• Procedural Differences for Claims on Standard Form Performance and Payment Bonds
  • September 5, 2014 | Author: Jonathan R. Mayo
  • Law Firm: Smith, Currie & Hancock LLP - Atlanta Office
  • Construction suretyship is a three-part relationship in which a surety provides performance and payment bonds guarantying the performance of a contractor to an owner and the contractor’s subcontractors and suppliers. A contractor may also demand performance and payment bonds from its subcontractors. A surety’s obligation under a performance or payment bond only arises if the claimant complies with all required procedural steps or conditions precedent for making a demand on the bond. In the private sector, the terms of a bond document control these procedural requirements, and often, parties will agree to use standardized bond forms from associations such as the American Institute of Architects (AIA), the Engineers Joint Contract Documents Committee (EJCDC) or ConsensusDocs.

    The following article discusses the procedure for making claims on these standardized bonds on private projects and many public works projects. But it is important to be aware that federal, state, and municipal statutes may modify the procedural requirements for a bond claim. The AIA 312-2010 specifically provides for this possibility at § 13:

    When this Bond has been furnished to comply with a statutory or other legal requirement in the location of the Project, a provision in this Bond conflicting with said statutory or legal requirement shall be deemed deleted here from and provision conforming to such statutory or other legal requirement shall be deemed incorporated herein. When so furnished, the intent is that this Bond shall be constructed as a statutory bond and not as a common law bond.

    The ConsensusDocs bonds do not have a similar provision.

    Performance Bonds
    By issuing a performance bond, a surety guarantees that work a contractor has agreed to perform will be delivered to the project owner. The procedures for triggering the surety’s obligations under a performance bond depend on the express and implied terms of the bond, the bonded contract, and the type of bond. Private performance bonds are commonly modeled after form documents promulgated by the AIA (A311 and A312), the Engineers Joint Contract Documents Committee (EJCDC C-610), and ConsensusDocs (ConsensusDocs 260). The procedures for an owner to declare default on a performance bond differ across these standard forms.

    The AIA provides two distinct performance bond forms: AIA A312 (2010 and 1984 eds.) and the earlier AIA A311 (1970). A312 is the most widely-used traditional performance bond in private construction. Due to the fact that the EJCDC’s C-610 is published and updated to be consistent with the language of AIA A312-2010—and they are nearly identical—a discussion of AIA A312-2010 procedures will suffice for both forms.

    A312-2010 contains several procedural steps that the owner must follow to make a valid claim on the bond. First, the owner must notify the contractor and surety that it is considering declaring the contractor in default. The second condition precedent differs between A312-2010 and its predecessor, A312-1984. Under A312-1984, the owner must, within 15 days, request and attempt to arrange a meeting with the contractor and surety to see if an agreement can be reached on future performance. If using A312-2010, the owner need not request a meeting if it provides notice of potential default to the contractor and surety. But A312-2010 does allow the surety itself to request such a meeting. Next, under both editions of A312, the owner may, after 20-days’ notice to the contractor and surety, declare the contractor in default and formally terminate the contractor’s right to complete the contract. It is important to note that A312 incorporates the underlying contract by reference, which may contain additional requirements for declaring default and terminating the contractor. The owner must then agree to pay the balance of the contract price to the surety, or to another contractor selected by the surety. Lastly, the AIA form requires that the owner not be in default itself on the contract and follow the contract termination procedures, including any opportunities to correct the cited deficiencies as mandated by the contract and the applicable law.

    The case Stonington Water Street Assoc., LLC v. Hodess Building Co., Inc., 792 F. Supp. 2d 253 (D. Conn. 2011) provides a good example of an owner’s failure to comply with A312-1984’s performance bond procedural requirements. In Stonington, the owner complied with the notice and pre-default meeting procedures, but it failed to correctly declare the contractor in default when reasons arose, failed to formally terminate the contractor in accordance with the incorporated terms of the construction contract, and improperly selected its own replacement contractor without consulting the surety. Accordingly, the court held the owner was barred from bringing its claim on the bond.

