Bransdorfer Law Office
Frequently Asked Questions About Suretyship, Construction and Payment Bonds
Suretyship is a three-party contract in which one party, the surety, undertakes to guarantee the performance of or compliance with an underlying contract by one of the parties to the underlying contract. The suretyship contract is called a bond.
Under a construction bond, the underlying contract is for the construction of a building or other structure, such as a roadway, an airport runway, an office building, housing units, or part of a subway system. The surety agrees in its bond to provide substitute performance if the principal party to the underlying contract – usually the general contractor – defaults.
An OWNER contracts with a GENERAL CONTRACTOR (the "GC") for the construction of a building. Pursuant to their contract, the OWNER requires the GC to deliver a bond guaranteeing the performance of the GC's obligations to the OWNER. The GC obtains a bond from a SURETY and delivers it to the OWNER. Pursuant to the terms of the bond, if the GC defaults on its obligation to complete the project in substantial compliance with the underlying construction contract (or to pay its subcontractors and suppliers), then the SURETY will be obligated to complete the project in place of the GC (or to hire and pay another contractor to complete it).
In the above example, the GENERAL CONTRACTOR is the PRINCIPAL on the bond.
The OWNER is called the OBLIGEE on the bond.
The SURETY is a professional BONDING COMPANY, sometimes also called the BONDSMAN.The bond in the above example is a PERFORMANCE BOND, because the SURETY undertakes to guarantee the performance of the PRINCIPAL's obligations to the OWNER pursuant to the underlying building contract.
A. Performance Bonds
Under a performance bond, the surety or bonding company undertakes to guarantee the faithful performance by a general contractor of its obligations to a construction project owner pursuant to an underlying building contract between the owner and the general contractor.
IF THE GENERAL CONTRACTOR DEFAULTS ON ITS OBLIGATION TO DELIVER A COMPLETED BUILDING OR STRUCTURE TO THE OWNER IN SUBSTANTIAL COMPLIANCE WITH THE CONTRACT REQUIREMENTS, THE SURETY WILL BE REQUIRED TO COMPLETE – OR PAY FOR COMPLETION OF – THE PROJECT, IN PLACE OF THE GENERAL CONTRACTOR.
B. Payment Bonds
Under a payment bond, the surety undertakes to guarantee payment of the subcontractors and suppliers on a building project if the general contractor fails to pay them.
IF A GENERAL CONTRACTOR OR A SUBCONTRACTOR DOES NOT PAY ITS SUBCONTRACTORS OR SUPPLIERS, THEN THE UNPAID SUBCONTRACTORS OR SUPPLIERS WHO ARE COVERED UNDER THE PAYMENT BOND ARE ENTITLED TO PAYMENT BY THE SURETY.
C. Combined Performance and Payment Bonds
Often, one unified bond contains both the performance and payment bond obligations of the surety for a given project. In many instances, however, separate performance and payment bonds are issued.
Yes, there are several. In addition to construction bonds, there are also fidelity bonds that provide guarantees to employers (such as banks, wholesalers, retail sellers and government agencies) against embezzlement by their employees. Bail bonds are another type. All of these different types of bonds have the same contractual structure: the surety or bonding company undertakes to guarantee the compliance by another person or entity with an underlying obligation to the person or entity protected by the bond.
In general, the award of any contract for the construction of public works in the United States – both federal and state building projects – requires the general contractor to obtain a performance bond and a payment bond from an authorized surety, and to deliver the bonds to the owner, whenever the value of the contract as awarded exceeds a minimum dollar amount specified by law. Under federal law, the minimum amount is $100,000. Among the states, the District of Columbia and Puerto Rico, the minimum amount varies from one state or jurisdiction to another. In New York, the threshold is $40,000. In New Jersey, it is $100,000 for schools and certain other buildings, and $200,000 for works contracted for with the Director of the State Division of Building and Construction, as well as departments designated by the Director.
On private construction projects, performance and payment bonds are not required by law in most states or jurisdictions, but are sometimes required by contract.
Whether your project is government owned or privately owned, you can find out if there is a payment bond by reviewing your subcontract or by writing to the owner and contractor who hired you and requesting copies of any bonds issued for the project. In addition, for government owned projects, many jurisdictions have specific requirements for making copies of the bonds available to subcontractors, suppliers and the public. Accordingly, you should review your state's "little MIller Act" law to determine which government office maintains the bonds. Often, there is an administrative fee for obtaining a copy of the bond.
