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Presenting a live 90‐minute webinar with interactive Q&A
Payment and Performance Surety Payment and Performance Surety Bonds in Construction Projects Asserting or Defending Surety Bond Claims to Maximize Recovery or Protect Rights and Interests
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, OCTOBER 20, 2011
Today’s faculty features:
Gina M. Vitiello, Shareholder, Chamberlain Hrdlicka, Atlanta
Glenn C. Kennett, Senior Associate, Pillsbury Winthrop Shaw & Pittman, Washington, D.C.
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PAYMENT BONDSPAYMENT BONDS
• Joint and several liability of contractor andJoint and several liability of contractor and surety
• Payment of “downstream” parties who y pprovide labor and/or materials and/or equipment
• So in addition to contract claim against contractor, there is a separate bond claim against contractor and suretyagainst contractor and surety
• Privity usually not required—notice issues
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TYPES OF PAYMENT BONDS
• Miller Act (40 U.S.C. § 3131 et seq.)Miller Act (40 U.S.C. § 3131 et seq.)– Generally contract of $100,000 or more
(Payment bond = contract amount; performance bond = “adequate” amount).
– Exclusions/opt outs include (1) some cost-plus contracts marine contracts etc (40plus contracts, marine contracts, etc. (40 U.S.C § 3134); and (2) possibly on foreign contracts if “impracticable” (40 U.S.C. p (§ 3131(e)).
– Approved corporate sureties at htt // f t / 570/ 570 ht lhttp://www.fms.treas.gov/c570/c570_a-z.html.
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TYPES OF PAYMENT BONDS
• State Little Miller ActsState Little Miller Acts – Generally required for contracts of certain $$
size or more
– If bonds are required, contract not validIf bonds are required, contract not valid without them
• Private Bonds (AIA A312 is very common)
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PAYMENT BOND CLAIMANTS
• Miller Act payment bondMiller Act payment bond– Intended to protect “all persons supplying
labor and material” 40 U S C § 3131(b)(2) Aslabor and material 40 U.S.C. § 3131(b)(2). As applied:
– 1st tier sub/supplier: YES1 tier sub/supplier: YES– 2d tier sub/supplier of 1st tier sub: YES– 2d tier sub/supplier of 1st tier supplier: NO2d tier sub/supplier of 1 tier supplier: NO– 3d tier: NO
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PAYMENT BOND CLAIMANTS
• Little Miller Act payment bondsLittle Miller Act payment bonds
S h b d th f d l t– Some have broader coverage than federal act
– Example: a supplier to a second tier sub is a claimant under the GC’s bond
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PAYMENT BOND CLAIMANTS
• Private payment bondsPrivate payment bonds– View them as contracts with claimants as intended
beneficiaries– Language of the bonds controls as to who may make
a claimAIA 312 anybody who has a contract with contractor– AIA 312 – anybody who has a contract with contractor posting bond or a subcontractor to furnish “labor, materials or equipment” plus anybody else who could assert lien under controlling statute
– Private bond will also (usually) dictate when and how to make the claimto make the claim
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Statutes of Limitation/Notice
• Miller Act payment bonds (41 U.S.C § 3133)Miller Act payment bonds (41 U.S.C § 3133)
– If not paid within 90 days of last providing labor/material can sue (venue=where job is but seelabor/material, can sue (venue=where job is . . .but see recent case discussed below)
Suit must be filed within 1 year of last providing– Suit must be filed within 1 year of last providing labor/material
A i d b t d 91 d 365 t– A window between days 91 and 365 to sue
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Statutes of Limitation/Notice
• Miller Act payment bonds (41 U.S.C § 3133)Miller Act payment bonds (41 U.S.C § 3133)
– If not in privity with contractor providing bond, must give written notice to that contractor within the first 90give written notice to that contractor within the first 90 days
– A waiver of Miller Act rights is only valid if writtenA waiver of Miller Act rights is only valid if written, signed by party waiving rights and signed after that party furnished labor/materials=waiver in subcontract void. . . Lots of contradictory/conflicting cases re how y gto treat “pay if/when paid” clauses and clauses requiring subcontractor to allow general contractor to exhaust administrative remedies. Are they unenforceable waivers? Answer laterunenforceable waivers? Answer later.
