Understanding the Nuts and Bolts of Surety Bonds
As a subcontractor, it is important to understand the purpose and function of surety bonds relating to federal and state public projects. These projects generally require the contractor to obtain a surety bond to guarantee the performance and payment obligations on the job. Getting a "nuts and bolts" look at bonds and bond claims will better prepare you for performance on a project by helping you to know exactly how far the bond protection extends and what requirements are placed on you to exercise your bond rights.
The Bond
Surety bonds are a type of tri-part agreement. One party (the surety company) guarantees another party (the owner) that a third party (the contractor) will perform the contract. Similarly, it guarantees the payment to certain parties working on the project. Typically, the owner will specify the bond requirements and the contractor will be obligated to secure the bonds.
Bonds are required on most public work projects as a way to protect the tax-paying public from incompetent or irresponsible contractors. The federal law embodying these requirements is known as the Miller Act of 1935. Most state and local governments have adopted similar legislation, often referred to as "Little Miller Acts."
The Miller Act and Little Miller Acts
The Miller Act requires that all general contractors post a performance and a payment bond on projects that exceed $100,000. The payment bond is secured "for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person." [40 U.S.C.A. ? 3131 (b)(2).]
In the event a claim is made against the bond, the surety may have various defenses that permit it to avoid finishing the project. In contrast, payment bonds are secured to ensure that subcontractors and suppliers on a job are paid. As discussed below, a subcontractor that fits within the Act's provisions may be able to make a claim against the bond for unpaid fees.
Little Miller Acts similarly protect unpaid subcontractors and suppliers who work on state construction projects. The requirements stipulated by Little Miller Acts may vary from state to state.
Who Is Protected by the Miller Act?
The Miller Act, as interpreted by courts across the country, provides that the payment bond protection applies to "first tier" subcontractors. Subcontractors and suppliers who contract directly with a general contractor are entitled to protection. In addition, certain second tier parties who supply labor or materials directly to a subcontractor performing work are also protected. Second tier parties who contract with a material supplier rather than with the subcontractor, however, are not protected. Third tier subcontractors or suppliers receive no protection.
Subcontractors should also familiarize themselves with the extent of payment bond protection in their specific states in relation to the Little Miller Acts. The same question of exactly how far the payment bond protection extends is also an issue on state projects.
Notice and Limitations Periods
Under the Miller Act, first tier subcontractors and suppliers are not required to provide notice of a claim to the general contractor. Second tier claimants, on the other hand, must give written notice of their claim within 90 days after the last labor or materials were furnished to the project. The notice must contain both the amount claimed and the name of the party to whom the material or labor was provided. As a practical matter, it is prudent to send the notice even if you believe it is not required.
In most instances, the surety is permitted to stand in the shoes of the contractor and assert those defenses available to the contractor. Nevertheless, bonds impose restrictions and limitations on sureties as well. For instance, in the recent Maryland decision of Nat'l Union Fire Insurance Co. of Pittsburgh, Pa. v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005), the court held that a surety had waived its defenses to the bond claim by failing to timely respond to a subcontractor's claim.
The subcontractor notified the surety on the general contractor's payment bond that it had not been paid in full by the general contractor. The bond required the surety to, among other things, send an answer to the claimant, within 45 days after receipt of the claim, stating the amounts of the claim that were undisputed and the sureties' basis for challenging any amounts that were disputed. Instead of providing the subcontractor with the timely requisite answer, the surety ignored the bond requirements alleging that its failure to timely respond within the 45-day period evidenced that the claim was disputed. The court disagreed and found in favor of the subcontractor. From the subcontractor's standpoint, this case illustrates the strict requirements that must be followed by all parties touched by the bond.
Under the various Little Miller Acts, you can also expect to have state-specific notice and limitations provisions. You may also have contractual notice and limitations periods contained in the individual bonds that were issued on the project.
In Conclusion
Knowing the nuts and bolts of bonds on public projects may offer subcontractors with an opportunity to get paid where they otherwise would not. It is critical to know and understand the terms of the applicable bonds on your project and whether the bond coverage extends to you and your work. Being armed with this information is particularly important prior to bidding on a project and being able to fully assess whether the job is right for you.
About the Author
Bradley J. Hansen, Esq., is an attorney with the northern Virginia law firm of Hughes & Associates PLLC. He specializes in franchise, construction and complex civil litigation. Hansen can be reached at brad@hughesnassociates.com, or by calling 703-671-8200.
This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.
