payment and performance bdbonds in ciconstruction...

Presenting a live 90‐minute webinar with interactive Q&A

Payment and Performance S B d i C i P jSurety Bonds in Construction ProjectsAsserting and Defending Surety Bond Claims and Exploring a Cost Effective Alternative for Owners, Contractors and Sureties to Protect Rights or Maximize Recovery

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, AUGUST 15, 2013

Today’s faculty features:

Lawrence Melton, Partner, Nexsen Pruet, Columbia, S.C.

Jonathan Burwood, Partner, Hinshaw Culbertson, Boston

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P f d P B dPerformance and Payment BondsAugust 15, 2013

Strafford Seminar August 15, 2013

Lawrence C. MeltonNexsen Pruet LLCNexsen Pruet, LLC

Columbia, South Carolina

Jonathan BurwoodHinshaw CulberstonHinshaw Culberston

Boston, Massachusetts


1976 J.D. Washington & Lee Law School1976 J.D. Washington & Lee Law SchoolAdmitted: Virginia, DC, South Carolina

1979 Representing Contractors on D.C. Metro System

1997 Returned to South Carolina

1998 Teaching Construction Law at University of South Carolina School of LawSouth Carolina School of Law

2001 Joined Nexsen Pruet – 7 offices in North and South Carolina; General Commercial Practice; 12 in construction practice group

2005 Published South Carolina Construction Law-2ed 20122ed. 2012.


Wants BuildingH M

Can BuildWants Money Has Money Wants Money

Owner ContractorO C


Build FirstP L

Pay FirstBuild Later Pay Later Build Later

Owner ContractorO C


Negotiated Schedule of V l AIA A201Values, e.g. AIA A201 (2007) §9.2

Applications for Applications for Payment Based on % of Completion

Architect’s Certificate of Payment

Retainage/Substantial Retainage/Substantial Completion/Punch List/Final Acceptance


Bill based on % of work in placeOwner GC

Payment based on approved % of work (self performs 0% of work)Payment based on approved % of work (self performs 0% of work)less retainage

Subs Suppliers

Subs and suppliers invoice full price. GC paid for workin place less retainage. GC never has enough to pay subs/ Survey Equipmentp g g p y /suppliers in full. GC subject to Prompt Payment Acts.

Subs may agree to retainage• Suppliers probably will not agree to retainage

Clearing & Grading Redi‐mix

Foundation Steel

Rebar Windows

Concrete Tile

Owner may agree to pay upfront: mobilization;general conditions; special equipment acquisition

• Owner will not agree to front end loading• GC Subject to False Claims Acts (31 U.S.C. §3729 et seq.)

29 States and D.C.

Framing Paint

Electrical Bricks

Mechanical Etc.

Roofing

Painting

Landscaping

Etc.


Every construction contract or subcontract is an extension of credit.


Subs/suppliers Risk not getting paid/not paid on timeGC Ri k f b / li fili li /GC Risk of subs/suppliers filing liens/non-

performance/failure/bankruptcyOwner Risk of GC non-performance; technical

incompetence; underbidding; dishonesty;incompetence; underbidding; dishonesty; mismanagement; liens tie up financing

Eliminate Risks Do Not buildManage the Risk Bonds and InsuranceManage the Risk Bonds and Insurance


Mechanics’ Liens: An American Solution to a Universal Problem: Laws of Maryland 1791, Chap. XLV, X : “. . . forProblem: Laws of Maryland 1791, Chap. XLV, X : . . . for all sums due and owing, on written contracts, for the building of any house in the said city . . . the undertaker . . . employed by the person for whose use the house shall be built shall have a lien on the house and the ground onbuilt, shall have a lien on the house and the ground on which the same is erected. . . and shall have the remedy as upon a mortgage . . .”

Mechanics’ Liens do not apply to Government projects absent express waiver of sovereign immunity.


Being surety has ruined many men who were prosperous . . .”E l i ti 29 18 ( i 180 B C )Ecclesiasticus, 29:18 (circa 180 B.C.)

3 Parties:3 Parties:Contract for construction

Owner (bond obligee) GC (bond principal)

promise to pay GAI premiums

Surety (Bond Obligor)


INSURANCE “A t t h b d t k tINSURANCE - “A contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies.” S.C. Code § 38-1-20.

d d b l f k k• Funded by a pool of premium paying risk takers • Underwriting based on actuarial tables• No indemnity of insurer by insured

SURETY BOND P i h d b f hSURETY BOND - Promise to pay the debt of another

• Funded by the Bond Principal • Underwriting based on performance record of Bond Principal

d land personal assets• Principal indemnifies the Surety – General Agreement of

Indemnity (“GAI”)


PAYMENT BOND: 3 PARTY AGREEMENT Surety promises owner to pay subs/suppliers if not paid bySurety promises owner to pay subs/suppliers if not paid by GC

PERFORMANCE BOND 3 PARTY AGREEMENTPERFORMANCE BOND: 3 PARTY AGREEMENT Surety promises owner to complete project in event of GC default


STATUTORY BONDS

MILLER ACT: Act of August 24, 1935, 49 Stat. 793 (40 U.S.C. § 3131, f l 40 U S C §270 ) A li t j t $100Kformerly 40 U.S.C. §270a). Applies to projects > $100K.