The federal Miller Act, 40 U.S.C. §§ 3131–3134, requires a performance bond (which protects the government as owner) and a payment bond (which protects the subcontractors and suppliers) for every federal construction contract awarded in an amount greater than $100,000. Because contractors, subcontractors and suppliers have no lien rights against government owned buildings, the federal Miller Act provides a remedy which, in effect, takes the place of lien rights. In the sense that the Miller Act creates a legislative remedy for the absence of lien rights against government owned buildings, the statute is "remedial" in nature. Therefore, at least in theory, the courts will apply the Miller Act remedy liberally in favor of claimants.
By law, almost all of the 50 states, together with the District of Columbia and Puerto Rico, require performance and payment bonds on public works contracts awarded for more than a minimum specified contract amount. These state statutes or laws are referred to generically as "little Miller Acts."
Each state or jurisdiction has its own requirements and procedures.For example, in New York State, the minimum contract award value for a public works contract to require performance and payment bonds is $40,000. The statute of limitation on the right to sue on the payment bond in New York expires one year after the date of the last furnishing of labor or materials by the plaintiff. In addition, in order for a second-tier subcontractor or a supplier to maintain a cause of action for breach of payment bond obligation, the subcontractor or supplier must deliver, within 120 days after its last furnishing of labor or materials, a written notice of claim to the contractor who obtained the bond.
Generally, there are few requirements imposed by law in order to commence a payment bond claim proceeding:
A. Notice of Claim
The claimant must deliver a written Notice of Claim within a prescribed period to each person or entity specified in the law and in the bond (i.e., the owner, the general contractor or other contractor who obtained the bond, and the surety).
The Notice of Claim must state the aggregate amount claimed.
Most of the states require a certification or an affidavit from the claimant that the claim is made in good faith, and that to the best of the claimant's knowledge and belief, the amount stated in the Notice of Claim is accurate.
Beyond the requirement for a certification or an affidavit, the federal Miller Act and the state little Miller Acts do not specify what documents are required to prove the claimant's entitlement to recover under a payment bond. Nevertheless, the claimant will need invoices and other documentation, specific to the facts its individual case, which demonstrate the general contractor's or other contractor's failure to make payment and the claimant's right to receive the payment.
E. Complaint for Breach of Payment Bond
If your payment bond claim is not resolved with or through the surety at the claims level, you have the right to sue the surety for breach of payment bond obligation, but only until the expiration of the applicable statute of limitation.
Your right to sue the surety is in addition to your other legal rights, including your right to sue for breach of contract against the non-paying contractor who hired you.
IT IS IMPORTANT TO KNOW THE SPECIFIC REQUIREMENTS OF YOUR STATE, BECAUSE SOME STATES IMPOSE MORE RESTRICTIVE REQUIREMENTS THAN OTHERS. For example, Michigan requires subcontractors and suppliers to deliver a written notice to the contractor who obtained the bond, within 30 days after the claimant's first furnishing of labor or materials. Subcontractors and suppliers in Michigan who do not give such notice when they begin to work or provide materials lose their right to claim against the payment bond. Louisiana, by comparison, requires a sworn notice of claim to be filed in the office of the recorder of mortgages in the parish where the project is located
EACH STATE OR JURISDICTION HAS DIFFERENT LAWS AND REQUIREMENTS, SO YOU MUST BECOME FAMILIAR WITH YOUR STATE OR JURISDICTION'S SPECIFIC REQUIREMENTS IN ORDER TO PROTECT YOUR RIGHTS.
In most U.S. jurisdictions, the protection of a payment bond extends only to the second tier of subcontracting. However, owners and general contractors sometimes require more distant tiered subcontractors to obtain construction bonds which protect subcontractors and suppliers farther down the contracting chain.
Most states do not require any particular form for notice of a payment bond claim. However, a small number of states do specify the forms or the substance required for the notice of claim. Minnesota, for example, specifies the form for a notarized notice of payment bond claim. Florida, on the other hand, specifies both a form for sureties to use in contesting payment bond claims, and forms for subcontractors and suppliers to use for waivers of payment bond rights. Moreover, a significant number of states specify the method required for delivery of a notice of payment bond claim (e.g., by certified letter with return receipt requested).
YOU MUST REVIEW THE LAWS IN FORCE IN YOUR JURISDICTION TO DETERMINE WHETHER SPECIFIC FORMS ARE REQUIRED, WHAT TIME LIMITS APPLY, AND THE OTHER REQUIREMENTS FOR YOUR CLAIM. IF YOU ARE IN DOUBT, YOU SHOULD CONSULT YOUR ATTORNEY.
CLAIMANTS MUST PAY CLOSE ATTENTION AND BE CAREFUL WITH STATUTES OF LIMITATION ON PAYMENT BOND CLAIMS, BECAUSE THEY ARE GENERALLY SHORT AND OFTEN COMPLICATED.