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Statutes of Limitation/Notice
• Private payment bonds:Private payment bonds:– State law will control
Private bonds will often contain shortened– Private bonds will often contain shortened limitations periods
– Some states allow a bond to establish a– Some states allow a bond to establish a limitation period that is shorter than the statutory period; other states say it is against y p ; y gpublic policy, and ignore the shorter period contained in the bond
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Statutes of Limitation/Notice• Notice requirements in private bonds are no different
than notice requirements in a contract. So failure to l t i k if f il t f llcomply exposes you to same risks as if you fail to follow
contract notice provisions
• AIA A312 Payment Bond– Must submit “claim” to surety before filing suit; also, if no privity
with party providing bond, notice to that party within 90 days of last labor/materials is requiredlast labor/materials is required
– Surety responds to claim in 60 days (2010 version, contrasted with 45 days in 1984 version which is still being used), or may be
d ’ fexposed to attorneys’ fees
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Costs covered under Miller Act t b dpayment bonds
Labor• Labor Union dues Supervision Supervision Lodging
• MaterialsMaterials • Rental equipment• Extra work• Extra work Including reasonable profit on
extra work
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Costs covered under Miller Act payment bonds
• Delay Damages- Historically not recoverable because theyHistorically not recoverable because they
were not viewed as labor and materials incorporated into the projectp p j
- Now some jurisdictions allow increasedNow, some jurisdictions allow increased labor and materials due to delay
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Costs covered under Miller Act payment bonds
• Delay Damages- U.S. ex. rel. Pertun Construction, Co. v. Harvesters
hGroup, Inc., 918 F.2d 915 (11th Cir. 1990)“We hold that the Miller Act allows recovery from the surety for increased out-of-pocket costs caused bysurety for increased out of pocket costs caused by delay and that the subcontract provision regarding no damages for delay does not preclude recovery under th i t ”these circumstances.”
- Lost profits on delay damages not allowed- Lost profits on delay damages not allowed
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Costs covered under Miller Act payment bonds
Interest• Permitted to recover if provided for by statePermitted to recover if provided for by state
law or contract
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Costs not covered by Miller Act payment bonds
• Insurance premiums• Lost profitsp• Capital equipment costs/use
of owned equipment• Attorneys’ fees
- Unless provided for by federal statute or contract between claimant and principal
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Surety Defenses
• Defenses to payment bond claims:Defenses to payment bond claims:– Surety may assert any defenses available to
the principalthe principal• Payment• Offset• Defective work by subcontractor• Other breaches by claimant causing principal to
incur damages
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Surety Defenses
• Defenses to payment bond claims:F il t f ll ti i tFailure to follow notice requirements
Limitations periodsLimitations periodsLimitations period in bond for bringing action may
be shorter than statute of limitationsbe shorter than statute of limitations
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Surety Defenses
• Defenses to payment bond claims:Defenses to payment bond claims:- “Pay-if-paid” clause
Miller Act:- N.D. Ga. has held that contingent payment clauses will not be
a defense to a surety under a Miller Act claim, citing cases from 9th and 5th Circuit
- U.S. ex. rel. McKenney’s, Inc. v. Gov’t. Technical Services, LLC, 531 F.Supp.2d 1375 (N.D. Ga. 2008)
“Where subcontract terms [affect] the timing of recovery or the [ ] g yright of recovery under the Miller Act, enforcement of such terms to preclude Miller Act liability contradict the express terms of the Miller Act.”
23
Surety Defenses
• Defenses to payment bond claims:Defenses to payment bond claims:- “Pay-if-paid” clauses
Georgia Little Miller Act:g- Contingent payment clause in subcontract will be defense to
surety under Georgia Littler Miller Act- St. Paul Fire & Marine Ins. Co. v. Georgia Interstate Elec.St. Paul Fire & Marine Ins. Co. v. Georgia Interstate Elec.
Co., 187 Ga. App. 579, 370 S.E.2d 829 (1988)“A provision in a contract may make payment by the owner a condition precedent to a subcontractor's right to payment if 'the contract between the general contractor and the subcontractor [contains] an express condition clearly showing the intention of the parties.”
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Surety Defenses
• Defenses to payment bond claims:Defenses to payment bond claims:- “Pay-if-paid” clauses
- Private bonds: If the bond incorporates the- Private bonds: If the bond incorporates the claimant’s contract and there is a contingent payment clause, it will likely be enforced
- Practice tip: - some contractors are including language in
b t t th t “ t b d h llsubcontract that says “surety on any bond shall have the benefit of this clause”
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RECENT CASESRECENT CASES
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U.S. ex. rel. Roc Carter Co, LLC v. Freedom Demolition, Inc., 2009 WL 3418196 (M.D. Ga. 2009), ( )
– U.S. leased federal property to a corporation for the purpose of constructing operating and maintaining a military housing facilityconstructing, operating and maintaining a military housing facility
– Lease limited government’s liability to that of a lessor and stated construction was a private undertaking
– Corporation enters into design-build contract to construct military housinghousing
– Contractor provided payment and performance bonds naming United States and project lender as co-obligees
– Second-tier sub sued contractor and surety under Miller Act for labor and materials provided to the projectand materials provided to the project
– District Court dismissed subcontractor’s suit, holding that the Miller Act did not apply because U.S. was not a party to the design-build contract and it was not a contract to construct a “public work”Three elements to have a “public work” contract: (1) construction– Three elements to have a public work contract: (1) construction contract, (2) U.S. must be a party to the construction contract; and (3) contract must require Payment and Performance bonds that are in favor of U.S.
