Protect your ability to enforce payment

After several years of an overheated construction market, signs of slowing are starting to appear. Interest rates have jumped. Housing starts are down. Major homebuilders report cooling of revenues or dropping earnings. Some of these trends are mirrored in the commercial markets.

In this environment, the focus of legal issues begins to shift from problems related to an overabundance of work to recovery of payments from past contracts. On public and some commercial private projects, payment bonds can be an excellent way to recover unpaid outstanding invoices.

One recent case highlights a number of factual and legal issues. Specifically, a claimant needs to be careful to comply with the timing of submissions of claims and filing suits. A claimant needs to know his or her specific bond language and understand its implications on the claim. A failure to consider such elements may result in dismissal of the case.

Timing and obligation language

Payment and performance bonds, including the bonds issued on architectural forms, contain language that defines what triggers obligations for each party. For example, in an American Institute of Architects (AIA) performance bond, the surety is entitled after a contractor default to discharge its performance obligations under the bond in any number of ways. In addition to funding completion efforts and even hiring the original contractor, the surety can take over the project and complete it. Similarly, payment bonds contain strict timing limitations that require subcontractors, suppliers and sureties to undertake certain actions or risk losing the benefits of the bond altogether.

The surety takeover

A recent case in the United States District Court for the Eastern District of Virginia addressed a surety’s takeover and a subcontractor’s bond claim. In Casey Industrial Inc. v. Seaboard Surety Co., a subcontractor filed suit against a surety under a payment bond issued on behalf of the general contractor. The surety had taken over the project after the owner default terminated the general contractor. The subcontractor had already demobilized from the site at the time of the termination. While the surety and its completion contractors asked the subcontractor to return to the site, they also asked the subcontractor to sign a “subcontractor hold agreement.” The subcontractor eventually returned but signed no new or different contracts from the original subcontract agreement.

The payment bond gave the subcontractor one year to file suit from the completion of performance of work by anyone under the construction contract. The subcontractor filed suit within one year of its return to work on the job but more than one year after the general contractor’s termination. The surety moved to dismiss and moved for summary judgment on the grounds the claim was time barred.

Just the facts

The court denied the surety’s motions. It held that there were material facts in dispute as to whether the subcontractor’s return to the job was work under its original subcontracts with the original general contractor. The court noted that if the subcontractor had signed any different or new contract, such as the proposed “subcontractor hold” agreements, the claim would have been time barred.

The ultimate influence of the Casey opinion is unclear, particularly given that the case is ongoing. It is an interesting case considering the lack of national authority in this context. It is clear, however, that a troubled project involving a default terminated general contractor is a very dangerous situation for a subcontractor. Subcontractors absolutely need competent legal counsel in that context. The signing of an otherwise innocuous document could have resulted in the outright dismissal of a sizeable bond claim. In today’s construction environment, it pays to be careful and to ensure you are taking the necessary steps to protect your ability to enforce payment.

HUGHES Esq. is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C., www.hughesnassociates.com. He specializes in construction litigation, corporate and business related representation, and complex civil litigation. He may be reached at tim@hughesnassociates.com.