July 28, 2009

Texas court grants relief to supplier

AUSTIN, TEXAS

The Texas Supreme Court recently, in a ruling in Dealers Electrical Supply Co. v. Scoggins Construction Co., Inc., confirmed the right of a construction subcontractor to bring a claim against a general contractor when the sub has missed the strict notice requirements for a claim on a McGregor Act bond.

Ben Aderholt of the Houston office of Looper Reed & McGraw represented Dealers Electrical Supply before the Supreme Court.

If a subcontractor is not paid for work on a private construction project, he can file a lien on the property. But on a public project, a bond is filed and the subcontractor’s usual recourse is to sue on the bond under the McGregor Act.

A claim on a McGregor Act bond has stringent and complex notice requirements: if they are not sent or sent one day late, the subcontractor will have waived its right to the bond claim. Many subcontractors are small companies or solos who are not represented by lawyers. By the time they realize they are not going to be paid, it may already be too late to file a bond claim.

Dealers Electrical Supply, an electrical parts supplier, filed suit against Diamond Industries, an electrical subcontractor; Scoggins Construction Company, the general contractor; and Bill R. Scoggins, the president and sole shareholder of Scoggins Construction. Dealers was not paid for electrical materials furnished to Diamond on a school project.

The materials were supplied under a joint check agreement between Dealers, Diamond and Scoggins. A joint check agreement is a credit facility frequently used to help a small subcontractor with low or unestablished credit obtain supplies on credit from a supply house.

In Dealers v. Scoggins the judge agreed with the plaintiff that the company could sue on the grounds of the joint check agreement and under the Trust Fund Doctrine. The Trust Fund doctrine holds that, when a general contractor on a construction project receives funds from the owner, the money is held in a trust for subcontractors and their suppliers. The general contractor has a fiduciary duty to use that fund to pay suppliers and subcontractors.

The judge awarded Dealers US$135,910.08 as damages, attorney fees, and interest against Bill Scoggins and Scoggins Construction. Scoggins appealed to the Thirteenth Court of Appeals, which reversed the trial court on the basis that the McGregor Act bond claim was Dealers’ exclusive remedy in the case.

The Texas Supreme Court granted Dealers’ petition for review and reversed the Thirteenth Court’s holding and reasoning.

The higher rejected the exclusivity theory upon which the Thirteenth Court founded its opinion.

-DCN News Services

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