LITTLE MILLER ACTS: See, Bransdorfer’s 50-State Little Miller Act Compilation (bransdorfer.net) or contact the American Subcontractor’s A i i ( ) i Al d i VAAssociation, (asa.org), in Alexandria, VA.

NOTE: Some States have more than one Little Miller Act, e.g., S. C. has three, §29-5-440 (payment bonds required on all State projects), § 11-1-120 (payment & performance bonds required on most contracts by agencies subject(payment & performance bonds required on most contracts by agencies subject to State Consolidated Procurement Code), § 29-6-210 (SC DOT Bonds).


The Miller Act Bond: FAR 53.301-25-A Standard Form 25-A, Payment Bond:

OBLIGATION:We, the Principal and Surety(ies), are firmly bound to the United States of America (hereinafterWe, the Principal and Surety(ies), are firmly bound to the United States of America (hereinafter called Government) in the above penal sum. For payment of the penal sum, we bind ourselves, our heirs, executors, administrators, and successors, jointly and severally. However, where the Sureties are corporations acting as co-sureties, we, the Sureties, bind ourselves in such sum “jointly and severally” as well as “severally” only for the purpose of allowing a joint action or actions against any or all of us. For all other purposes, each Surety binds itself, jointly and severally with the Principal for the payment of the sum shown opposite the name of the Surety. y p p y pp yIf no limit of liability is indicated, the limit of liability is the full amount of the penal sum.

CONDITIONS:The above obligation is void if the Principal promptly makes payment to all persons having a direct relationship with the Principal or a subcontractor of the Principal for furnishing labor,

t i l b th i th ti f th k id d f i th t t id tifi d bmaterial or both in the prosecution of the work provided for in the contract identified above, and any authorized modifications of the contract that subsequently are made. Notice of those modifications to the Surety(ies) are waived.


§ 2. If the Contractor promptly makes payment of all sums due to Claimants, and defends, indemnifies and holds harmless the Owner from claims, demands, liens or suits by any person or entity seeking payment for labor, materials or equipment furnished for use in the performance o abo , ate a s o equ p e t u s ed o use t e pe o a ceof the Construction Contract, then the Surety and the Contractor shall have no obligation under this Bond.

§ 3. If there is no Owner Default under the Construction Contract, the S ’ bl h O d h d h ll f hSurety’s obligation to the Owner under this Bond shall arise after the Owner has promptly notified the Contractor and the surety of claims, demands, liens or suits against the Owner or the Owner’s property by any person or entity seeking payment for labor, materials or equipment furnished for use in the performance of the Construction Contract andfurnished for use in the performance of the Construction Contract and tendered defense of such claims, demands, liens or suits to the Contractor and the Surety.


§ 3. “If there is no Owner Default [defined in § 16.4 as non-payment] under the Construction Contract . . . after the Owner has promptly notified the Contractor and the Surety. . .”

§ 5 Notice requirements for subcontractors and remote claimants – claim must be for work done/material furnished “within ninety (90) days after having last performed labor or last furnished materials or equipment included in the Claim” – NOTE §15 “Upon request by any person or entitymaterials or equipment included in the Claim NOTE §15 Upon request by any person or entity appearing to be a potential beneficiary of this Bond, the Contractor and Owner shall promptly furnish a copy of this Bond or shall permit a copy to be made.” DON’T WAIT UNTIL THE INVOICE IS OVERDUE TO REQUEST A COPY OF THE BOND!!!! Also NOTE § 16.1 - .8 – definitions of “Claim”

§ 7.1 [Surety to respond within sixty (60) days after receipt of the Claim]

§ 7.3 Bond obligee (Owner) entitled to attorneys’ fees if Surety fails to pay amounts agreed to be owed

§ 8 Surety’s obligation limited to amount of the Bond

§ 10 Surety not liable for obligations unrelated to the Construction Contract

§ 12 One year statute of limitations (not enforceable in many states, e.g. SC)

CAVEAT: PRIVATE BONDS MAY BE SUBJECT TO STATE REGULATION AS TO NOTICE, ETC., e.g., S.C. CODE § 29-5-440.


1. RTB!! Read the Bond.

2. RTS!! Read the Statute.

3. RTB2!! Read the Book. See, Kevin L. Lybeck, et al The Law of Payment Bonds (2d ed ) ABAal., The Law of Payment Bonds (2d ed.), ABA (2011). 921 Pages!!!!


