Taking Away Surety's Defenses

Learn from sample case:

A recent case translated to a series of decisions in favor of our client, and it may be helpful to electrical subcontractors raising payment bond claims; the case showed issue types that often appear in litigation and can dramatically impact whether you recover and what your damages are. Accordingly, you need to understand the rulings, the terms of your bond and the law that applies to your case.

Most electrical subcontractors are somewhat familiar with payment bonds. The express terms of payment bonds are critical. In particular, you need to be intimately familiar with the limitation for when claims must be presented, when a suit needs to be filed and compliant with notice provisions. Similarly, the surety has obligations regarding the nature and timing of its response that are also governed by the terms of the bond.

Each of these elements of the bond must be placed in the context of surrounding law.

The law that governs may be the place of the project, or it may be another state law depending on the terms of the bond and the specific facts. The main issue is you need to understand what law governs and whether there are any specific nuances to that state’s law with respect to your bond claim.

In Casey Industrial Inc. v. Seaboard Surety Co., an unpaid subcontractor filed a claim against a payment bond. The surety denied the claim in a response letter asserting certain limited and specific grounds for denying the claim. The surety attempted to preserve additional possible defenses by claiming it reserved its rights to assert other defenses at a later point.

The payment bond at issue was a form payment bond. The general contractor was default terminated in December 2004. The surety took the job over pursuant to a takeover agreement, after which the surety demanded that the subcontractor return to perform certain work, which he did but refused to sign a subcontractor hold agreement as requested and indeed signed no other contracts.

The subcontractor presented a first claim in June 2004. The contractor, after having returned to the job to perform the additional corrective and completion work in August 2005, asserted a second adjusted claim in September 2005. The bond required that the subcontractor file suit within one year of work being performed by anyone under the construction contract or within a year of a claim. The subcontractor filed suit in February 2006.

The surety initially filed a motion to dismiss claiming the suit was filed more than a year after the contractor was terminated. The surety claim furthered that any work performed by the subcontractor within a year of suit was “de minimus.” The court rejected the motion to dismiss, finding facts in dispute.

The surety took a second bite at the apple on summary judgment and argued that the one year period should run from the first claim in June 2004 rather than the later September 2005 claim. The subcontractor argued that there was no limit in the bond, stating it could only file one claim. The court agreed and ruled that the surety was bound to the express terms of its bonds. The court again overruled the surety’s motion finding facts in dispute.

It was apparent that the surety intended to raise factual defenses not included in the bond response letter, including challenges to specific damages and whether the claimed damages were, in fact, extras. The subcontractor argued that the surety should be barred from raising any additional defenses not raised in its letter. The sub’s argument was that the language of the bond required the surety to respond to the claim within 45 days and state “the amounts disputed and the basis for challenging the amounts that are disputed.”

The court agreed and held that the plain meaning of the bond required the surety to assert all defenses within 45 days of the claim. Virginia law required that the bond be strictly construed against the surety. The court specifically rejected the surety’s argument that the surety should be permitted to conduct discovery to flesh out additional possible defenses that were not contained in the original letter. The court said the bond’s language spoke for itself and that while the surety might believe the result was “draconian,” to hold otherwise would violate both Virginia law and the bond’s plain meaning.

If you are raising a payment bond claim, look to the Casey case and its potential implications. This case places a great deal of pressure on surety companies to assert all potential defenses very early in the case. Further, the case presents some additional wrinkles that you can argue to keep claims alive in the face of contractual limitations period arguments. Perhaps each of the decisions in the Casey case flows from construction and interpretation of performance and payment bonds. The widespread use of these bonds guarantees that the logic of these decisions may eventually have a big impact on one of your claims. If you are considering or have presented a bond claim, these decisions may have a significant impact on your case.     •

HUGHES, ESQ., is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C. and counsel for Casey Industrial Inc. He can be reached at tim@hughesnassociates.com, or by phone at 703.671.8200.


About the Author

Timothy R. Hughes

Freelance Writer
Timothy R. Hughes, Esq., LEED AP, is a shareholder in the law firm of Bean, Kinney & Korman, P.C. in Arlington Virginia. A construction, real estate and business attorney, he was recognized as a "Leader in the Law" in 2010 by Virginia Lawyer's Weekly...

Stay Informed Join our Newsletter

Having trouble finding time to sit down with the latest issue of
ELECTRICAL CONTRACTOR? Don't worry, we'll come to you.