Must North Carolina withhold a prime contractor’s payment after a subcontractor reports an unpaid claim on a bonded state construction project?

Plain-English summary

A subcontractor reported an unpaid claim on a North Carolina state construction contract and asked the state to hold money otherwise due to the prime contractor. The contract’s Article 32 called for withholding in that situation. The state had also obtained a statutory contract payment bond. The Department of Transportation asked whether Article 32 remained necessary to protect either the state or the subcontractor.

The AG said no legal requirement made the state withhold the money after notice. The opinion states that “neither the state nor its agents are exposed to additional liability for failure to withhold funds after notice of such claim.” The AG found the withholding provision unnecessary to protect the state and knew of no reason to continue using or enforcing it on the facts supplied. The opinion does not say that withholding would expose the state to breach claims, delay damages, interest, or punitive consequences.

The statutory payment bond was central to the answer. The opinion says it gives laborers, material suppliers, and subcontractors a substantial equivalent to a lien on private construction. A lien cannot be acquired on a public building, and the legislature excluded the private-property lien provisions from the public-project bond article. The AG said the request gave no facts or reasons suggesting the subcontractor was inadequately protected by the required bond.

Currency note

This opinion addresses a 1988 state construction contract and the statutes then in force. Check current Chapter 44A and the actual contract terms for a present payment dispute.

Background and statutory framework

Article 3 of Chapter 44A required a contract payment bond and performance bond for the public construction or repair contracts discussed in the opinion. G.S. 44A-34 stated that the lien provisions for private property did not apply to Article 3. The AG reviewed North Carolina cases on public-property liens and noted that a contrary remark in Harrison Associates v. State Ports Authority was dicta; the legislature later adopted the statutory bond provisions.

The opinion also says payment of withheld funds to a third party is not authorized without contract provisions or statutory authority. It answers whether the state must withhold after notice and whether Article 32 is needed on the supplied facts. It does not resolve a dispute over a missing or insufficient bond or specify claim deadlines.

Common questions

Does a subcontractor’s notice force the state to hold the prime contractor’s payment?

The AG said there is “no legal requirement to withhold the funds” after such notice on the bonded project in the question. The opinion also says failure to withhold does not create additional liability for the state or its agents.

Why did the AG focus on the payment bond?

The opinion describes the statutory bond as a practical substitute for a lien on public property and says the request identified no reason it would fail to protect the subcontractor in this case.

Did the opinion say the state risks damages if it does withhold?

No. It found the Article 32 provision unnecessary and saw no reason to continue it, but did not analyze breach, delay damages, interest, or penalties arising from withholding.

Source

• Landing page: https://ncdoj.gov/opinions/public-construction-contracts-contract-payment-bond/

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