SURETY BONDING – THE NUTS & BOLTS

Posted on July 12, 2014July 12, 2014 by Edward Garber

Surety bonding is necessary in construction, particularly on federal and Florida public projects where the contractor is required to furnish a payment and performance bond. Even certain owners of large-scale private projects want their contractor to obtain a payment and performance bond. Understanding the nuts and bolts of surety bonding is valuable for the contractor that wants to increase job opportunities and/or increase their bonding capacity.

There are three main parties to the surety bond:

1. The surety– the entity (typically, a division of an insurance company) that issues the payment or performance bond for the contract price; the surety guarantees obligations on behalf of its principal, whether it is the performance of the contract (performance bond) or the payment to those entities working under the contractor providing labor, services, or materials (payment bond)

2. The principal – the entity (contractor) that procured the bond from the surety and who the surety is issuing the bond on behalf of; the principal along with personal and corporate guarantors will execute a General Agreement of Indemnity before the bond is issued outlining the rights and remedies of the principal/guarantors and the surety

3. The obligee – the entity (or entities) that can make a claim against the bond and who the bond is ultimately designed to benefit

Not every contactor can get a payment and performance bond. This means that not every contractor can perform public work that requires a bid bond to be furnished with the bid/proposal and then a payment and performance bond upon the award of the contract. This is because sureties undertake rigorous underwriting to best assess their risk before issuing bonds. And, many contractors, even if bonds are issued, will have a bonding capacity meaning the surety will not issue an unlimited dollar amount for the bond(s) issued or will not issue an unlimited number of project bonds at the same time. Rather, it will issue a bond or bonds totaling the bonding capacity of the contractor.

To obtain a bond, a contractor will go to a surety bond agent/broker, commonly referred to as the producer. The producer represents select sureties. Certain sureties cater to certain market niches or contractors and the producer tries to fit the contractor with the surety that best fits the needs, strengths, and qualifications of the contractor. The producer will work with the contractor to fill out required forms and review and collect the material and information that will be needed by the surety in the underwriting process. As a contractor, it is important to develop a strong relationship with a producer that understands your construction business and capabilities and can assist you with obtaining bonding capacity.

In the underwriting process, the surety will want to determine the financial strength, creditworthiness, and condition of the contractor by analyzing extensive financial documentation along with the contractor’s operational ability to perform a contract based on the contractor’s history, equipment, personnel, etc. Underwriting needs to obtain and assess financial and operational material to best assess the surety’s risk (based on the surety’s appetite or market) because if the surety has to pay out a claim on the bond it will absolutely be looking to recoup the costs it incurs from the bond principal as well as the guarantors that executed the General Agreement of Indemnity. Among other things, the surety will run a credit check for the principal and likely the owners/guarantors; will analyze balance sheets, income statements, and other financial information to understand the contractor’s cash flow, working capital, net worth, and profitability history and forecasts; will want to know of judgments and lawsuits; will likely contact references; and will want to specifically understand past projects completed and current projects underway, including the project in which the bond is being requested, from an estimating and accounting standpoint, personnel and management standpoint, insurance standpoint, and possibly a scheduling standpoint. The surety will do its homework because the very last thing a surety wants to do is pay a claim or expose itself to massive liability with a bond claim from a contractor that failed to pay its subcontractors or abandoned a job without any true recourse to recoup money expended. The surety will consider the personal and corporate guarantors it requires from a contractual indemnity standpoint per the General Agreement of Indemnity and may require cash collateral or property collateral to be pledged for underwriting approval. Again, developing the relationship with the producer that understands your business is crucial as the producer will understand the underwriting process and facilitate the transmission of information and material between the contractor and the surety.

The surety charges a premium for the issuance of the bond. Payment and performance bonds are often single premium bonds. Depending on the producer you ask, the premiums typically range from 1-3% of the bond amount. Naturally, there are contractors that will have to pay in excess of 3% of the bond amount based on the associated credit risk with issuing the bond.

Once underwriting runs its course and the contractor is approved for the requested bonds, the producer typically signs the bonds on behalf of the surety. The producer is given a power-of-attorney to sign bonds as an attorney-in-fact on behalf of the surety.

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.

MILLER ACT REQUIREMENT FOR SUPPLIER ON AN ONGOING OR OPEN ACCOUNT

Posted on July 1, 2014July 1, 2014 by Edward Garber

Suppliers oftentimes rent or furnish supplies or equipment on credit to a customer (such as a subcontractor) on an ongoing or open account. Under this scenario, the supplier typically has its customer enter into a credit application (ideally, where there is a personal guarantor) and then there may be a sales or rental agreement (or purchase order) documenting the costs of the supplies bought or rented in accordance with the account.

