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Wednesday, March 18, 2009

Construction Law: Payment Bonds

If your company is a subcontractor or supplier to a government project, you need to understand payment bonds. Some private jobs also utilize payment bonds. The federal statute generally applicable to payment bonds on federal projects is the Miller Act, with state and local statutes termed Little Miller Acts.

Payment Bonds Defined

Payment bonds are required on almost all federal, state and local construction projects. Federal and state laws require these bonds on public projects for the protection of the subcontractors, materialmen and suppliers against insolvent or defaulting contractors and subcontractors. Although no legal requirement exists regarding privately owned construction projects, payment bonds are frequently required by owners and lenders.

The bonding relationship is as follows: The "principal" is the general contractor or the subcontractor whose work is being bonded. The "surety" is usually an insurance company that is standing behind the principal. If the general contractor is the principal, the "obligee" is the owner of the project. If the subcontractor is the principal, the "obligee" is the general contractor. The "claimant" is the subcontractor, materialman or supplier seeking payment from the bond.

Who is Covered, and What is Covered

Payments bonds posted by a general contractor will always cover the subcontractors, materialmen and suppliers who have a direct relationship with that general contractor. On public projects, a general contractor may be required to have its subcontractors post payment bonds; in such a case, sub-subcontractors, materialmen and suppliers to those subcontracts will then be covered by the bonds of those subcontracts. In addition, on both public and private projects, the terms of a payment bond itself might extend coverage to include suppliers and materialmen who would not generally be covered.

The terms of a payment bond along with any applicable statutes define the extent of the bond's coverage. The typical payment bond coverage is for labor and materials furnished for use on contract projects. Numerous factors are considered by the courts in determining coverage, including the relationship of the parties, the nature of the product or labor provided and the cost of the work or materials relative to the overall project. Such an analysis is complex.

Notice Requirements

Notice of a bond claim to the principal and surety needs to be done within prescribed time limitations in order to pursue a claim. The terms of the payment bonds on both public and private projects typically contain strict time requirements for giving notice, as well as time limitations on when suit must be filed. Furthermore, federal, state and municipal statutes will set strict time deadlines.

For state projects in Virginia, the applicable statute is Virginia Code Section 11-60B. This section bars suits or actions under certain circumstances on a payment bond unless the claimant had given written notice to the principal and surety within 180 days after it performed the last of the work or labor or furnished the last of the materials for which the claim was made.

Summary

Before you begin a job, get a copy of the bond that covers the project in order to determine whether you are covered and how to enforce your rights. Notices of your claim must exactly track the bond and applicable statutes. Legal enforcement is never simple, since the principals and sureties typically assert every available defense.

This brief article is only meant to provide a very broad overview of the complex area involving payment bonds and cannot be relied upon as a substitute for legal advise. Contact Gross & Romanick directly if you need information about your specific situation.