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June 20, 2011
In one of my first posts, I discussed changes to the A312 Performance Bond. As I mentioned in that post A312 Bonds are widely used on many projects. The golden rule when facing a default on a project is to read the bond. Most bonds list certain conditions that must be met before an enforceable claim may be asserted against the bond. In a relatively new case, decided by the Indiana Court of Appeals, the Court has reinforced this mandate.
In the Town of Plainfield v. Paden Engineering Co., Inc. 943 N.E.2d 904 (2011), which can be found here, the Court granted partial summary judgment in favor of the surety. The Court held that the claimant did not satisfy conditions necessary to recover from the surety on an A312 Bond. Here are some of the most important points to take away from this case as it relates to making a claim against an A312 Bond:
- Read the Bond. In order to recover on a bond certain conditions must be met. In this case, an A312-1984 Performance Bond, the surety’s obligations is triggered only after (1) the Owner has notified the Contractor and the Surety that the Owner is considering declaring a Contractor in default and request and attempt to arrange a conference with the Contractor and Surety no later than 15 days after receipt of the notice from the Owner; (2) the Owner declares the Contractor in default and formally terminates the Contractor’s right to complete the contract. The Owner must not declare the Contractor in default earlier than 21 days after the Contractor and Surety have received the first notice; and (3) the Owner has agreed to pay the balance of the contract price to the Surety.
- In Indiana, there is a Rebuttal Presumption of Prejudice. Many times, if a claimant fails to meet the technical requirements of making a claim against the bond, such as late notice, the Court will look to see whether or not the surety was actually prejudiced by the technical failure. If the surety was not prejudiced, then the surety may still be liable under the bond. The Court in Paden Engineering affirmed Indiana’s position that if a surety asserts a defense of untimely notice there is a rebuttable presumption of prejudice in favor of the surety. The surety need not show actual prejudice. It is then the claimant’s responsibility to rebut this presumption of prejudice.
- A Contract of Surety is Not an Insurance Contract. The Court emphasized the unique nature of a surety contract. Insurance indemnifies another against loss, damage, or liability resulting from an uncertain event. A surety answers for the debt or default of another. Therefore, the Court held that a surety’s liability must be measured by the strict terms of the contract. (Insurance contracts are typically read in favor of the insured.) The Court summarized its position by stating “the Sureties are liable for no more than the contract provisions would dictate.”
Sureties have the unenviable job of taking responsibility where others have failed. Rightfully, before a surety is required to undertake responsibility it may dictate its rights and the terms for its takeover for payment or performance. I’ve said it once, and I’ll say it again and again, always read the Bond. There are steps that must be taken by a claimant before a surety is required to perform under the terms of the bond.
January 11, 2011
Happy 2011!! Now that the ball has dropped, the champagne is drunk, and the glitter is gone, it is time to commit to your New Year’s resolutions. One of my ongoing resolutions is stay on top of all deadlines. So, with my outlook calendar in hand and reminders popping up faster than popcorn, I wanted to remind all of our Indiana contractors of the deadlines for submitting payment bond claims and the suit limitations period for filing suit against sureties on various Indiana public projects. Again, it’s always a good idea to consult with an attorney to make sure that you have complied with all notice and suit requirements as well as any deadlines.
Indiana does not require payment bonds to be posted on private projects. If a bond is posted the deadlines for filing a claim and filing suit will be outlined in the bond. It is also essential that regardless of the statutory deadlines, you should always read the bond. If the bond enlarges these time periods, the deadlines in the bond will control.
There are four different types of public projects in Indiana. It’s important to know which type of project you are working on so that you are aware of your statutory rights and obligations. The four types of projects are:
Title 4 State Projects – Indiana Code §4-13.6-1-1 et seq.
Title 4 projects are Indiana state public works projects solicited by the Indiana Department of Administration, the Public Works Division. Unless the bond provides for a greater period of time, a claimant must file a claim with the Public Works Division and the surety within 60 days from the last date labor was performed, material furnished or service rendered. If you have submitted your notice of claim and have not yet been paid, you must wait at least 30 days before filing suit against the surety to recover under the Bond. However, any suit must be brought against the surety within 1 year after final settlement of the contract with the contractor.
Title 5 State Projects – Indiana Code §5-16-1-1 et seq.
Any Indiana state public works project not covered under Title 4 or Title 8 are Title 5 projects. In order to make a claim against the bond on a Title 5 project, the claimant must file a verified claim with the state agency that commissioned the project within 60 days after completing labor or furnishing materials. The state agency will furnish a copy of the claim to the surety. The claimant must then wait at least 30 days. If payment has not been received a suit may be filed against the surety. Any suit against the surety must be brought within 60 days from the date of the final completion and acceptance of the project.
