Payment Bonds

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A performance bond ensures that the bonded contractor or subcontractor will complete its work on a project. If a bonded contractor or subcontractor defaults, the surety should step in and exercise one of its options under the bond, which typically includes arranging for the completion of the defaulted contractor’s work.

Often, before a surety’s obligation to complete the defaulted contractor’s work is triggered, the surety must be given written notice of the contractor’s default. This gives the surety the chance to choose one of its options under the bond.

If an owner or contractor fails to provide any required written notice before hiring a replacement contractor or subcontractor to complete the work, the surety may assert the lack of written notice as a defense to a performance bond claim.

But what happens when an owner or contractor fails to timely provide the required written notice of default and the surety, once it learns of the default, indicates that the owner or contractor’s decision to hire a replacement contractor or subcontractor is fine?

In that situation, it’s possible that the surety may have waived its right to timely written notice. A recent federal court case—VEC, Inc. v. Joyce Electrical, Inc.—recently addressed such a situation.Continue Reading Can a Surety Waive Its Right to Notice Under a Performance Bond?

When a subcontractor goes unpaid on a public project, the subcontractor will almost always demand to be paid by the surety that issued the payment bond for the project. Sureties have many defenses to bond claims.

One of their favorite defenses is that the surety’s liability is coextensive with that of its principal’s (i.e., prime contractor’s) liability under the subcontract. In other words, sureties like to argue that unless the prime contractor is liable under the subcontract, the surety has no liability to the subcontractor for unpaid work.

Many courts have addressed the above “coextensive liability” argument and at least some have generally agreed that the surety’s liability is coextensive with the prime contractor’s liability. But there are courts that have found exceptions to that general rule under the federal law governing performance and payment bonds on most federal projects–the Miller Act.Continue Reading Surety Liability – Not Always Limited to the Principal’s Liability

Sureties have many defenses that they like to assert to avoid paying under a performance bond. One of those defenses arises when the obligee (usually the owner or the general contractor terminating a subcontractor) precludes the surety from exercising one of its options under the bond.

While performance bond terms vary, a surety frequently has three options under the bond where a bonded contractor has been default terminated:

(1) the surety can step in and complete the defaulted contractor’s work;

(2) the surety can obtain bids from other contractors to complete the defaulted contractor’s work and tender a new contractor to complete the work; or

(3) the surety can simply pay the obligee (again, typically the owner or the general contractor that defaulted a subcontractor) the cost above the remaining contract balance to complete the defaulted contractor’s work.

If a surety perceives that it was not given a chance to exercise one of its options under the bond, you can rest assured that the surety will argue it is no longer liable for any of the excess completion costs.

The you-deprived-the-surety-of-its-completion-rights defense is playing out in real time right now in a pending lawsuit between a surety and a contractor in Western Surety Company v. PCL Construction Services, Inc.Continue Reading Another Performance Bond Surety Defense – Impairing a Surety’s Completion Options Under the Bond

Unpaid subcontractors on federal government projects typically have payment bond rights that allow subcontractors to sue for payment to which they are entitled. There are many deadlines subcontractors must meet to preserve their rights under a payment bond. One deadline requires subcontractors to file a payment bond claim no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.

One year seems like plenty of time to file a payment bond claim, but you would be surprised how many subcontractors wait until the last possible second to file a payment bond lawsuit. That’s dangerous because it may subject an otherwise valid payment bond claim to the argument that it’s untimely because it wasn’t filed within one year of the last performance of the subcontractor’s work.

That’s exactly what happened in a very recent federal court case, United States ex rel. RCO Construction, LLC v. Federal Insurance Company. In that case,  a federal court judge provided one of the most thorough analyses of the one year statute of limitations for federal payment bond claims I have ever seen.Continue Reading The One Year Statute of Limitations for Subcontractor Federal Payment Bond Claims

Payment bonds protect subcontractors, sub-subcontractors, and others who provide labor and materials for a public project. Subcontractors and others who want to make a payment bond claim must follow the legally-required steps. The required steps depend on the type of project (e.g., federal and state government projects) and the role of the company making the claim (e.g., subcontractor, sub-subcontractor, supplier to sub-subcontractor, etc.). If you do not follow the steps by the required deadlines, you may lose your payment bond rights.

This post provides a high-level overview of the steps that must be taken to perfect a payment bond claim on most Florida state and federal public projects.Continue Reading How to Make a Payment Bond Claim on a Public Project

Resolving construction disputes through arbitration may be preferable under certain circumstances. I won’t go into the pros and cons of arbitration versus litigation, but one of the negatives of arbitrating a dispute is that the parties have to pay for the arbitrator(s) time. For larger construction disputes, the cost for the arbitrators is relatively small compared to the amount in dispute. And frequently, the extra cost to have arbitrators with significant construction experience is worth it for larger disputes. But for smaller disputes, the extra cost can be hard to justify and may discourage claimants from prosecuting their claim. In those situations, it may be smart to strike out any provision in a contract requiring the arbitration of disputes between the parties.
Continue Reading If You Don’t Want Arbitration, Make That Clear in Your Contract!

In United States ex rel. Aarow/IET LLC v. Hartford Fire Insurance Company, an electrical subcontractor sued a general contractor and the payment bond surety for $2.9 million in additional labor costs incurred on a federal government project. The subcontractor alleged that the general contractor mismanaged the project and disrupted the subcontractor’s work. The general contractor filed a motion to dismiss, which the trial court granted because, among other reasons, the trial court believed that a no-damages-for-delay clause in the parties’ contract barred the subcontractor’s claim.
Continue Reading Court Concludes No-Damages-for-Delay Clause Did Not Bar Subcontractor’s Disruption Claim

After a general contractor on a federal government project allegedly terminated a subcontractor’s contract for convenience, the subcontractor sued the payment bond surety for the amounts owed to the subcontractor. In Maguire-O’Hara Construction, Inc. v. Cool Roofing Systems, Inc., the subcontractor claimed the surety was liable for the unpaid remaining balance on the subcontract of nearly $2.6 million, even though the subcontractor was only owed about $360,000 for completed work. The surety filed a motion for judgment on the pleadings seeking dismissal of the subcontractor’s $2.6 million claim, which asked the court to determine whether the subcontractor could assert a claim against the surety for unperformed work. The court’s answer? No way.
Continue Reading Federal Court Rejects Subcontractor’s Payment Bond Claim for Unperformed Work

If you are an unpaid sub-subcontractor on a federal government project, don’t forget to provide notice of your claim to the general contractor within 90 days and file a lawsuit no later than one year after last furnishing labor or material to the project or you will lose your payment bond rights. That’s exactly what happened in a recent federal court decision in which a sub-subcontractor lost its right to assert its $8.5 million claim against the co-sureties that issued a payment bond because the sub-subcontractor failed to give notice within 90 days and file a lawsuit within one year of last furnishing labor or material on a federal government project.
Continue Reading Sub-Subcontractor Loses Payment Bond Rights on $8.5 Million Claim for Failing to Provide Timely Notice and File a Lawsuit