    The AIA A311 (1970) performance bond is the predecessor to A312 and is still used on construction projects. The default procedures under A311 are simpler than those of A312. The conditions precedent for surety liability under A311’s language are limited to a default by the contactor, declaration by the owner of that default, and that the owner itself not be in default. Another important difference between A311 and A312 is that A311 does not require the owner to agree to pay the balance of the contract price to the surety. Based on A311’s broad terms, courts have come up with varying interpretations of the conditions precedent. Depending on the applicable state and federal case law, an owner may or may not be required to give notice of default to the surety, make a formal declaration of default, and/or terminate the contractor. See, e.g., Hunt Const. Group, Inc. v. National Wrecking Corp., 587 F.3d 1119 (D.C. Cir. 2009) (requiring reasonable notice to the surety and a declaration of default); Nova Cas. Co. v. Turner Const. Co., 335 S.W.3d 698 (Tex. App. Houston 14th Dist. 2011) (requiring owner to only notify the surety of the contractor’s default without having to terminate the bonded contract); Walter Concrete Const. Corp. v. Lederle Labs., 788 N.E.2d 609 (NY 2003) (rejecting the notice requirement outside of pleadings, as well as the declaration of default requirement). In order to adequately understand the conditions precedent for A311, a careful review of the applicable jurisdiction’s law is required.

    In 2007, ConsensusDocs published a new standard form performance bond, ConsensusDocs 260. This form contains similar provisions to the AIA A311, but with more modern language. The conditions to make a claim under ConsensusDocs 260 require the owner to: (1) declare the contractor to be in default, (2) make a demand on the bond to the surety, and (3) make the amount of the contract balance available to the surety. The owner also must not be in default under the contract. Among other differences, ConsensusDocs 260 does not require a pre-default meeting as required by the AIA A312.

    Payment Bonds
    When it issues a payment bond, a surety agrees to cover the risk that a contractor will fail to pay its subcontractors, laborers, or suppliers with proper claims for unpaid labor and material. The primary payment bond forms on private projects are those provided by the AIA (A312), the EJCDC (C-615), and ConsensusDocs (ConsensusDocs 261). These standard form payment bonds also contain different procedural requirements for pursuing a claim.

    The payment bond form used most frequently on private projects, as well as on many state and local public works, is AIA A312-2010. Because EJCDC C-615 (2013) is virtually identical to A312, the procedures for making a claim on the bonds are addressed together. Regarding notice requirements, the AIA and EJCDC payment bond forms differentiate between two types of claimants: (1) claimants employed by or in direct contractual privity with the contractor, and (2) claimants that lack contractual privity with the contractor. For claimants with privity, the surety’s obligations do not exist until the claimant gives notice to the surety and owner of a claim and its amount “with substantial accuracy.” For claimants lacking privity, there are three conditions precedent that must occur: (1) within 90 days after having last performed labor or furnished materials included in the claim, a claimant lacking privity must provide written notice to the contractor and surety stating with “substantial accuracy” the amount of the claim and name of the party for whom the labor or materials was provided; (2) a claimant lacking privity must either have (a) received at least a partial rejection by the contractor of its written notice, or (b) within 30 days of that written notice, not received any communication from the contractor indicating the claim will be paid; and (3) where a claimant is not paid within the 30 days of its notice, the claimant must send written notice to the surety and contractor stating that a claim is being made, and including a copy of the previously provided notice. However, if the contractor itself notifies the claimant lacking privity or surety of its non-payment, then that is sufficient to satisfy the claimant’s notice requirements above.

    The ConsensusDocs 261 form’s procedures are simpler than those of the AIA and EJCDC. With regard to notice, ConsensusDocs 261 distinguishes between first-tier subcontractors and suppliers (those with a direct contract with the contractor) and lower-tier claimants (those without such privity). For those claimants with privity, the payment bond does not require any notice be given to the surety or contractor. However, claimants lacking privity must provide written notice to the contractor, surety, and owner within 90 days of the claimant’s performance or furnishing of materials stating with substantial accuracy the amount claimed. The claimant must also identify the party for whom the labor or materials were provided and deliver the claim by either service of legal process or a means with “written third party verification of delivery.”

    A claimant with privity may bring a claim to the surety if the claimant has not been paid in full within 90 days after it provided or performed the last of the work or labor. Similarly, a claimant lacking privity may also bring a claim on the bond after the same 90-day period—as long as it has also provided the notice outlined above.

    Parties intending to use a standard form payment bond should note the procedural differences for making a claim between the AIA and ConsensusDocs forms. While AIA A312 requires notice to the contractor and surety before filing a lien, ConsensusDocs 261 does not require claimants in privity with the contractor to provide notice of their claims before the applicable 90-day period expires. However, ConsensusDocs 261 does impose an additional requirement for “written third party verification of delivery,” not required by AIA A312.

    The procedures for making a claim under standard form bonds differ by the type of bond and the promulgating association. The process for determining the procedural requirements of a specific bond should involve a detailed examination of the bond, with focus on the obligations imposed on the parties, as well as a comparison of the bond language against the minimum requirements in applicable federal, state, or municipal statutes.