The Texas Supreme Court recently ruled on the extent of the exclusivity of remedy under the McGregor Act. In reversing a court of appeals decision, the Texas Supreme Court, in Dealers Elec. Supply Co. v. Scroggins Const. Co., Inc., __S.W.3d__, 2009 WL 1901638 (Tex. Jul 03, 2009), held that the exclusivity of remedy under the McGregor Act extended only to suits against the bond itself, and did not preclude a subcontractor’s supplier from suing for Trust Fund Violations pursuant to Texas Property Code § 162.001(a) or for suing under a joint checking agreement.

      The Mercedes Independent School District hired Scoggins Construction Company, Inc. ("SCC") as the general contractor for the construction of an elementary school. Because the project was a public work, SCC subsequently executed a bond with Colonial American Casualty and Surety Company and Fidelity and Deposit Company of Maryland. SCC subcontracted for electrical labor and supplies with Diamond Industries ("Diamond"). SCC entered into a joint check agreement with Diamond and Dealers Electrical Supply Co. ("Dealers") whereby Dealers would provide Diamond with electrical supplies for the project.

      Dealers provided electrical supplies for which it was not paid after Diamond walked the job. As a result, Dealers sued SCC, its President, and Diamond for breach of the joint check agreement, for violation of the Texas Construction Trust Fund Act ("TCTFA"), and under the McGregor Act for recovery under the payment bond. However, Dealers dropped its McGregor Act claim after failing to perfect notice under the statute. The trial court held that SCC had breached the joint check agreement and had violated the TCTFA.

      The appellate court held that the McGregor Act provided the exclusive remedy for unpaid laborer’s on a public works project and reversed the trial court. As a result, Dealers received a take nothing judgment on its alternative claims for breach of the joint checking agreement and for its suit under the TCTFA.

      The Texas Supreme Court reversed the court of appeals deicision, and held that the McGregor Act’s statutory language did not preclude recovery under the TCTFA. The court distinguished the cases relied on by the appellate court to stand only for the proposition that the McGregor Act was an exclusive remedy. Furthermore, the Court recognized a 1987 amendment to the TCTFA which narrowed the exemption from liability only to a corporate surety. Finally, the Court dismissed the appellate court’s concern that permitting both TCTFA and McGregor Act actions would subject contractors to double liability for payment of funds, thereby encouraging contractors to withhold those funds until the statute of limitations runs (after four years) on the TCTFA. The court held that Texas Property Code § 162.031(b) provided contractors an affirmative defense to a TCTFA violation so long as moneys paid "actual expenses directly related to the construction or repair of the improvement." Thus, reasoned the court, as long as contractors pay subcontractors, they would not be liable to the subcontractors’ sub-subcontractors or suppliers, thereby precluding double liability.

      The Court also held that common-law remedies, such as breach of contract, should not lightly be disfavored except by clear statutory language. The Court held that there was not sufficient language in the McGregor Act to preempt Dealer’s contract claim. To the contrary, the Court held that permitting subcontractors to enforce their contract rights furthered the purpose of the McGregor Act, which is ultimately the protection of laborers on public works projects.