Construction Law - Henry L. Balkcom Iv, Dana R. Grantham, and Devin H. Gordon

• Jurisdiction: Georgia,United States
• Publication year: 2006
• Citation: Vol. 58 No. 1

Construction Lawby Henry L. Balkcom IV^*

Dana R. Grantham^** and Devin H. Gordon^***

This Article surveys construction law decisions handed down by Georgia courts and construction-related legislation enacted by the Georgia General Assembly between June 1, 2005 and May 31, 2006. As in prior years, the cases discussed are divided into five categories: (1) contracts, (2) torts, (3) mechanics and materialmen's liens, (4) arbitration, and (5) miscellaneous. Recent legislation is highlighted and summarized in Section VI, including a brief overview of the General Assembly's substantial revisions to Georgia's "Right to Repair" Act, the mandatory alternative dispute resolution framework that the legislature put in place in 2004 for residential construction defect claims in Georgia.

I. Contracts

A. Quantum Meruit and the Doctrine of Sovereign Immunity

During the survey period, the Georgia Court of Appeals noted an exception to the doctrine of sovereign immunity whereby a general contractor was allowed to recover damages from a county school district and other defendants on the theory of quantum meruit, despite a Georgia statute requiring that all contracts with county governing authorities be in writing and entered in the county's minutes.

In Brown v. Penland Construction Co.,¹ Penland Construction Company, Inc. ("PCC") sued the Walker County School District, the Walker County Board of Education (the "Board"), Ridgeland High School's booster club, and Michael Brown, the high school's former baseball coach, seeking payment for PCC's construction of an indoor baseball practice facility to be used for baseball training and summer camps. Although construction of the facility was approved by the Board and built at Brown's request, no written contract was ever executed by the parties. Upon completion, PCC attempted to recover its expenses from the Board, but the Board refused to pay for the building or to allow PCC to disassemble the prefabricated structure and remove it from the Board's property. PCC then brought this action for quantum meruit against the defendants.²

The case was tried before a jury in the Walker County Superior Court, which found that no oral contract existed between the general contractor and any of the defendants. Nonetheless, the jury determined that the general contractor was entitled to recover $150,000 on the theory of quantum meruit. The defendants appealed the jury verdict, asserting, inter alia, that (1) recovery in quantum meruit is prohibited by the doctrine of sovereign immunity, (2) Brown, the former coach, did not receive any personal benefit from the construction of the building, and (3) the jury's verdict was against the weight of the evidence.³ Based upon principles of constitutional law, the court of appeals rejected the appellants' enumerations and affirmed the jury's judgment against all appellants.⁴

As a general rule, the court stated that recovery in quantum meruit is equivalent to recovery based upon an implied contract, which is statutorily prohibited under Georgia law when a county or its subdivision is a defendant.⁵ According to Official Code of Georgia Annotated ("O.C.G.A.") section 36-10-1, "'all contracts entered into by the county governing authority with other persons in behalf of the county shall be in writing and entered on its minutes.'"⁶ Thus, for a contract with a county or county subdivision to be valid and enforceable, it must comply with the statutory requirements.⁷ Nevertheless, the court stated that the shield of sovereign immunity does not bar recovery of just and adequate compensation from a county where property is taken for a public purpose.⁸ This principle, however, applies only where the complainant has a valid property interest in the property that is taken.⁹

Here, the court determined there was no question that the general contractor had a valid property interest in the building because he had paid for all of the materials and labor to erect it.¹⁰ The school officials admitted that the facility was a benefit to the school and that the school district had utilized the building for public purposes (as a classroom and athletic facility).¹¹ In addition, the court held that the former baseball coach had benefited economically from use of the facility to recruit and train high school athletes and by receiving monetary compensation for operating baseball camps in the new building.¹² Accordingly, the court concluded that the school district's refusal to pay for a facility it used for public purposes constituted a taking under the Georgia Constitution.¹³ As a result, PCC was entitled to just compensation and relief from the appellants for their use of the facility.¹⁴ Based on this "constitutional" exception to the doctrine of sovereign immunity, the court affirmed the jury verdict in favor of the general contractor.¹⁵

