DURATION OF PUBLIC PAYMENT BOND = FULL TERM OF PUBLIC CONTRACT

Posted on August 8, 2016August 8, 2016 by Edward Garber

Florida Statute s. 255.05 governs public payment bond rights on Florida public construction projects (other than Florida Department of Transportation projects). This is an important statute for all that perform Florida public construction work! (Check out this article for more information on s. 255.05 and this chart summarizing steps required to preserve payment bond rights.) If you are subcontractor, sub-subcontractor or supplier on a Florida public construction project, you want to understand what you need do to preserve and perfect payment bond rights to secure any potential nonpayment. And, if you are a prime contractor that furnished a public payment bond, you will likely be indemnifying your payment bond surety with respect to any payment bond claim. You want to know those payment bond claims that are worth fighting and those that are worth spending the time and effort on the frontend to efficiently resolve because payment bond claims create a statutory basis to recover attorney’s fees.

The recent opinion in Maschmeyer Concrete Co. of Florida v. American Southern Ins. Co., 2016 WL 3746379 (M.D.Fla. 2016) serves as an example of a contested public payment bond dispute between a supplier and payment bond surety. In this matter, a prime contractor was awarded a concrete repair and construction contract from the City of Orlando in 2011. The City’s acceptance letter to the prime contractor stated that the contract was for one year but could be renewed upon mutual agreement as provided in the City’s solicitation upon entering into an amendment to the contract. The terms of the solicitation and contract allowed the City to renew the contract for four additional one-year terms.

Before the expiration of initial one-year term, the City sent an amendment to the prime contractor renewing the contract for an additional year. The prime contractor signed the amendment. The amendment required the contractor to submit a public (payment) bond, which the contractor furnished. The bond stated that it was for a period of one year from 12/1/12 through 11/30/13.

Before the expiration of the second one-year term, the City sent another renewal amendment to the prime contractor renewing the contract for an additional year. The prime contractor signed the amendment. An updated bond was never furnished.

Before the expiration of the third one-year term, the City sent another renewal amendment to the prime contractor renewing the contract for an additional year. The prime contractor signed the amendment. An updated bond was never furnished. During this renewal period, a supplier furnished materials to the prime contractor that was utilized in the concrete repair and restoration work. The prime contractor did not pay the supplier and the supplier initiated an action against the prime contractor’s public payment bond.

The surety argued that the supplier did NOT have payment bond rights because the supplier furnished materials after the expiration of the payment bond—after the11/30/13 duration listed in the bond. The supplier argued that any expiration or duration limitation in the payment bond was unenforceable under s. 255.05 since a public payment bond cannot expand or limit the effective duration of the bond. Fla. Stat. s. 255.05(e). But, what does “effective duration of the bond” mean? “The only reasonable interpretation of ‘effective duration’ of the Statutory [public ] Bond is a bond duration that corresponds with the full term of the Public Work Contract identified on the face of the Statutory Bond or incorporated by reference in the Statutory Bond.” Maschmeyer Concrete Co. of Florida, 2016 WL at *4.

Here, although the contract was for a one-year term, the terms of the contract / solicitation allowed it to be renewed an additional four years. Thus, the City renewing the contract through amendments was authorized pursuant to the very contract that was identified and incorporated into the public payment bond. The fact that the bond was never updated is of no moment because the bond legally had to remain in effect during the duration of the contract.