Title 8 Indiana Department of Transportation Projects – Indiana Code §8-23-9-1 et. seq.
Title 8 covers any project for the Indiana Department of Transportation. In order to make a claim on a bond posted for a Title 8 project, a claimant must within 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due. The claimant must wait at least 60 days after furnishing the statement to file suit against the surety. The claimant must bring any action within 18 months from the date of final acceptance of the project by the Commissioner.
Title 36 Local Government Projects – Indiana Code §36-1-12-1 et. seq.
Title 36 projects are projects for local governments, political subdivisions or their agencies. A claimant must within 60 days of last performing labor or furnishing material file with the local government board a signed statement of the amount due. The board will forward the statement to the surety. The claimant must then wait 30 days. If payment has not been received, a suit may be filed against the surety. Any suit against the surety must be brought within 60 days after the date of the final completion and acceptance of the project.
Dizzy yet? It can be difficult to keep track of things. So here is a quick reference guide. LAW under CONSTRUCTION wishes you Happy and Profitable New Year!
|Project Type||Notice of Bond Claim Deadline||Grace period before filing suit||Suit Against the Surety Deadline|
|Title 4||60 days from the last date of labor performed, material furnished or services rendered||30 days after filing notice to file suit against the surety||1 year from final settlement with the contractor|
|Title 5||60 days after completion of labor or service or within 60 days after last item of material was furnished||30 days after filing notice to file suit against the surety||60 days from the date of final completion and acceptance of the project|
|Title 8||1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due||60 days after furnishing the statement to file suit against the surety||18 months from the date of final acceptance of the project by the Commissioner|
|Title 36||60 days from the date of last performing labor or furnishing materials||30 days after filing the notice of claim||60 days after the date of final completion and acceptance of the project|
December 17, 2010
This post, which provides an overview of basic strategies for contractors, subcontractors and suppliers who are faced with non-payment from a bankrupt entity on a project, can be found on Construction Law Musings, Christopher Hill’s excellent construction law blog (our second guest posting honor) (click HERE). I hope you won’t have a construction project affected by a bankruptcy any time soon, especially as we emerge from the recession. But just in case you do, check out my post and be prepared for getting paid for work you performed or materials you supplied.
December 3, 2010
This post, which discusses whether contractors and subs should get LEED accredited (or pursue a working knowledge), can be found on Construction Law Musings, Christopher Hill’s terrific construction law blog, where I have the honor of guest posting (click HERE). So travel on over to Musings to read more, but don’t forget to write! Seriously, your comments are appreciated, either there or below.
November 29, 2010
The most significant change in the Performance Bond form involves the process for an Owner to declare a Contractor in default and to make a claim under the Performance Bond. Under the old Bond form a Surety was not obligated to perform until the Owner notified the Contractor and its Surety of its intention to declare the Contractor in default and attempted to arrange a meeting with both parties. This meeting had to be held within 15 days after receipt of the claim notice. The Owner could not then declare a contractor in default or terminate the contractor until 20 days after the Contractor and Surety received notice of the default as described above.
Section 3 of the 2010 Performance Bond form no longer requires the Owner to jump through these hoops in order to declare the Contractor in default and assert a claim under the Bond.
Instead, under revised Paragraph 3.1, the Owner may request a meeting in its notice to the Surety, but isn’t required to do so. If the Owner does not make this request, the Surety may within 5 business days after receipt of the notice request the conference. If the Surety requests the conference, then the Owner must attend within 10 business days of the Surety’s receipt of the notice.
Additionally, the A312-2010 Performance Bond no longer requires a waiting period before the Owner can declare the Contractor in default or terminate the Contractor.
The most important aspect to the new claims process under the A312-2010 Performance Bond is new Section 4. This section states:
Failure on the part of the Owner to comply with the notice requirement in Section 3.1 shall not constitute a failure to comply with a condition precedent to the Surety’s obligations, or release the Surety from its obligations, except to the extent the Surety demonstrates actual prejudice.
