On September 22, 2014, the Georgia Supreme Court affirmed a controversial Court of Appeals decision, which held that the doctrine of sovereign immunity did not bar sureties or subrogees from recovering breach of contract damages from the State, so long as the surety or subrogee’s principal would have a cause of action for such damages.
On September 22, 2014, the Georgia Supreme Court affirmed a controversial Court of Appeals decision, which held that the doctrine of sovereign immunity did not bar sureties or subrogees from recovering breach of contract damages from the State, so long as the surety or subrogee's principal would have a cause of action for such damages. This decision, a significant positive development for the construction industry, stems from a simple set of facts:
In 2008, the Georgia Department of Corrections ("GDOC") awarded Walker Roofing ("Walker") a contract to finish the roofs on several buildings at the Valdosta State Prison. As a prerequisite to obtaining the contract, Walker was required to procure payment and performance bonds that assured its proper performance on the project. Developers Surety ("the Surety") issued said bonds to Walker. The bonds required the Surety, upon Walker's default, to promptly remedy the resultant defects, and complete the contract in accordance with specifications.
Importantly, the Contract between GDOC and Walker required: (i) that Walker complete construction of the Prison roofs within 150 consecutive calendar days; and (ii) that GDOC permit Walker to access the Prison between 7:30 a.m. and 5:00 p.m., on all weekdays. Naturally, delays arose, and Walker was unable to complete the project within the 150 day time-frame. GDOC issued a formal notice of default, and declared Walker in breach, triggering the Surety's obligations under the performance bond.
However, it soon came to light that Walker's daily start-time had been delayed "by at least 30 minutes, and up to two-and-a-half hours" due to GDOC's access restrictions. Additionally, GDOC required that Walker cease roofing work by 3:30 p.m. on each day. Thus, Walker and the Surety believed, in good faith, that GDOC, not Walker, had committed the material breach of the contract's terms. Nonetheless, GDOC had declared Walker in default, and the Surety stood to lose $577,118.60.
Subsequently, the surety paid the loss on behalf of Walker, and filed suit against GDOC for breach of contract. GDOC, a State Entity, initially found the Surety's suit quite frivolous, and argued that it was clearly barred by the doctrine of sovereign immunity. Under Georgia law, it is well-settled that "the sovereign [the State, and any State-entities, such as the Dep't of Corrections] cannot be sued in its own courts, or in any other court, without its consent and permission." Of course, there are exceptions: the State may "waive" its sovereign immunity privilege, and permit itself to be sued in certain instances. For example one of the Georgia State Constitution's exceptions to the defense of sovereign immunity is for "any action ex-contractu, for the breach of any written contract…. entered into by the State or its departments and agencies."
At first blush, it appeared that the Georgia Constitution might permit the Surety's suit against GDOC, which, after all, sought damages for breach of contract. However, GDOC quickly reminded the trial court that the Surety was not a party to the construction contract between the State and Walker, and that the State's waiver of sovereign immunity did not apply to the Suerty, which was a complete stranger to that contract. Surprisingly, the lower court held that GDOC waived its sovereign immunity by entering into the contract with Walker, and that the doctrine of equitable subrogation gave the Surety the ability to sue GDOC once the Surety incurred liability, and paid the obligations of its principal (Walker) under the bonds.
Many industry insiders were surprised by this holding, and the Georgia Supreme Court recently granted certiorari to consider "whether the State's sovereign immunity is waived for a claim asserted by a surety on a contract with the State." On September 22, 2014, the Georgia Supreme Court issued its holding, which is extremely favorable to sureties, subrogees, and all contractors doing business with State entities, whether as a contractual counterparty, a distant upstream supplier, a subcontractor, or a guarantor.
The Court began its analysis by noting that there was "no doubt that by entering into the contract, GDOC waived the defense of sovereign immunity for any breach of the Contract for which [GDOC] could be held liable [and] there is little question that Walker could maintain an action against GDOC for the alleged breach of contract." The key question, however, pertained to the Surety's ability to seek damages from the State, given that it was not a party to the relevant contract.
The Court went on to discuss the principles of suretyship and subrogation, noting that "a surety who has paid the debt of his principal shall be subrogated… to all the rights of the [principal] and, in a controversy with others, shall rank in dignity the same as the [principal] whose claim he paid." Applying this reasoning, the Court held that the Surety, as subrogee of Walker, stood in Walker's shoes, and succeeded to its rights. Because Walker had a right of action for breach of contract against GDOC, so did the Surety. Additionally, the Georgia Contstitution's sovereign immunity waiver for breach-of-contract suits expressly relies upon only the nature of the action, not the identity of the parties who may sue the State in such an action. Simply put, "[s]ubrogation is merely a basis upon which the Surety, after having incurred liability and paid its bond obligations for its principal, can assert the claim for breach of contract initially belonging to its principal, Walker."
Later, the Court provided sound public policy support in favor of its decision by noting that payment bonds are mandated for all State construction contracts over $100,000.00, and that the State is free to require such a bond for any public construction contract. Thus, the Court properly recognized that "at best, it would be inconsistent, and at worst, unjust and impractical, to require a surety's bond to ensure payment or performance in favor of the State in the case of a defaulted contract… but then to bar the surety from exercising its right of subrogation in an action for breach of the contract in the event that the State is the defaulting party."
 Ga. Const. Art. I, Sec. II, Para. IX (c)
 Dept. of Corrections v. Developers Sur., 750 S.E.2d 697 (Ga. App. 2013).
 Dept. of Corrections v. Developers Sur., 295 Ga. 741 (2014); 2014 WL 466751.
 O.C.G.A. § 13-10-60