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When dealing with payment default, it is not uncommon for clients to learn for the first time that either the opposing party, or the project itself, is in serious financial trouble, or on the verge of bankruptcy. There are many factors that can lead to the financial instability of a project, including poorly coordinated or incomplete design documents, unforeseen site conditions, excessive change orders, insufficient capitalization, supply chain issues, or an overextended prime contractor.
When it appears that there may be no stable source of payment, construction bonds can come to the rescue. Not all construction projects are bonded, but private owners will often mandate bonding on larger projects, and State law requires that most public projects of significant value be bonded. Payment bonds typically protect subcontractors and suppliers up to two tiers below the prime contractor from a payment default which was not caused by the party making the bond claim.
Like contractor’s liens, bond claims also have a limited life and require strict adherence to both statutory procedures and the written terms of the bond. Under its general indemnity agreement with the prime contractor, the bond surety is also allowed to avail itself of any defense the prime contractor has under its agreement with the subcontractor or supplier asserting a claim. Construction bonds often have shortened notice and limitations periods which must also be considered when making a claim. Filing and pursuing a bond claim requires familiarity with these requirements. I have substantial experience filing and litigating bond claims, including evaluating surety defenses for contractors, suppliers and the trades.
At times it helps to understand some of the legal concepts that affect the construction industry on a deeper level. I have collected a few articles of interest to share with you. Remember, however, that this is a general resource to assist you in understanding concepts, not legal advice on a specific matter. If you have questions about how these general concepts apply to a particular situation, I strongly urge you to contact your counsel to discuss the particulars of your situation.