Failure by an Owner to comply with the notice requirement is not a free pass, even under the new Bond form. Most jurisdictions already have case law protecting a Surety where an Owner fails to give proper notice. For example, in Dragon Construction Company v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. 3d 1997), where an Owner terminated a contractor and replaced the contractor without giving notice the Surety the Illinois Appeals Court held:
since the (owner) replaced (contractor) with (replacement contractor) before informing (surety) that (contractor) was to be terminated and without consulting (surety) as to the successor, (surety) was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. (surety) would be entitled to select, or at the very least participate in selecting, the lowest bidding contractor to complete the project in order to mitigate its damages under the performance bond. Surely, (surety) would not have issued the surety bonds if it did not have the authority to protect itself through the selection of the successor contractor.
Generally under this line of cases, a Surety does not have to show prejudice before being discharged under the Bond. Performance Bond A312-2010, however, requires a Surety to show that it has been prejudiced by the Owner’s actions if proper notice was not given to the Surety under Paragraph 3.1. What constitutes actual prejudice is unclear. A Surety may be prejudiced if it was not given an opportunity to participate and mitigate its damages. This standard could then be read in conjunction with current case law. As the Dragon court states a Surety is entitled to mitigate its damages and it would not have issued the surety bonds if it did not have the authority to protect itself. Or it may be that a Surety must show quantifiable damages in order to demonstrate prejudice. Overall, it remains to be seen how the Courts will interpret this section, given existing case law, if the Bond, like its counterpart, is widely adopted.
* Because I can’t end our flashback to 1984 without a bit of reminiscing, the #1 movie was Beverly Hills Cop, the most popular fiction was The Talisman, the most popular non-fiction was Iacocca: An Autobiography, and the most popular television show…..Dynasty (should have been the Cosby Show!).
November 3, 2010
In 1984, Apple introduced the first mac computer, the world had only met Vice President George Bush, Miami Vice altered men’s fashion (for the better?), and the American Institute of Architects released the A312 Payment and Performance Bond forms. The A312 bond forms have only grown in popularity over the years. They have become some of the most commonly used forms for projects throughout the country. This year, the AIA has released revised versions of the bond forms. In this two-part series, we examine the most significant changes in each of the Payment and Performance Bond forms.
For quick reference and a more thorough comparison, the AIA has provided a handy side by side comparison chart of the A312-1984 and A312-2010 Payment and Performance Bond forms which can be found here.
A312 – 2010 Payment Bond
Most significant, the A312-2010 Payment Bond addresses the consequence of the notorious Bramble case, Nat’l Union Fire Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005). As most sureties are aware, following the Bramble ruling, a surety may waive its defenses for any portion of a payment bond claim if the surety does not strictly comply with Section 6 of the A312 payment bond which requires a surety within 45 days after receipt of the claim, to state the amounts that are undisputed and the basis for challenging any amounts that are disputed. A surety must also pay or arrange for payment of any undisputed amount.
The revised A312-2010 bond form Sections 7.1 and 7.2 increases the timeframe for a surety to respond and arrange for payment of undisputed amounts to a claimant from 45 days to 60 days. New Section 7.3 expressly provides that a surety’s failure to discharge its obligations under Section 7.1 and 7.2 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a Claim, except as to undisputed amounts for which the Surety and Claimant have reached agreement. However, if a Surety does fail in its obligations under Section 7.1 or 7.2 the Surety must indemnify the Claimant for reasonable attorney’s fees incurred to recover any sums found to be due and owing to the Claimant.
Another significant revision of the A312 Payment Bond is the claim submission process. Section 5 requires claimants to submit “Claims” to the surety, not just “Notice” of a claim. Section 16.1 of the Bond defines “Claim” which requires a Claimant to submit a written statement and at a minimum the following:
- The name of the Claimant;
- The name of the person for whom the labor was done, or materials or equipment furnished;
- A copy of the agreement or purchase order pursuant to which labor, materials or equipment was furnished for use in the performance of the Construction Contract;
- A brief description of the labor, materials or equipment furnished;
- The date on which the Claimant last performed labor or last furnished materials or equipment for use in the performance of the Construction Contract;
- The total amount earned by the Claimant for labor, materials, or equipment furnished as of the date of the Claim;
- The total amount of previous payments received by the Claimant; and
- The total amount due and unpaid to the Claimant for the labor, materials or equipment furnished as of the date of the Claim.
The changes to the claims process is intended to prevent claimants from submitting bare bones notice of claim in the hopes that a surety will be unable to timely respond. As with any bond form, time will tell whether the new payment bond form will be widely adopted. At a minimum the new A312 – 2010 Payment Bond addresses the significant challenges and concerns faced by sureties struggling to properly investigate a claim without waiving its entire defense of the claim under the Bond.
Next time, we will review the more significant changes of the AIA A312-2010 Performance Bond.