Understanding Payment Bonds

Contractors, although quick to exercise their Mechanic's Lien rights, often fail to pursue available Payment Bond claims, a sometimes more effective and timely way of getting paid. Although Payment Bonds come in many different shapes and sizes, this Article will focus on 3 of the most commonly encountered:

1. Private Bonds modeled after AIA Document A312;
2. Little Miller Act Bonds (New York's Public Project Payment Bonds); and
3. Federal Miller Act Bonds (Payment Bonds on federally funded projects).

Each type carries with it distinct notice and claim requirements. Failure to follow a given bond's requirements may result in the waiver of an otherwise valid claim against the project's surety, often the deepest pocket.

PRIVATE BONDS

Larger private projects tend to require the issuance of a payment bond in favor of the Owner, so as to protect against subsequent lien claims. The AIA's standard payment bond-A312- is one such common example. To be a claimant under A312, i.e., to be eligible to recover from the surety, you must have a direct contract with the individual/entity which purchased the bond (usually the General Contractor "GC"). In absence of such contractual privity, a contract with the GC's sub will suffice. In addition, all those individuals or entities which have rightfully asserted a Lien Law claim maybe considered claimants. .

In addition to qualifying as a "claimant," A312 has mandatory written notice requirements which, if not followed, will result in forfeiture of an otherwise valid bond claim. If you have a contract with the bond purchaser (GC) you simply need to send the bonding company a notice of your claim. If you do not have a contract with the GC, written notice of the non-payment must be sent to the GC within ninety (90) days of your last performance of work or supply of materials and a notice of claim must be sent to the bonding company itself. The written notice must include the amount claimed and the name of the party to whom you supplied labor and/or materials. Once this notice is served, the surety has sixty (60) days to answer your claim, specifying which if any parts thereof are disallowed and, if all is in order, pay the undisputed amounts. If the surety fails to pay, you can bring suit against it for the amount due and reasonable attorneys' fees. There is, however, a one (1) year "statute of limitations" (time within which you can bring a lawsuit) on most private payment bonds. The one (1) year runs from the earlier of when you sent in your claim to the surety or when the final labor and/or materials were provided to the project.

LITTLE MILLER ACT

New York State Finance Law §137, commonly known as the "Little Miller Act," requires that public improvements undertaken by the state, municipal corporations, public benefit corporations, and commissions appointed by law, must have payment bonds. [1] State §137 bonds differ from most private bonds in their notice and time requirements. If you have a contract with the GC, and have not been paid within ninety (90) days from when you last performed labor and/or supplied materials to the job, you can sue the bonding company without any prior notice of claim. If you are a sub or sub-sub contractor, however, a notice of claim must be given to the GC within 120 days of when you last supplied labor or materials. This notice must be served personally or by registered mail. See N.Y. Fin. L. §137(3). In addition, Little Miller Bonds allow the claimant to collect interest and attorneys' fees if the surety defaults in paying a legitimate claim after receiving timely notice.

Finally, although the Statute of Limitations is the same as most private bonds, one (1) year, it is measured from the date of completion and acceptance of the project by the public owner. Thus, if you provided labor and materials at the beginning of a project, assuming timely notifications to the surety, your time to bring the suit would not lapse until a year after the project's completion.

FEDERAL MILLER ACT

Like its State counterpart, the Federal Miller Act requires payment bonds on federally funded projects of one hundred thousand ($100,000.00) dollars or more. There are, of course, exclusions and certain opt-outs which are enumerated in the statute. 40 U.S.C. §3131(e). If you have a direct contract with the general contractor, and have not been paid within ninety (90) days of last providing labor or material, you can sue on the bond within one (1) year of last providing labor and materials. In layman's term, you will have between day number 91 and day 365 from the last date that you provided labor to file suit against the public bond. If you do not have contractual privity with the general contractor who provides the bond, written notice similar to that described above must be given to the contractor within the first ninety (90) days.

HOW DO YOU OBTAIN A COPY OF THE BOND

Logistically, one of the most difficult tasks when making a bond claim is obtaining a copy of the actual payment bond. Without it, you will not have the address to which to send the required notice. In addition, the bond could have more restrictive notice and limitations periods then described above- making obtaining a copy all the more important. Most private payment bonds, however, contain a provision that requires the contractor and owner to promptly furnish a copy of the bond upon request from any person or entity who may be a potential beneficiary. Thus, if you request a copy the bond from the general contractor, and it refuses, the surety may later be barred from refusing your claim based upon a failure to serve within the required time frames. In addition, if the project is over one hundred thousand ($100,000.00) dollars, and a payment bond has been issued, the owner of the project must file a copy of the bond with the County Clerk of the municipality where the project is located, within thirty (30) days of the owner's receipt of the bond. See New York General Obligations Law §5-322.3. Although a private owner has no duty to obtain a bond, if it does and fails to file it, a subsequent bond claimant may recover attorneys' fees.

The Little Miller Act requires that copies of payment bonds for state and local public projects be kept in the office of the Head of the Department or Bureau having charge of the public improvement in connection with which the bond is given. It also requires that the bond be open to public inspection. Similarly, Federal Law provides that the Department Secretary or Head of the Contracting Agency must furnish a certified copy of the payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that he or she supplied labor and material for work described in the contract and that payment of the work has not been made.

CONCLUSION

Contractors and suppliers working on federally and/or state funded projects, or private projects with payment bonds, must be vigilant in their notification to the GC of non-payment, and submit claims, where necessary, to the surety. If correctly pursued, a bond claim can be a less costly and more effective means of recovering accounts receivable. Unlike a Mechanic's Lien, which requires an expensive foreclosure action to fully prosecute, actions against a surety can be less involved, can include recovery of attorneys' fees and interest and can result in quicker payment. Sureties, as financially secure insurance providers, are more likely to settle legitimate claims pre-suit than a beleaguered Owner with limited funds.