After a week off from posting, much of it dealing with payment bond claims, I am back with a basic, but necessary refresher on these claims. A payment bond on a construction project (whether private or public) gives an unpaid subcontractor or supplier another collection option outside of a breach of contract action, or in the case of a private project, the recording and prosecution of a mechanic’s lien. Because of this, my first tip is to always check to see if the general contractor carries a payment bond on your project, even in the case of construction for a private non-governmental owner.
The rules for claiming under a payment bond can be different depending on whether you are providing labor and materials to a private or a public project. I’ll look at them both here.
Bonds on Private Projects
Bonds on private projects have become more prevalent since the economic downturn. More private owners are seeking the protection of a payment and performance bond to avoid payment issues and mechanic’s liens. More often than in more booming economic times even subcontractors are required to carry bonds to protect general contractors. In such an environment, failure to check to see if a bond exists could be a mistake.
While the Miller Act and Little Miller Acts govern the terms of engagement/rules for a claim on a public project (I’ll discuss these further below), the terms of the bond itself govern on a private project. The payment bonds generally have specific notice requirements. Your notice is likely to have to be in writing to specific parties and within a particular time frame. You, as a subcontractor or supplier (particularly where you don’t have a direct contractual relationship with the principal on the bond) will have to jump through the hoops set out in the bond in a timely fashion if you are to prevail on the bond claim.
Because the contract is king in Virginia, in most circumstances the terms of the bond will not be “trumped” by any other interest, statutory or otherwise. It therefore is a best practice to request a copy of any payment bond early in the process, preferably at the time of signing your contract. Most construction companies will not have a problem with giving you this information because having the ability to get a bond on a large project shows financial stability. If the general contractor or other party with whom you are getting ready to go into business balks at giving you a copy, this could be an issue to consider before entering into the business relationship.
Bonds on Public Projects
As I stated above, if the owner of the project is a government entity, then either the federal Miller Act or the state Little Miller Act will govern the rules for a claim. Recently (meaning about 4 years ago) the Virginia General Assembly lined up the timing for notice, etc. under my state’s Little Miller Act with that of the federal act so the rules are mostly the same.
The U. S. Code and the statutes of most states, including Virginia, [enhanced version available to lexis.com subscribers], require a general contractor to carry a payment bond guaranteeing payment to subcontractors and suppliers providing labor and materials to that project. This bond is there to cover for the fact that construction companies cannot place a mechanic’s lien on government property.
The basic rules are these:
• All claimants against a payment bond have 1 year from the date of the last work for which it claims payment during which to file suit. If you are a so called first tier subcontractor, this is the only hard timing requirement that you have in Virginia. As a first tier subcontractor, you may want to send a notice to the bond company for strategic reasons, but it is not necessary.
• If you are a second tier subcontractor, you have 90 days from that same date to send a notice of claim to the general contractor. As a best practice, you want to copy the bond company so that they know what is going on and can apply pressure to the general contractor.
• Once 90 days have elapsed from the date of last furnishing, you can file suit. Of course, keep in mind the 1 year limit.
There are some other wrinkles, for instance that the bond protection may only reach second tier subcontractors/suppliers, that depend on how your state’s bond law reads, but these are the general rules. Also, your case will turn on its facts that could change the application of these rules.
As always, I highly recommend that you consult an experienced construction attorney early on in this process to avoid potential pitfalls and to make sure that something is not missed.
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