Under the surety’s argument, the supplier was s*** out of luck because the supplier furnished materials outside of the bond’s listed duration. Hence, the supplier was furnishing materials to a project where there was no bond to protect its financial interests. This gotcha-type argument does not seem reasonable. There was a bond in place because the City required a bond. Whether that bond was renewed or not should not make a difference because the contract was still in effect and the prime contractor was still performing under the contract after the listed duration in the bond. To punish a supplier because the base contract is still in effect and being performed makes no rationale sense. What does make sense, however, is that as long as a prime contractor is still performing base contract work, the public payment bond is still in effect to secure any potential nonpayment.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

DRAFTING THE BOND FORM, PARTICULARLY THE PERFORMANCE BOND FORM

Posted on July 8, 2016July 8, 2016 by Edward Garber

Oftentimes, when it comes to payment and performance bonds (in particular), the bond forms are drafted by the obligee. For example, an owner (as the obligee) may draft the bond forms that it wants its general contractor’s surety to execute. And, a general contractor (as the obligee) may draft the bond forms that it wants its subcontractors’ sureties to execute. As an obligee, it is always beneficial to draft the bond form (particularly the performance bond) that you want the surety to execute. The bond is to benefit you—the obligee—so having a hand in creating conditions to trigger the application of the bond is important, specifically when it comes to triggering a performance bond upon the bond-principal’s default.

What if the surety executes a bond form prepared by the obligee and there is an ambiguity in the bond? Should the ambiguity be interpreted against the obligee as the drafter of the bond?

This issue was addressed by the Fourth District Court of Appeal in The School Bd. Of Broward County v. Great American Ins. Co., 807 So.2d 750 (Fla. 4^th DCA 2002) where the School Board owner prepared the performance bond form. The surety argued there was an ambiguity with the bond form and wanted the ambiguity to be interpreted against the School Board as the drafter of the bond. The court rejected this argument explaining:

Florida’s policy is to construe any ambiguity in a bond in favor of granting the broadest possible coverage to those intended to be benefitted by protection of the bond [e.g., the obligee]. This policy recognizes that the purpose of a bond is to protect a party to a contract; the burden is on the surety, who is in the business, to include the appropriate language in its bonds if it seeks to narrow its obligations after default.

The School Board of Broward County, 807 So.2d at 752 (internal citations and quotations omitted).

To reiterate, it is always beneficial as the obligee to prepare the bond forms (particularly the performance bond) that you want the surety to execute since the bond is designed to benefit you. Work with counsel to ensure the bond form provides you the broadest or best coverage based on the anticipated risks.

QUICK NOTE: PERFECTING & PRESERVING CONSTRUCTION LIEN & PAYMENT BOND RIGHTS

Posted on June 20, 2016June 20, 2016 by Edward Garber

You are a subcontractor, sub-subcontractor, or supplier on a construction project. What steps can you take to maximize your ability to collect payment?

Read this chart to understand what steps you need to undertake to preserve and perfect construction lien or payment bond rights. This chart will assist you with what notices you may need to serve to preserve your lien or payment bond rights and the timing to do so.
Read this article that has tidbits to maximize payment on a private construction project. This article will be beneficial for any subcontractor, sub-subcontractor, or supplier that performs work on a private construction project.
Take a look at the below presentation. This is a presentation I put on with a notice company that summarizes steps you can implement to preserve your rights and increase your chances to timely collect payment.
Please consult a construction attorney so that you can be proactive and not necessarily reactive when it comes to perfecting and preserving your rights.

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2016/06/FL-Mechanics-Liens-Roofers-DMA.pptx”]

QUICK NOTE: TIMING TO SUE PUBLIC PAYMENT BOND FOR RETAINAGE ON PUBLIC CONSTRUCTION PROJECTS

Posted on April 22, 2016April 22, 2016 by Edward Garber

You are a subcontractor (or sub-subcontractor) on a public construction project. The general contractor has a public payment bond per Florida Statute s. 255.05. You finished your scope some time ago but you are still owed retainage. When do you sue for retainage? There is a statutory retainage exception that governs the timing of when to sue for retainage. Check out this article for the applicable statutory language regarding the retainage exception. Timing is important to ensure that you do not prematurely sue for retainage or, worse, sue for retaiange after the statute of limitations expired.