There are two types of time limits. First, there is a time limit on delivery of a notice of payment bond claim. Second, there is a statute of limitation that defines the permissible time period for filing a complaint in court to commence an action for breach of payment bond obligation. Each type of time limit can be based either on the provisions of the applicable law or on the conditions of the written bond.
A. Notice of Claim – In most cases, the claimant must deliver a written notice of claim within a specified time period as a condition precedent to maintaining a judicial cause of action for breach of payment bond obligation at a later date.
1. This time period is established either in the applicable law, or in the written terms of the bond, or by reading both the provisions of the law and the terms of the bond together.
2. The practice of contractually shortening the time period for making a claim against the bond, by shortening the time period in the written bond terms, is prohibited in some states but permitted in others, with no majority rule among the several states.
3. The most common time limit on delivery of a notice of payment bond claim is 90 days after the last furnishing of labor or materials by the claimant, but there is much variation in the required time limits among the 50 states. The shortest time limit in the country is 30 days, while some states permit up to 180 days.
B. Statue of Limitation on Filing a Lawsuit – The second time limit is the expiration by operation of law of the right to file a lawsuit in court for breach of payment bond obligation if the claimant does not file a complaint before the expiration of the statute of limitation.
1. The statute of limitation on the right to sue is different from the expiration of the time period for delivery of a notice of claim. If the written notice of claim is not timely delivered, it gives the surety a defense that the claimant has failed to satisfy a condition of the bond, independent of the statute of limitation.
2. The most common statute of limitation on breach of payment bond obligation is one year after the date of the plaintiff's last furnishing of labor or materials.
3. Nevertheless, the shortest statute of limitation in the country is 90 days, and in some states the period begins to run as of some event other than the last furnishing of labor or materials, such as acceptance of the building by the owner.
Within the time period prescribed by law or in the terms of the bond, the surety or bonding company must provide a written response to the claimant. Generally, the bonding company will send a written acknowledgement of its receipt of the notice of claim, together with a form entitled "Affidavit of Payment Bond Claim" or something similar. The affidavit form sent by the surety must be filled in, signed, notarized and returned to the surety. The information requested in the form includes the identification of the project, the owner and the general contractor or contractor who obtained the bond, and the amount claimed. The surety will also ask for documentation showing that the amount claimed is actually owed. The requested documentation may include copies of the contracts and subcontracts, purchase orders, manifests or logs of work, labor and materials provided, invoices, canceled checks, and a copy of the bond.
The time period within which the surety or bonding company is required to respond in writing depends on the law of the jurisdiction where the project is located, or on the written terms of the bond. The most commonly used form for payment bonds in the United States is form A312 published by the American Institute of Architects (the "AIA"). Pursuant to form A312, the surety must "send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed."
The documentation may include copies of the contracts and subcontracts, purchase orders, manifests and logs of labor, hours worked and materials, invoices, canceled checks, a copy of the payment bond, and affidavits.
Generally speaking, the more organized the claimant's documentation, the better for the claimant. For example, it is worthwhile to send invoices at regular intervals to the contractors and subcontractors to whom you supply labor and materials, but not less frequently than once a month, especially where there is a delay in receiving your payment. The invoices should also include all interest owed due to late payments, because in some cases the interest may be recoverable in a lawsuit for breach of payment bond obligation.
Finally, if your case is not resolved at the claims level with the surety, but instead proceeds to court, you will be required to disclose all of your records relating to the project in question during the discovery phase of the litigation, including electronically generated and stored records. It is therefore important not to dispose of any hard copy or electronic documentation relating to the project.
Retaining an attorney is not required, but it is always well advised when it is necessary to file a lawsuit. In many cases, it is possible to avoid the necessity of a lawsuit – and to minimize the cost of legal representation – by hiring an attorney to prepare your notice of claim properly at the earliest practicable time.
The same is true of proper contract drafting and review. Too often, contractors and other clients lose significant sums of money because they do not consult their attorney during the contract drafting and review phase – only to discover later on, when a dispute occurs – that the contract is ambiguous or does not mean what they thought it meant.
Attorneys experienced in government construction contracts and payment bond claims, especially in large law firms, often charge from $300 to $500 per hour or more. Our office charges $250 per hour for this type of work, with an hourly premium in those cases where the claimant delivers its file to us less than 15 days before the expiration of the statute of limitation. Because of our experience with payment bond matters, we can often perform the required work in significantly less time than other attorneys.
Use of this page or any other portion of this web site is not a substitute for consultation with an attorney and does not create an attorney-client relationship.
The Law Office of David Bransdorfer • 8102 Fulton Street East • Ada, Michigan 49301 • Phone: 616.682.5155