In the quest to get paid, subcontractors and suppliers often overlook their rights under payment bonds applicable to public and private work. The vast majority of public work must be bonded. In addition, many commercial owners and developers require payment bonds on private projects. As a result, if all other payment and collection tools fail, ask whether a payment bond protects your project. Let’s go through the basics.
I. What is a Payment Bond?
A payment bond is a type of surety bond. In the construction context, a surety bond is a guaranty agreement issued by the surety which guarantees that the payment obligations of a named contractor will be performed to the extent required by the applicable construction agreements. The bond will generally refer to the surety as the “obligor” and to the contractor as the “principal.” The owner is typically the “obligee”, and the contract requirements are called the “obligation.” Those who can collect on the bond are usually referred to as the “beneficiaries.” Surety bonds are issued in specific dollar amounts which typically correspond with the value of the general contract. This value is known as the “penal sum” of the bond.
II. Who can Take Advantage of a Payment Bond?
The owner and any unpaid subcontractors or suppliers are the intended beneficiaries of a payment bond. Most payment bonds refer to any party who makes a claim on the bond as the “Claimant.” In the event that the contractor fails to pay one of these parties without justification, the surety is responsible for payment of valid claims, up to the penal sum of the bond. Although less common, a payment bond may also be issued by a subcontractor in favor of the general contractor to ensure payment to its lower tier subcontractors and suppliers.
III. Is my Job Bonded?
A subcontractor or supplier experiencing payment problems must first determine whether its job is protected by a payment bond. On a public project of any kind, the answer is usually yes. New Hampshire requires all state projects with a contract value in excess of $75,000, and municipal projects in excess of $125,000, to be covered by a payment bond at 100% of the contract value. Similar requirements apply to federally funded projects under the provisions of the Miller Act.
Payment bonds are not legally required on private projects. Nonetheless, on larger projects the owner or developer may impose a bond requirement as an added level of protection against subcontractor and supplier claims. It is wise for a subcontractor or supplier to inquire about the existence of a payment bond on every private project.
IV. How do I get a Copy of the Payment Bond?
Subcontractors and suppliers are not often provided with bond documentation unless they ask for it. Many standard general contract forms require the contractor to provide the payment bond to a claimant who makes a written request. Opt to make this request early, before there is any payment tension. Once there is an actual claim, the bond request is much more threatening to the contractor and can quickly sour the relationship. Sureties typically require indemnity from the contractor and its shareholders for all bond claims. As a result, the general contractor and its owners have a vested interest in discouraging claims.
V. Am I Covered by the Bond?
- Public Bonds
New Hampshire law requires a payment bond issued on a public project to cover all subcontractors, sub-subcontractors and suppliers for a broad range of claims, including (1) labor performed or furnished; (2) equipment hired, (3) materials used, (4) fuel, (5) lubricants, (6) power, (7) tools, (8) hardware, (9) supplies, (10) equipment repairs, and (11) parts furnished.
The bond form itself may provide more expansive rights to subcontractors and suppliers, but it cannot provide less protection than required by the statute. For this reason, the statutory requirements are deemed to be “written in” to the terms of every payment bond issued on a public project in New Hampshire.
- Private Bonds
Where a bond is issued on a private project, the requirements contained in the public bond statute do not apply, and the terms of the bond itself define the parameters of the surety’s obligation to cover subcontractors and suppliers. Although the precise terms of private bonds vary widely among sureties, most state a specific intent to ensure payment to any party who has contracted directly with the contractor or one of its first-tier subcontractors.
The important take away is that payment bonds on private projects may contain different coverage than those applicable to public work. In general, you are likely to be covered by the terms of a private bond if you have a direct agreement with the contractor, or with its first-tier subcontractor. Subcontractors and suppliers that are further down stream from the contractor are much less likely to be covered by a private bond. The language of the bond will dictate the level of coverage.
VI. How do I Make a Claim on the Bond?
- Public Bonds
In New Hampshire, making and enforcing a claim on a public payment bond is generally a two-step process:
First, you must preserve your claim by filing a “statement of claim” with the appropriate government department or court clerk within 90 days after the completion and acceptance of the project by the contracting party. There is no prescribed form for this statement, but it should reference the bond number, the name of the surety and state the value of unpaid labor and materials provided to date, if applicable. The statement of claim must be filed with (1) the Secretary of State (if the State is a contracting party), (2) the Department of Public Works (if the State is contracting through the DPW); or the Clerk of the Superior Court in the project county (if a city, town or other political subdivision is the contracting party). Strict compliance with the statutory notice provisions is required to avoid forfeiture of the subcontractor or supplier’s rights under the bond.
Second, if the claim has not been resolved within one year after filing the statement of claim referenced above, the claimant must file suit in the county in which the contract was principally performed to enforce the bond claim. Failure to file suit prior to the one-year deadline is generally construed as a waiver of your bond claim. The bond form itself will also contain independent notice and documentation requirements.
- Private Bonds
In the case of a private bond, the procedures for making a claim are dictated exclusively by the terms of the bond, not by statute. As a result, preparing the “statement of claim” and adhering to the filing deadlines described above may not be required. Unfortunately, however, the requirements of private bonds can sometimes be far more stringent and burdensome than those imposed by the statute. Although there are several different forms used on private projects, these forms typically contain strict notice and documentation requirements, proof of material delivery and shortened statute of limitations periods.
VII. What Happens After I Submit my Bond Claim?
Once you have satisfied the statutory and contractual requirements for making a bond claim, the burden generally shifts to the bonding company to investigate the claim and determine its validity. Many bonds contain relatively short deadlines, sometimes less than 60 days, for the surety to respond to the claim. In its response, the surety must usually inform the claimant of any amounts that are undisputed, its basis for challenging any disputed amounts, or request the additional information it needs to make such a determination. Most bond forms also require the surety to immediately pay or arrange for payment of any undisputed amounts.
Despite these contractual conditions, sureties sometimes fail to honor them, letting weeks or months pass without providing a proper response. This is a breach of the surety’s bond obligations and may give rise to additional damages claims for bad faith. Should you be faced with this situation, encourage your counsel to document the surety’s delay by writing periodic letters to the surety regarding its delay and failure to adhere to contractual deadlines. In the meantime, keep a watchful eye on the limitations period. No matter what happens, do not let the limitations period stated in the bond expire without filing suit against the surety. Once this deadline passes, the surety has no obligation and no incentive to pay you because you no longer have a valid claim against it.
Making a payment bonds claim can be complicated, but the process can be mastered with help from your counsel. Make sure to adhere to notice deadlines and take note of shortened limitations periods to ensure that all of your rights are retained. In the case of a serious project default, your compliance with claims procedures will put you in the best possible position to get paid.