project gave notice of unpaid claims, the public owner did not withhold, and the subcontractors sued. The court held that no lien attached to the public property, no withholding obligation existed at common law, and the public owner had no duty to retain funds in the absence of a contract provision or statute requiring it. Manufacturing Co. v. Blaylock (1926), Steel Corp. v. Brinkley (1961), Amarr v. Dixon, Inc. (1969), and Builders Corp. v. Dry Wall, Inc. (1979) all reaffirmed the line.
Harrison Associates v. State Ports Authority (1972) contained the inconsistent dictum the AG had to deal with. The court there suggested in passing that the state might have some exposure to subcontractor claims because of contract provisions. But the dictum was not necessary to the holding, cited no authority, and ran against the Noland line. Scheflow v. Pierce (1918) had contained a similar errant dictum that Noland had expressly disapproved. The AG treated the Harrison dictum as similarly disregardable.
After the 1973 enactment of Article 3, the law became cleaner. The legislature chose the bond mechanism. The subcontractor's remedy is to make a claim against the surety. The public owner has no duty to police the prime/subcontractor relationship, except to confirm that the bond is in place and properly executed before contracting.
The practical implication for NCDOT and the Department of Administration was that the Article 32 withholding clause was excess baggage. It did not give the state additional protection (the public owner was already not subject to a lien). It did not protect the subcontractor (the bond was the protection mechanism). It created risk for the state because withholding payment from a prime contractor without a legal basis could be a breach of the prime contract, exposing the state to liability for delay damages, interest, and possibly punitive consequences.
The AG's recommendation was not framed as a directive (an AG opinion is advisory). But the recommendation was clear: there is no legal reason to keep the clause, and continued use creates unnecessary risk. The agencies could and probably should remove or stop enforcing it.
Common questions
What happens to a subcontractor on a NC public project when the prime contractor does not pay them?
The subcontractor's remedy is a claim against the payment bond, under Article 3 of Chapter 44A. The subcontractor makes a written demand on the prime contractor and the surety. If not paid within 90 days, the subcontractor can sue the surety on the bond. The subcontractor cannot put a lien on the public building or force the public owner to withhold payments to the prime contractor.
Why can't subcontractors get a lien on a public building?
Public buildings are owned by the state, county, or municipality. Public ownership is incompatible with the lien-and-sale remedy: you cannot force-sell a courthouse, school, or highway to satisfy a private debt. So the legislature created the statutory payment bond as a substitute remedy on public projects.
What if the prime contractor did not post a bond?
That is a serious problem. The bond requirement is statutory, and the public owner is required to obtain the bond before contracting. If the bond is missing, the subcontractor may have a direct claim against the public owner for failing to require the bond, but the legal posture is more complex than a bond claim. The AG opinion did not address this scenario directly.
What if the bond is exhausted or the surety is insolvent?
Again, a more complex scenario. The subcontractor's primary remedy is still the bond, but if the bond is inadequate, the subcontractor may have to look to the prime contractor's general assets, the bond's required reinsurance, or other surety remedies. The public owner is not generally a backup payor.
Why was the state's withholding clause (Article 32) unnecessary?
Because withholding does not give the state any added protection (the public owner is already not subject to lien), it does not give the subcontractor any added remedy (the bond is the remedy), and continued use creates risk for the state (withholding payment from the prime contractor without legal basis could breach the prime contract).
Has this opinion been superseded?
Not in its core analysis. Article 3 of Chapter 44A is still NC's framework for subcontractor remedies on public construction. The specific statutes have been amended, but the basic structure (statutory payment bond is the subcontractor's remedy; no lien on public property) remains.
Source
Original opinion text
Requested By: James S. Lofton, Secretary, N.C. Department of Transportation
Question: In view of the required statutory contract payment bond, is the provision of Article 32 of the general contract conditions of state construction contracts necessary, which provides for the withholding of the prime contractor's funds upon notice of a claim by the subcontractor against the prime contractor?