QUICK NOTE: PERFECT PRIVATE PROJECT PAYMENT BOND RIGHTS IF NOT IN PRIVITY WITH GENERAL CONTRACTOR

Posted on April 13, 2016April 13, 2016 by Edward Garber

Remember, if you are not in privity of contract with the general contractor on a private project where the general contractor furnished the owner with a payment bond (e.g., sub-subcontractor or supplier), you NEED to perfect your payment bond rights by initially serving a notice of intent to look to the bond on the general contractor. (Or, serve a notice to owner but make sure you serve a copy on the general contractor). Not serving the general contractor with this initial notice can deprive you of payment bond rights. How do you know if there is a payment bond in place? Pull up the notice of commencement recorded in the official records where the property is located which should identify if there is a payment bond and will attach a copy of the payment bond.

For more information on payment bond rights, check out this chart.

PRIME CONTRACTOR INTERVENING INTO LAWSUIT AS PRINCIPAL OF MILLER ACT PAYMENT BOND

Posted on March 25, 2016March 25, 2016 by Edward Garber

In a Miller Act payment bond lawsuit (or any payment bond lawsuit for that matter), there are many times where a claimant (subcontractor, sub-subcontractor, or supplier) will sue the Miller Act payment bond surety and NOT the prime contractor or principal of the payment bond. There are also times where the prime contractor moves to intervene in the lawsuit as the principal of the payment bond. Perhaps the prime contractor wants to assert a counterclaim against the claimant or a third-party claim. These affirmative claims would belong to the prime contractor and not its surety; thus, the prime contractor moves to intervene in the lawsuit so that it can assert such affirmative claim(s) in the context of the dispute against its surety. Oftentimes, a federal district court will allow the prime contractor to permissively intervene in the lawsuit as the principal of the payment bond, especially if the prime contractor plans to assert an affirmative claim to allow for the efficient resolution and disposition of all such claims.

For example, in U.S. f/u/b/o Jackson Geothermal HVAC & Drilling, LLC v. Western Surety Co., 2016 WL 1030392, (D.N.J. 2016), the prime contractor hired a subcontractor to provide HVAC, geothermal services, plumbing, and sprinklers. The subcontractor, in turn, subcontracted the geothermal services to the claimant–a sub-subcontractor on the project. The sub-subcontractor (claimant) filed a lawsuit against the Miller Act payment bond surety for approximately $300,000. The prime contractor, as principal of the payment bond, moved to intervene in the lawsuit primarily to (a) assert an affirmative claim for negligence against the sub-subcontractor and (b) assert a third-party claim against its subcontractor for breach of contract and negligence. The issue before the court was whether the prime contractor should be able to intervene in the sub-subcontractor’s lawsuit against the Miller Act payment bond surety. The district could found that permissive intervention was appropriate to allow the prime contractor to intervene in the sub-subcontractor’s Miller Act payment bond lawsuit:

[T]he Court finds no reason to believe that permitting Ranco [prime contractor / principal of payment bond] to intervene in this matter will unduly delay these proceedings or unfairly prejudice the adjudication of Jackson’s rights. While Ranco could pursue its state law claims against B&S [subcontractor] and Jackson [sub-subcontractor claimant] in state court, “notions of judicial economy suggest aggregating them in a single proceeding […] rather than have different tribunals examine these issues at different times.” Indeed, as the Third Circuit has noted, the court’s policy preference, i.e., “judicial economy, favors intervention over subsequent collateral attacks.” As a result, the Court finds that intervention will protect all of the parties from having to revisit the main issues being litigated here in separate proceedings. Thus, the Court shall permit Ranco to intervene in this matter.

Western Surety Company, supra, at *4 (internal citation omitted).

There are times where a principal prime contractor intervening into a lawsuit against its surety may not be appropriate. But, if the principal has affirmative claims or if the surety happens to be represented by different counsel (such that the surety is not allowing the principal to defend it with the principal’s preferred counsel) the prime contractor has a stronger basis to intervene in the lawsuit as a principal of the payment bond. A prime contractor intervening in a lawsuit against its Miller Act payment bond surety is an important consideration based on the factual circumstances of the dispute.