B. Contractual Right to Set-off

In Foster & Co. General Contractors v. House HVAC/Mechanical, Inc.,¹⁶ the Georgia Court of Appeals determined that Foster & Company General Contractors, Inc. ("Foster") was entitled under its subcontract with House HVAC/Mechanical, Inc. ("House") to withhold final payment from House pending satisfaction of the subcontractor's payment obligations to its suppliers, despite having received a lien waiver form from House promising that it had either already paid or would use the monies from the final payment to pay all of its outstanding obligations related to its work on the project.¹⁷

Foster and House entered into a subcontract for the provision and installation of a heating, ventilation, and air conditioning system for the Clayton County Board of Education Building Complex (the "Project") being constructed by Foster.¹⁸ As a condition precedent to final payment, the subcontract required House to provide satisfactory evidence to Foster that "'all known indebtedness connected with [House's] Work [had] been satisfied.'"¹⁹ The subcontract also provided that the general contractor had an "absolute right" to set-offfrom monies due or owing to the subcontractor for

"all claims, debts, costs, expenses, damages, liabilities or other obligations which [Foster] has incurred or might incur as a result of any acts, omissions, breaches, or negligence by [House] arising out of or related to any and all agreements, contracts, subcontracts, . . . by and between [Foster] and [House], . . . the Project, . . . or any other matters or dealings of any kind between [Foster] and [House]."²⁰

After a dispute arose between the parties regarding nonpayment of House's sub-subcontractors and suppliers, Foster asserted its right under the subcontract to withhold final payment from House until House had paid all bills associated with its work on the Project.

When Foster received final payment from the owner, House requested immediate release of the remainder of its retainage, even though House continued to have unpaid suppliers and had not yet completed all items on the punch list. When Foster refused, the subcontractor made a claim on the general contractor's payment bond for final payment of retainage. After the surety denied the claim, House then filed an action for breach of contract and failure to honor the payment bond against both Foster and the surety.²¹

In the trial court House moved for summary judgment on the basis that it had satisfactorily completed all of the work called for under its subcontract and was, therefore, entitled to final payment in full.²² House also contended that the "Unconditional Waiver and Release Upon Final Payment" that it executed showed that the parties contemplated that all unpaid suppliers would be paid out of Foster's final payment to House, and thus Foster breached its contract when it withheld funds from House pending satisfaction of all of House's obligations to its subcontractors and suppliers.²³ The trial court granted House's motion for summary judgment, and Foster appealed.²⁴

On appeal Foster contended that the subcontract provided that Foster could withhold final payment from House until House had paid "'all known indebtedness connected with [House's] Work,'" and House openly acknowledged it owed suppliers outstanding debts related to the Project at the time Foster requested final payment.²⁵ Foster also contended that the parties' subcontract afforded Foster an "'absolute right'" to set-off against monies owed all claims or other obligations Foster might incur as a result of acts, omissions, or breaches by House.²⁶ Finally, Foster asserted that the subcontract authorized Foster, in the event of a default by House, to deduct the cost of making good any deficiencies from payments due to House.²⁷ The court of appeals agreed with Foster's contentions.²⁸

The court observed that under O.C.G.A. section 13-11-3,²⁹ a subcontractor is entitled to payment for performance in accordance with its contract only upon satisfaction of the subcontract's conditions precedent to payment.³⁰ Here, the subcontract granted Foster the right to withhold final payment from House until House had paid all known indebtedness related to House's work.³¹ Construing the contract as a whole, the court concluded that the parties intended for the general contractor to remain entitled to withhold final payment pending the subcontractor's satisfaction of all known obligations related to work performed on the project.³² Instead of eliminating the general contractor's right to withhold final payment as a set-off to outstanding indebtedness of the subcontractor, the court determined that the final lien release and waiver merely reinforced the subcontractor's obligation to pay its suppliers from monies received from final payment by the general contractor.³³

The court also rejected House's contention that allowing the general contractor to withhold final payment exposed the subcontractor to "double liability."³⁴ House contended that it should not be required to forfeit part of its final payment on account of the fact that its...