Construction Bonds and Arbitration

A large percentage of construction contracts require arbitration if there is a dispute between the owner, general contractor and/or a subcontractor.  At the same time, many general contractors have payment and performance bonds in place for the construction project which do not have mandatory arbitration provisions.  If the owner or subcontractor seeks to call on the payment or performance bond, must the parties resolve the bond claim in arbitration? At the most basic legal level, arbitration is only available with the consent of the parties to the dispute.  Therefore, a court cannot compel a reluctant party to arbitrate a dispute absent a clear agreement requiring arbitration.  Typically, this agreement takes the form of a written contract between the parties to the dispute, whether signed before or after the dispute originated.  Bond claims, however, take a somewhat different form.

Consider the usual scenario for a construction bond.  A contractor enters into a contract with a bonding company for two purposes: (1) to ensure the contractor’s performance of the construction job to the owner of the property (a performance bond); and (2) to ensure payment to  subcontractors (a payment bond).  If a subcontractor is not paid for their work, they are permitted to pursue an action against the bonding company for payment as a “a third party beneficiary”.  If the subcontractor is successful in their claim, then the bonding company will pay the claim and pursue the prime contractor for the amount paid.  Notice that the subcontractor is permitted to claim against the bonding company despite the fact that the subcontractor’s agreement is with the prime contractor, not the bonding company. Most bonding agreements contain language that specifies how an individual or an entity becomes a “claimant” to the bond. 

Construction Law At Gross & Romanick

Gross & Romanick, P.C., located in Northern Virginia represents contractors, owners and suppliers in Virginia, Maryland and Washington, DC. Our goal is to find solutions for our clients through understanding and respect for their business concerns. We strive to keep our clients out of court with proper advice, timely action and effective contracts. When necessary, our lawyers draw upon their very significant experience in construction litigation in state and federal courts, as well as arbitration.

Some of the areas of law in which we can help are:

Business Formation
Avoid exposure of your personal assets by conducting business as a Corporation or Limited Liability Company. We have organized simple and complex business structures. After formation, we can assist with matters from annual Board of Directors meetings to complex corporate reorganizations.

Mechanic Lien's
Our firm has represented claimants in very large mechanic lien cases. In addition, we understand surety law and Miller Act Claims.

Contracts
We can prepare, review and advice on a broad range of contracts from Construction Contracts to Joint Check Agreements. Because we understand the construction industry, our clients use us to negotiate terms and draft their agreements.

Credit Extension/Collections
From credit application through bank garnishment, we can help at every step to lessen your company's risk. We provide credit investigations, seminars and collections. Furthermore, our bankruptcy experience allows us to effectively pursue many debtors even after bankruptcy is filed.

Litigation
Our lawyers have represented companies in the construction industry in hundreds of cases in state and federal courts. These cases range from simple collections to complex breach of contract disputes.

Registered Agent
Edward Gross acts as registered agent for many corporations and limited liability entities. Included in the annual fee is assistance in preparing annual reports, as well as acceptance of legal service of process.

To speak to one of the lawyers at Gross & Romanick, call us today at 703-273-1400 or by filling out our online information request form.

Should You Cash That Check?

You receive a check for less than the amount owed from a company. The company has stated that they owe you less than you contend is owed. Should you cash the check?

Virginia Law: In the 2002 case of Gelles & Sons General Contracting, Inc. v. Jeffrey Stack Inc., the Virginia Supreme Court for the first time interpreted Virginia Code §8.3A-311 which is a 1992 statute enacted to address the issue of cashing such checks. According to the Supreme Court opinion, the test is whether "a reasonable person" would consider the check to be a tender in full satisfaction of the claim.

Facts of Case: A general contractor ("general") and its subcontractor ("sub") dispute the amount owed by the general to the sub. The general wrote two letters to the sub setting out its position and included a check with the second letter which stated that it represented "final payment". The sub cashed the check but sued for the balance it claimed was due. The trial court found (and the Virginia Supreme Court agreed) that the letter and check was a "drop-dead letter" offer of final payment. By cashing the check, the sub could not sue for any additional sums.

Advice: If there is a question about whether a check is tendered as final payment, look at the correspondence and notations on the check to determine the intent of the maker. Cashing checks may be risky if there is some evidence for an accord and satisfaction.

The above article is not meant to replace legal counsel. If you'd like to speak to one of the attorneys at Gross & Romanick, call (703) 273-1400 or fill out their online Information Request form.

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 by calling (703) 273-1400 if you need information about your specific situation.

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.