New Iowa Supreme Court decision on subcontractors' remedies for unpaid work on public improvements

Joan Fletcher Iowa Commercial Litigation Dickinson Law Firm Des Moines Iowa

Posted on 02/04/2014 at 11:36 AM by Joan Fletcher

Where a general contractor that is a Targeted Small Business (TSB) fails to pay its subcontractors for work they performed on public improvements, the retained funds are insufficient, and the construction surety bond has been waived for the TSB, the public corporation must pay the subcontractors' claims for unpaid work. So held the Iowa Supreme Court in its 1/31/2014 decision in Star Equipment Ltd v. State of Iowa et al. In Star Equipment, the IDOT hired Universal Concrete, Ltd. as the general contractor for two public construction contracts. Universal was a TSB, which is defined as a small business that is: located in Iowa; operated for profit; has an annual gross income below $4 million; and is at least 51% owned, operated and actively managed by minorities, women, or persons with disabilities. (Iowa Code § 15.102). (Note that one minority, one female or one person with a disability can be sufficient to qualify for TSB status.) Iowa Code section 12.44 requires state agencies to waive the bond requirement for TSBs that are able to demonstrate the inability of securing such a bond due to lack of experience, lack of net worth, or lack of capital. In short - the waiver of the bond eliminates that protection in circumstances where there is a higher risk of default. The IDOT waived the requirement of a construction surety bond for Universal, pursuant to Iowa Code § 12.44. Universal sub-contracted with three other entities, but failed to pay the subcontractors in full for the work they performed. The funds retained by the IDOT from amounts owed to Universal were insufficient to satisfy the amounts owed to the subcontractors. The subcontractors in the Star Equipment case argued that Iowa Code § 573.2 imposed liability on the IDOT for the amounts by which their claims exceeded the retained funds, while the IDOT argued that its obligation was limited to the amount of the retainage. The trial court ruled in favor of the IDOT and dismissed the subcontractors' claims to the extent they exceeded the retained funds. On appeal the Supreme Court reversed the trial court and held that § 573.2 requires the IDOT to step into the shoes of a TSB general contractor and to pay subcontractors' claims for unpaid work on public improvements, when the retained funds are insufficient to do so and the bond has been waived. The Court reasoned that its interpretation of § 573.2 effectuated the legislature's policy goals of promoting TSBs, while protecting their subcontractors and materialmen from defaults. In the abstract, it is difficult to argue with the notion that if the Legislature determines as a matter of public policy to require that a performance surety bond be waived for what are admittedly high-risk entities, then the government which waived the bond -- and not the subcontractors -- should bear the risk where the TSB fails to pay the subcontractors, and there is no bond for the subcontractors to look to for payment. That said, the Iowa Legislature is in session: Will it decide that the subcontractors should bear the risk of the policy decision the Legislature made?  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Joan Fletcher


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