Conclusion: No. There is no legal requirement for the withholding of such funds. No facts are given and no reasons are suggested in the request which indicates that the subcontractor is not adequately protected by the contract payment bond required by Article 3 of Chapter 44A of the General Statutes.
A contract payment bond was provided on a state construction contract pursuant to G.S. 44A-26. A dispute arose between the prime contractor and the subcontractor over the amount due. The state was given notice of the subcontractor's unpaid claim with the request that the state withhold the payment of the funds due the prime contractor until the subcontractor's claim against the prime contractor is resolved. Article 32 of the general contract conditions provides for the withholding funds in such cases. The Department of Administration is concerned with the necessity for the provision of Article 32 of the General Conditions of the State Contract and the state's practice of withholding payment of funds pursuant thereto.
The Secretary of the Department of Administration questions whether the provision is necessary to protect the state from liability and whether it is necessary for the protection of the subcontractors in view of the contract payment bond furnished pursuant to Article 3 of Chapter 44A of the General Statutes.
Article 3 of Chapter 44A requires a contract payment bond and performance bond for public construction or repair contracts. Article 3 was passed by the Legislature in 1973 and replaced several of the public construction contract bond provisions that were codified elsewhere. (1973 Chapter 1194).
The purpose of such statutory contract payment bonds is to give laborers and materialmen and subcontractors a substantial equivalent to the lien given laborers and materialmen engaged in private construction. The surety on the bond is for practical purposes, a substitute for the lien. The law in North Carolina is that the lien statutes are not applicable to public construction contracts as no lien can be acquired on a public building. Where property is not subject to a lien, no duty or obligation is imposed upon the owner of principle by virtue of any notice or attempt to acquire a lien thereon. As no lien can be secured or enforced against a public building, there can be claim on the funds retained in the hands of the owner, either by statutory or equitable liens. Noland v. Trustees, 190 N.C. 250 (1925) pp. 252, 253, 254; Manufacturing Co. v Blaylock, 192 N.C. 407 (1926) pp. 412, 413; Steel Corp. v. Brinkley, 255 N.C. 162 (1961) p. 164; Amarr v Dixon, Inc., 5 N.C. App. 479 (1969) p. 481; Builders Corp. v. Dry Wall, Inc., 43 N.C. App. 444 (1979) p. 449.
There was dicta to the contrary in the case of Harrison Associates v. State Ports Authority, 280 N.C. 251 (1972) p. 262. That was based on the state's contract provision, but it was not necessary for the opinion and no authority was cited for it. Dicta to the same effect as that in the Harrison case also appeared in the case of Scheflow v. Pierce, 176 N.C. 91 (1918) p. 93, and it was expressly disapproved by the North Carolina Supreme Court in the case of Noland Company v. Trustees, 190 N.C. 250 (1925) p. 253. See also Manufacturing Company v. Blaylock, 192 N.C. 407 (1926) p. 412. Subsequent to the Harrison case, the Legislature passed Article 3, Chapter 44A (Chapter 1193, 1973 Session Laws) providing for statutory contract payment bonds on public construction contracts. The Legislature expressly provided that the lien provisions of Articles 1 and 2 of Chapter 44A applicable to private property and private contracts shall not be construed as applying to Article 3. G.S. 44A-34.
Therefore, this office is of the opinion that the contract provision in question is not necessary to protect the state from liability. There is no legal requirement to withhold the funds after notice to the state by the subcontractor of the unpaid claim against the prime contractor, and neither the state nor its agents are exposed to additional liability for failure to withhold funds after notice of such claim. Payment to a third party of such funds is not authorized in the absence of contract provisions or statutory authority. Noland Company v. Trustees, 190 N.C. 250 (1925) p. 253. No facts are given and no reasons are suggested in the request that would indicate the subcontractor is not adequately protected by the contract payment bond required by Article 3 of Chapter 44A. This office is not aware of any reason to enforce the provision or to continue to use the provision.
LACY H. THORNBURG
Attorney General
Eugene A. Smith
Senior Deputy Attorney General