QUICK NOTE: SUIT AGAINST MILLER ACT PAYMENT BOND MAY NOT BE BROUGHT UNTIL 90 DAYS AFTER FINAL FURNISHING

Posted on March 18, 2016March 18, 2016 by Edward Garber

If you have a claim against a Miller act payment bond, a lawsuit cannot be brought until 90 days after your final furnishing date. This is set forth in 40 USC s. 3133(b)(1) that provides if you “have not been paid in full within 90 days after the day on which…[you]…performed the last of the labor or furnished or supplied the material for which the claim is made [you] may bring a civil action on the payment bond.” In other words, your claim is ripe 90 days after your final furnishing date. With that said, even if you prematurely filed suit before this 90-day period, there is authority that the lawsuit should not be dismissed, but rather, you can cure this by filing a supplemental pleading (relating back to the original pleading). Otherwise, if the lawsuit was dismissed, you could potentially be facing a statute of limitations argument barring your right to seek a Miller Act payment bond claim.

DO NOT EXECUTE A WAIVER AND RELEASE IN CONSIDERATION OF PAYMENT THAT RELEASES CLAIMS YOU ARE NOT PREPARED TO RELEASE

Posted on March 13, 2016March 13, 2016 by Edward Garber

Absolutely do NOT execute a waiver and release in consideration of a progress payment that waives and releases claims (such as change order requests, lost productivity, or delay) that you are not prepared to release through the date of the release. Carve out such exceptions from the release—identify those claims or rights you are not prepared to release. Otherwise, when you go to pursue such claims, the waiver and release you previously executed will come back to haunt you!

For example, in U.S. f/u/b/o Chasney and Company, Inc. v. Hartford Accident & Indemnity Co., 2016 WL 852730 D.Md. 2016), a prime contractor on a federal project subcontracted with a mechanical and plumbing subcontractor. The subcontractor’s last partial waiver and release it executed in consideration of a progress payment was in November 2013 for payment through October 31, 2013. The waiver and release provided that the subcontractor waived and released all liens, claims, and demands against the prime contractor or its surety in connection with the project through the period covered by the payment (through October 31, 2013). The waiver and release included space for the subcontractor to identify exceptions. No such exceptions were identified. In fact, prior to November 2013, the subcontractor executed a total of 24 progress waivers and releases and never excepted a single item or claim from the release.

Notwithstanding, the subcontractor encountered design defects that caused it to incur additional costs and delayed its performance. The subcontractor asserted pass-through claims that the prime contractor submitted to the federal government. However, when the prime contractor and government settled their issues and a global settlement was reached, no amounts were assigned to respective items such as the subcontractor’s pass-through claims. The subcontractor then asserted the Miller Act payment bond lawsuit against the prime contractor’s Miller Act payment bond surety.

Applicable here, the surety and prime moved for summary judgment that any damages, including delay-related damages, that the subcontractor sought through October 31, 2013 were waived and released through the subcontractor’s November 2013 progress waiver and release. The District Court of Maryland agreed since all it had to look to was the last waiver and release the subcontractor executed where it waived and released such rights:

“By executing the October 31 Partial Release without exempting its claim, Chasney [subcontractor] relinquished its right to pursue the claim should it ever ripen. In hindsight, Chasney may regret its decision to sign such a release—but the Court’s task is to examine the agreement the parties did sign, not the agreement that one or the other now wishes they had negotiated instead….

***

In summary, the Court’s analysis begins and ends—as it must—with the unambiguous language of the Partial Releases. By signing each release, Chasney waived all claims relating to work performed through the covered period: no reasonable factfinder could conclude otherwise. While Chasney’s opposition brief teems with subtle linguistic maneuvers (and more than a few red herrings), Chasney cannot avoid the plain consequences of its contracting through artful argument….”

U.S. f/u/b/o Chasney & Company, 2016 WL at *7, 9 (internal quotations omitted).