27
Artistic Stone Crafters, Inc. v. Safeco Ins. Co. of America 2010 WL 317472 (S D Ga 2010)
– Payment bond surety was entitled to enforce
of America, 2010 WL 317472 (S.D. Ga. 2010)
Payment bond surety was entitled to enforce a forum selection clause contained in the claimant’s subcontract without regard to whether the subcontract was expressly incorporated into the bond.
– Court also found that Miller Act venue provision (where the subcontract was to be performed) was not controlling because it wasperformed) was not controlling because it was waived by the subcontract’s forum selection clauseclause.
28
U.S f/u/b Sigler v. AMC and E.C. Scarborough, 2010 WL 5100913 (D. Nev.)
• 2d Tier Supplier v Surety2d Tier Supplier v. Surety• Payment bond stated (“sort of”) that it was limited to 1st
year of project.• Individual (not corporate) surety collected premium for• Individual (not corporate) surety collected premium for
only one year.• Supplier didn’t even deliver materials until year 2.
Supplier argues (1) limitation impedes purpose of Act;• Supplier argues (1) limitation impedes purpose of Act; and (2) GC violated Act.
• Held: Surety’s motion for summary judgment GRANTED: “The Court cannot hold a surety liable for coverage that itThe Court cannot hold a surety liable for coverage that it did not intend to provide.”– Court ignores statutory requirement that bond is for protection of those
who supply labor/materials for “carrying out the work provided for in the contract”, and that surety effectively provided a bond it knew to be non-compliant.
29
U.S f/u/b Sigler v. AMC and E.C. Scarborough, 2010 WL 5100913 (D. Nev.)
• What could supplier have done? Not much:• What could supplier have done? Not much:– Get copy of bond via FOIA (or by asking GC) pre-
performance, so he would be “smart”.Try to get from CO (Miller Act only requires CO to– Try to get from CO (Miller Act only requires CO to give bond if request made via affidavit post performance).
Court throws a bone to supplier by allowing him• Court throws a bone to supplier by allowing him to maintain a QM claim against contractor to extent he can show GC didn’t pay subcontractor (d i i d ’t t h th h i(decision doesn’t suggest whether showing can be made).
• GC’s price must have reflected “savings” fromGC s price must have reflected savings from one-year bond—craziness!
30
U.S. f/u/b Vining v. Carothers, 2010 WL 1931199 (M D Ga )(M.D. Ga.)
• Surety is not compelled to arbitrate where not a• Surety is not compelled to arbitrate where not a party to the subcontract, bond does not incorporate subcontract and subcontract doesn’t incorporate bondincorporate bond
• Court stays case as to surety, and compels y y, parbitration between GC and sub
31
U.S f/u/b WFI v. Gray 701 F. Supp. 2d y1320 (N.D. Ga. 2010)
• Where surety is aware of arbitration, is invited to voluntarily participate, and chooses not to, award will be binding on him, subject to special surety defenses, even g , j p y ,where GC didn’t show up and defend at arbitration
• Arbitration award included attorneys’ fees, and sinceArbitration award included attorneys fees, and since those are not generally available against surety under the Miller Act, judgment against surety excluded fees awarded against GC in arbitration.
32
• Conclusion:
– Surety chooses not to participate in arbitration at its own peril
– In WFI, surety counsel had been very involved, and seems to have made a conscious decision to stay on sidelines It is strange that surety took this risksidelines. It is strange that surety took this risk, particularly given that principal was a no-show at the hearing
33
Basic Structure
Tripartite relationship:
Surety (the Obligor) guarantees performance of a promise made by another (the Principal) to a third party (the Obligee).
The rights, duties, and obligations of the parties are determined by contract: (1) the subcontract / prime contract and (2) the performance bondthe subcontract / prime contract and (2) the performance bond.