A. Coverage: Miller Act


Who can make a claim on Miller Act projects?Who can make a claim on Miller Act projects?

Prime Contractor

Materialman(proper bond claimant)

Subcontractor(proper bond claimant)1st Tier(p p ) (p p )

S b i l

Sub-Subcontractor(proper bond

2 d TiMaterialman(proper bond

Subcontractor(NOT a proper

bond claimant)

Materialman(NOT a proper

bond claimant)

claimant provided notice to Prime

Contractor within 90 days of last work)

2nd Tier(Remote Claimant)

(p pclaimant provided

notice to Prime Contractor within 90

days of last work)

3rd TierSub-Sub-

Subcontractor(NOT a proper

bond claimant)


bond claimant)


bond claimant)bond claimant)Proper Bond Claimant

Never a Proper Bond Claimant (i.e., out of luck)Strafford Seminar August 15, 2013 25

AIA A312 – 2010, § 16.2 definition of Claimant includes: “any individual or entity that has rightfully asserted a claim under an applicable mechanic’s lien or similar statute against the real property upon which the Project is located.”

B. BONDING CAPACITY (NOT EVERBODY HAS IT).C. INSOLVENCY OF THE SURETY.D. TIMELINESS OF THE SURETY’S RESPONSE.E. CLAIMS ARE SUBJECT TO SURETY DEFENSES:

1. OWNER DEFAULT.2. OWNER OVERPAYMENT (POTENTIAL LIABILITY FOR A/E)3. SUBROGATION: RIGHT TO ASSERT PRINCIPAL’S DEFENSES, E .G.

NON-PERFORMANCE, POOR PERFORMANCE, FAILURE TO MITIGATE DAMAGES.MITIGATE DAMAGES.

4. LACK OF NOTICEF. PENAL SUM IS LIMIT OF LIABILITY.



27

S t P f B dSurety Performance BondsJonathan Burwood

SURETY PERFORMANCE BONDS

SURETY FUNDAMENTALS:SURETY FUNDAMENTALS:

► Surety ≠ Insurance

► Tripartite Relationship

► Surety ≠ Insurance

p p

► Indemnity Agreement

► Every Claim is Different

© 2012 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 32


RT(F)B: “READ THE @*$%# BOND!”RT(F)B: READ THE @ $%# BOND!

► And Read the Statute

► Bonds are Contracts

► Terms of Bond Control

► Understand Rules of the Game

► Beware Conditions Precedent

► Understand Rules of the Game



PERFORMANCE BOND CLAIMS: "MAGIC" WORDS?

NOTICE

TERMINATIONDEFAULT



DEFAULT/NOTICE:L&A Contracting Co. v. Southern Concrete Services, Inc., 17 F.3d 106 (5th Cir. 1994).

Balfour Beatty v. Colonial Ornamental Iron Works, Inc., 986 F.Supp. 82 (D.Conn. 1997).

Dragon Construction, Inc. v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill.App.Ct. 1997).g , y , ( pp )

TERMINATION:Elm Haven Const. v. Neri Const., LLC, 281 F.Supp.2d 406 (D. Conn. 2003); pp ( )

Enter. Capital, Inc. v. The San-Gra Corp., 284 F.Supp.2d 166 (D. Mass. 2003).

CONDITIONS PRECEDENT:Seaboard Sur. Co. v. Greenfield, 266 F.Supp.2d 189 (D. Mass. 2003).



BASIC SURETY OPTIONS CHOOSE WISELYBASIC SURETY OPTIONS: CHOOSE WISELY

SURETY INVESTIGATION

DO NOTHING?!

SURETY OPTIONS


TAKEOVERTENDER


IMPORTANT ECONOMIC ISSUES:IMPORTANT ECONOMIC ISSUES:

► Financing The Principal► Financing The Principal

► Contract Proceeds

► Liquidated Damages

► Bond Penal Sum



COMMON SURETY DEFENSES:COMMON SURETY DEFENSES:

► Principal's Defensesp

► Limits of Bond Coverage

► Conditions Precedent

S it Li it ti► Suit Limitations

► Impairment of Collateral


► Impairment of Collateral


BEST PRACTICES: BOND CLAIMANTSBEST PRACTICES: BOND CLAIMANTS

► Read and Follow Contract, Bond and Statute

► Satisfy All Conditions Precedent

► Timely and Unequivocal Communications

► Preserve Contract Funds



BEST PRACTICES: SURETIESBEST PRACTICES: SURETIES

► Read Contract, Bond and Statute

► Investigate and Document

► Timely and Unequivocal Communications

► B A f P l S► Be Aware of Penal Sum

► Secure Contract Funds


Jonathan C BurwoodJonathan C. Burwood Hinshaw & Culbertson LLP 28 State Street 24th Floor28 State Street, 24 FloorBoston, MA 02109617-213-7009jb d@hi h [email protected]


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