Important Ruling for Contractors Doing Business with the State of Georgia

November 4, 2013

In a case of first impression, the Georgia Court of Appeals held that sovereign immunity does not bar a surety’s claims against a state agency even though the surety did not have a written contract with the agency.

Georgia Dep’t of Corr. v. Developers Sur. & Indem. Co., 2013 WL 5779779 (Ga. Ct. App. Case No. A13A0969, dec’d Oct. 28, 2013). The Georgia Department of Corrections (GDOC) contracted with Walker Roofing to perform roofing repairs at Valdosta State Prison. Developers Surety & Indemnity Company (the “surety”) furnished payment and performance bonds for the project pursuant to an indemnity agreement with Walker Roofing. The project became bogged down in delays. After the GDOC declared Walker Roofing to be in default, the surety stepped in, provided financial assistance to Walker Roofing and tendered a new contractor to complete the work. Thereafter, the surety filed a breach of contract action against DOC, alleging GDOC caused the delays by failing to make the premises reasonably available to Walker Roofing in violation of its agreement with Walker Roofing. GDOC argued that because its written contract was with Walker roofing – and not with the surety – there was no waiver of sovereign immunity. GDOC also relied upon the “anti- assignment” clause in its contract with Walker Roofing rendered the assignment to the surety ineffective. The Court of Appeals rejected both arguments. As to the sovereign immunity defense, the court held that under the principle of equitable subrogation, the surety stepped into the shoes of Walker Roofing and, as such, could claim the benefit of Walker Roofing’s written contract with GDOC. Additionally, the court held that the anti-assignment clause relied upon by GDOC was barred by O.C.G.A. § 11-9-406(d)(1) of the Uniform Commercial Code, which prohibits provisions in secured transactions that require the account holder to obtain the account debtor’s consent before the account can be transferred. The court reasoned that the account is Walker Roofing’s right to receive payment from GDOC, which right secured the obligations the surety undertook towards Walker Roofing.