When a subcontractor furnishes a payment bond, is it referred to as a common law payment bond governed by state law. There is no federal statute (or even state statute in most jurisdictions) governing the requirements of a subcontractor’s payment bond, hence the reason it is oftentimes referred to as a common law payment bond. This is different than a prime contractor’s payment bond which is generally governed by federal or state-specific statutes.
In an opinion out of the Northern District of North Dakota, U.S. v. Western Surety Company, 2010 WL 609548 (D. North Dakota 2020), the Court discussed a painting sub-subcontractor’s claim against a subcontractor’s common law payment bond on a federal project. Here, the subcontractor hired the sub-subcontractor and a payment dispute arose. The subcontractor furnished its own payment bond. The sub-subcontractor filed a lawsuit against both the prime contractor’s Miller Act payment bond and the subcontractor’s common law payment bond. The Miller Act payment bond dispute got resolved and the case proceeded as to the subcontractor’s common law payment bond.
The common law payment bond surety moved for summary judgment claiming the painting sub-subcontractor failed to properly trigger the bond because it failed to provide notice of its claim as required by the terms of the bond. Since the bond is deemed a contract, the Court looked at principles of North Dakota contract law governing this argument. The common law bond required a claimant to give written notice within 90 days of its last day of work (which is a common requirement in such bonds). The surety wanted the Court to construe this language similar to the requirements of the federal Miller Act by requiring the sub-subcontractor to give it notice with substantial accuracy of the claim. The Court rejected this sentiment, and denied the summary judgment, as the subcontractor’s payment bond made no mention of “substantial accuracy.” The Court looked at a hodge-podge of communications finding that a reasonable jury could conclude that the painting sub-subcontractor complied with the provisions of the bond. Additionally, the Court noted that even if the notice was inadequate, the surety failed to establish how it was prejudiced based on North Dakota law that states: “A surety is exonerated…[t]o the extent to which the surety is prejudiced by an omission of the creditor to do anything when required by the surety which it is the creditor’s duty to do.” U.S., supra, at *6 (internal quotation and citation omitted).
Lastly, the Court discussed how the subcontractor’s common law payment bond mentions the obligee of the bond is the general contractor. This is how all subcontractor payment bonds are worded. However, within the bond, there is a definition for “claimants” that allows claimants to sue on the bond. The Court addressed this to reflect that the painting sub-subcontractor, meeting the definition of claimant in the payment bond, was a third-party beneficiary of the subcontractor’s payment bond and had standing to sue the bond.
This is a good case if you are dealing with a subcontractor’s common law payment bond. The requirements to sue the bond will be less rigorous than suing a payment bond governed by a statute, such as a Miller Act payment bond.
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