35 |
Purpose
Designed to protect the owner / prime contractor (Obligee) from the inability or refusal of the contractor / subcontractor (Principal) to complete its contractual obligations
Provides protection to the “penal sum” of the bond, i.e., the face amount of the bond (often the amount of the prime contract / subcontract)
36 |
Types of Performance Bonds
AIA A312-1984 Performance Bond (Revised in 2010)
AIA A311-1970 Performance Bond
Federal Standard Form 25 Performance Bond Federal Standard Form 25 Performance Bond
Custom Performance Bonds
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AIA A312
38 |
AIA A312
Surety obligations:
The Surety and Principal are jointly and severally liable for “the performance of the Construction Contract”
The Construction Contract is “incorporated herein by reference ” making the bondThe Construction Contract is incorporated herein by reference, making the bond obligation coextensive with the Construction Contract
Surety obligations do not arise so long as “the contractor performs the construction contract”
39 |
AIA A312
Surety obligations arise if:
The owner itself is not in default The owner has notified both the contractor and the surety that it is considering
d l i th t t i d f ltdeclaring the contractor in default The owner has requested a conference with the contractor and the surety to
discuss methods of performing the contract The owner has declared the contractor to be in default and formally terminated the y
contractor’s right to complete the contract; and The owner has agreed to pay the balance of the Contract Price to the surety or to
another contractor selected to perform
40 |
AIA A312
Surety options on contractor default:
Arrange for the contractor (with owner consent) to continue performance through surety financing;T k d l t th t t Take over and complete the contract;
Tender a substitute contractor, with new bonds acceptable to the owner, and payment to owner of any excess costs of completion up to the penal sum;
Tender payment to the owner “the amount for which it may be liable”; orp y y ; Deny liability in whole or in part and with explanation
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AIA A312
Scope of Surety Liability:
Completion of the Contract Correction of defective work Delay costs resulting from contractor’s default including additional legal and design Delay costs resulting from contractor s default including additional legal and design
fees Liquidated or actual damages caused by delayed performance / non-performance
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AIA A312
2010 Revisions to AIA A312:
Conference Not Required
Waiting Period ReducedWaiting Period Reduced
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AIA A311
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AIA A311
The surety’s obligations arise only if:
The principal is in default The obligee declares the principal to be in default The obligee itself has not breached the contract
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AIA A311
No Express Requirement that there be a notice of default as a condition precedent to an action on the bondprecedent to an action on the bond
Inconsistent application:
Walter Concrete Const. Corp. v. Lederle Laboratories, 788 N.E.2d 609 (N.Y. 2003)
Colorado Structures, Inc. v. Insurance Co. of the West, 167 P.3d 1125 (Wash. 2007)
Hunt Const. Group, Inc. v. National Wrecking Corp., 542 F. Supp.2d 87 (D.D.C. 2008)
46 |
Federal Standard Form 25Performance Bond
48 CFR § 53.301-25 Provides for “payment” as the only performance option
CO’s are nevertheless authorized to consider alternative options to allow surety to complete the work (48 CFR § 49.401 et seq.) 48 CFR § 49.402-3(h) provides that upon issuing notice of termination, the surety
should be requested to advise if it desires to arrange for completion of the work 48 CFR § 49.404 provides for Surety-takeover Agreements
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Surety RightsSurety Rights
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Surety Rights
Surety’s liability is secondary and contingentU til th t t i f d i d f lt th t ’ i ht i th j t d t t Until the contractor is found in default, the surety’s rights in the project do not vest
Grounds for Default Failure to complete the work within the time for the contract or any extension “Failure to make progress” Repudiation by the contractor Contractor’s failure to perform its obligations under the contractContractor s failure to perform its obligations under the contract Failure to provide adequate assurances that performance will proceed Failure to continue performance during a dispute
49 |
Surety Rights
Upon termination, the surety’s rights are co-extensive with that of the principal (performance by one constitutes performance by the other)
Rights above and beyond rights those enjoyed the Principal Rights above and beyond rights those enjoyed the Principal
50 |
Surety Rights
Notice
Most bonded contracts require some form of default notice by the obligee to the surety (e.g. A312 Bond requires 20 days notice prior to declaration of default)
Allows surety to minimize liability and mitigate damages
Lack of proper and timely notice
Dragon Constr., Inc. v. Parkway Bank & Trust, 287 Ill. App.3d 29 (Ill. App. 1997)
When Is notice not Required?