Do NOT let this happen to you. Preserve your rights and claims and do NOT waive and release claims you are NOT prepared to release!

TIMELY FILE YOUR MILLER ACT PAYMENT BOND LAWSUIT

Posted on January 15, 2016January 15, 2016 by Edward Garber

If you are a subcontractor, sub-subcontractor, or supplier on a federal construction project, please make sure to preserve your Miller Act payment bond rights. This includes filing suit in a federal district court against the payment bond surety. The Eleventh Circuit’s ruling in Thomas v. Burkhardt, 2016 WL 143351 (11^th Cir. 2016) illustrates what can happen if you do not properly pursue your Miller Act payment bond rights.

In Thomas, a subcontractor sued a contractor in state court and recovered a judgment against the contractor. When the subcontractor could not collect on its judgment, it sued the contractor’s Miller Act payment bond surety. The problem was the subcontractor filed its lawsuit many years after the statute of limitations expired on the Miller Act. The subcontractor argued the contractor’s surety should be bound by the state court judgment against the contractor (the principal of the payment bond). The Eleventh Circuit said “No!” The surety was not bound by the state court judgment. Indeed, even if the surety had notice of the subcontractor’s state court suit against the contractor, the Eleventh Circuit still maintained that the surety would not be bound by the state court judgment and would not be estopped from raising the statute of limitations as a defense:

[T]he doctrine of estoppel against the surety rests on the principle that a surety with knowledge of a suit against the principal has a “full opportunity to defend” the suit and to protect its rights. But there is no such equitable principle at work here. The surety cannot protect its rights by joining in the defense of the suit. It cannot intervene as defendant any more than it could be named as defendant in the first place.

Thomas, supra, at *3 quoting U.S. Fid. & Guar. Co. v. Hendry Corp., 391 F.2d 13, 17 (5^th Cir. 1968).

The morale is to timely file your Miller Act payment bond claim against the payment bond surety. There is no reason not to!

WHAT TO DO IF THE PAYMENT BOND IS NOT RECORDED WITH THE NOTICE OF COMMENCEMENT

Posted on November 20, 2015November 20, 2015 by Edward Garber

There is an unconditional payment bond for the project but it was not recorded with the Notice of Commencement. Now there are subcontractor construction liens recorded against the property. What do I do? I thought the point of the payment bond was to exempt the real property from subcontractor and supplier liens.

No need to worry! Liens can be transferred to the payment bond even though the payment bond was not recorded with the Notice of Commencement.

The payment bond operates to “secure every lien under the direct contract accruing subsequent to its execution and delivery.” Fla.Stat. s. 713.23(2). Even though the payment bond was not recorded with the Notice of Commencement as required, the owner or contractor can record a Notice of Bond with a copy of the payment bond that will operate to transfer the lien to the security of the payment bond.

To this point, Florida Statute s. 713.13(1)(e) states in relevant part:

[I]f a payment bond under s. 713.23 exists but was not attached at the time of recordation of the notice of commencement, the bond may be used to transfer any recorded lien of a lienor except that of the contractor by the recordation and service of a notice of bond pursuant to s. 713.23(2). The notice requirements of s. 713.23 apply to any claim against the bond; however, the time limits for serving any required notices shall, at the option of the lienor, be calculated from the dates specified in s. 713.23 or the date the notice of bond is served on the lienor.

Stated differently, just because the payment bond was not recorded with the Notice of Commencement does not mean the payment bond is worthless. Rather, it can still be used to transfer construction liens to the security of the bond.

Further, if discovered early enough, and within the effective period of the Notice of Commencement, an Amended Notice of Commencement can be recorded which attaches a copy of the payment bond. The Amended Notice of Commencement needs to be served by the owner “upon the contractor and each lienor who serves notice before or within 30 days after the date the amended notice is recorded.” Fla.Stat. s. 713.13(5)(b). But, the Amended Notice of Commencement can be used to clarify the omission of the payment bond in the original Notice of Commencement.