51 |
Surety Rights
Declaration of Default Surety has no obligation to perform until there is a proper declaration of
default Declaration of default must be clear and unambiguous
L&A C t ti C S th C t S i I 17 F 3d 106 (5th Ci 1994) L&A Contracting Co. v. Southern Concrete Services Inc., 17 F.3d 106 (5th Cir. 1994)
2010 Revisions to A312 (conference is no longer required before declaration of default
52 |
Surety Rights
Wrongful Termination
May be a material breach of contract, discharging the surety’s performance obligations under the bond
Absent express bond language to the contrary the surety’s liability Absent express bond language to the contrary, the surety s liability does not arise if the owner is itself in default
A312 Bond: “If there is no Owner Default, the Surety’s obligation under this Bond shall arise ….”
A311 Bond: Whenever a Contractor shall be, and declared by Owner, to be in default under the Contract, the Owner having performed Owner’s obligations thereunder, the Surety may promptly remedy the default ….”
53 |
Surety Rights
Owner Default
A312 / A311 - Absent express bond language to the contrary, the surety’s liability does not arise if the owner is itself in default A312 Bond: “If there is no Owner Default, the Surety’s obligation under this Bond
shall arise ….” A311 Bond: Whenever a Contractor shall be, and declared by Owner, to be in
default under the Contract, the Owner having performed Owner’s obligations thereunder, the Surety may promptly remedy the default ….”, y y p p y y
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Surety ObligationsSurety Obligations
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Surety Obligations
Duty to Investigate “Reasonable” investigation into the merits of the alleged default of the
principal Determine whether propriety of the default Determine available surety options to cure default Determine available surety options to cure default Respond to Obligee
Expressly stated or silent“R bl ” i d f ti “Reasonable” period of time Seaboard Surety Co. v. Town of Greenfield, 266 F.Supp.2d 189 (D. Mass. 2003)
(“[S]ureties have been credited a reasonable amount of time for investigating and selecting from performance options . . . . [T]ime spent investigating a claim and f l ti th i t f th bl t f fformulating the proper response is part of the reasonably prompt performance of the surety”)
Failure to Investigate
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Surety Obligations
Performance Options
Buy back the Bond
Takeover the work
Finance the principal
Do nothing (allow obligee to complete)
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Surety Obligations
Buying Back the Bond
The surety seeks a full release from the obligee by purchasing back its performance bond by paying the obligee an amount up to the bond’s penal sum
Potential Risks
58 |
Surety Obligations
Takeover and Complete
Surety agrees to takeover and complete the project through a completion contractor
Potential Risks
Take Over Agreements
59 |
Surety Obligations
Financing the Principal
Surety provides financial assistance to principal to enable the principal to complete the project as economically and quickly as possible
Potential Risks
60 |
Surety Obligations
Do Nothing (Allow Obligee to Complete the Project)
Obligee completes work; surety pays difference between the total contract balance and the cost to complete the work (not in excess of penal sum)
Potential Risks
61 | Presentation Title
Surety Defenses
62 |
Surety Defenses
Surety “stands in the shoes of its Principal”
Surety specific Defenses Material alteration / cardinal change Material alteration / cardinal change Overpayment to principal Time limitations on commencement of suit Fraud / misrepresentationp Release of the principal
63 |
Surety Defenses
Material Alteration / Cardinal Change Test: If an alteration to the bonded contract imposes materially different risks
than those the surety undertook at the outset, the surety may be entitled to a complete discharge (or discharge to the extent of prejudice shown)
Examples: Unduly increase the cost of the work Unreasonably alter the character of the work
C tit t di l d t f th i i l t t Constitute a radical departure from the original contract
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Surety Defenses
Overpayment to Principal
Obligee pays for work that is either not completed or patently defective
Surety must prove actual prejudice as a result of overpayment
65 |
Surety Defenses
Time Limitations on Commencement of Suit
A311 Bond Suit within 2 years from the date final payment was due
A312 Bond Suit within 2 years after contractor default, or within 2 years from when surety refuses S y , y y
performance, whichever occurs first
Public Projects Statute controls (1 year under the Miller Act)
66 |
Surety Defenses
Fraud or Misrepresentation Obligee intentionally misstates / conceals material or fraudulent information
regarding the principal; potential discharge of the surety
Restatement (Third) of Suretyship & Guaranty § 12, discharge upon the following: The misrepresentation is fraudulent or material The misrepresentation induced the surety to issue the bond; and The surety reasonably relied on the misrepresentation The surety reasonably relied on the misrepresentation
67 |
Surety Defenses
Release of the Principal Obligee’s release of claims against the principal = release of claims against
the surety
Kiski Area School Dist. v. Mid-State Surety Corp., 967 A.2d 368 (Pa. 2008)y p ( )
Exceptions:
Where surety consents to its on-going liability; or Where obligee expressly reserves its rights against the surety
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