The case of Romona Equipment Rental, Inc. ex rel. U.S. v. Carolina Casualty Ins. Co., 2014 WL 2782200 (9^th Cir. 2014), illustrates an argument raised against a supplier of rental equipment in a federal Miller Act payment bond action when the supplier rented equipment to a subcontractor on an open account. In this case, the subcontractor entered into a credit application with the supplier that established the open account for the subcontractor to rent equipment on a federal construction project. The rental equipment that the subcontractor would utilize would be documented by rental agreements and corresponding invoices. The subcontractor entered into 89 rental agreements with the supplier where the supplier furnished the rental equipment on credit. Around this time, the prime contractor terminated the subcontractor from the project leaving the subcontractor owing the supplier substantial sums of money for the rental equipment.

The supplier served the prime contractor with its notice of nonpayment within 90 days of the last day it furnished rental equipment (as it was required to do under the Miller Act since the supplier was not in privity of contract with the prime contractor). The supplier then filed suit against the prime contractor’s Miller Act payment bond for the unpaid rental charges. The prime contractor and surety argued that the supplier’s notice of nonpayment was untimely as to ALL the rental equipment furnished to the construction project more than 90 days before service of the notice. The prime contractor and surety further argued that the supplier failed to mitigate its damages by continuing to supply equipment despite nonpayment. At trial, the district court held that the supplier’s notice of nonpayment covered ALL rental equipment the supplier furnished to the subcontractor for the project in light of the open book account. The district court further held that the supplier’s duty to mitigate damages occurred 4 days after the subcontractor was terminated and, therefore, the supplier was not entitled to recover for rental equipment after this date.

The main issue on appeal to the Ninth Circuit Court of Appeals was whether the supplier’s notice of nonpayment was timely as to ALL rental equipment furnished on an open book account more than 90 days before the notice. Stated differently, the issue was whether each rental agreement created, in essence, a separate contract with a separate requirement to serve a notice of nonpayment within 90 days from the last date the specific equipment was furnished pursuant to each rental agreement. The Ninth Circuit, relying on precedent from the First, Fourth, and Fifth Circuits, affirmed that: “if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all of the deliveries if it is given within ninety days from the last delivery.” Romona Equipment Rental, supra, at *3. This is a good ruling for suppliers!

Interestingly, while the Ninth Circuit agreed with the district court as to the date when the supplier’s duty to mitigate occurred (4 days after the subcontractor was terminated), there was discussion on this issue. It turned out that the subcontractor originally paid its supplier the first 9 invoices for rental equipment, but then only paid 2 of the remaining invoices. The supplier ceased renting equipment to the subcontractor when it learned that the subcontractor was terminated from the project. Yet, before the subcontractor was actually terminated, the subcontractor and prime contractor were trying to resolve the issues that led to the subcontractor’s termination (not uncommon). Thus, the supplier had a good faith belief that the issues would get resolved and it would get paid. Also, the subcontractor and supplier had a longstanding relationship and the supplier was currently furnishing equipment on another federal project and was being paid by the subcontractor. For these reasons, the Ninth Circuit explained that, “Although Ramona [supplier] failed to alert Candelaria [prime contractor] to Otay’s [subcontractor] delinquency until the seventy-eight invoices from Otay were overdue, this does not render the district court’s conclusion-that Romona had commercially reasonable justifications for choosing not to mitigate its damages prior to June 10, 2008 [4 days after the termination]—illogical.” Romona Equipment Rental, supra, at *4.

This dialogue raises an interesting issue regarding the mitigation of damages defense (or duty to mitigate losses/damages) raised by a prime contractor or surety when a supplier goes unpaid for an extended period of time but continues to furnish supplies or equipment. The point of termination raised an easy line of demarcation as to when the credit for rental equipment needed to be cut off. But, what if the subcontractor was not terminated and the supplier continued to rent equipment despite nonpayment? Even though the supplier typically expects payment net 30 days and does not have a pay-when-paid provision in its rental agreements or purchase orders, it still many times will give its customer (e.g., subcontractor) the appropriate slack while its customer is awaiting payment, especially a longstanding customer, a good customer, or when it has a good faith belief that it will ultimately get paid. Also, as it relates to rental equipment, while the supplier can stop furnishing new rental equipment, it is not that easy simply showing up to a project (let alone a federal project) unannounced and removing equipment being rented on a monthly or daily rate. So, there are definitely commercially reasonable justifications where a supplier will continue to let an account grow when it is not getting timely paid. The key for the supplier to establish that it tried to mitigate its losses is to lay the foundation that it sent communications to its customer and its customer’s customer (such as the prime contractor) regarding the delinquent account and its expectation that the equipment be returned when it becomes apparent (or the supplier is concerned) that it may not get paid (or when it no longer has the good faith belief that it will get paid). In Romona Equipment Rental, although the prime contractor likely knew the subcontractor was renting construction equipment (and was not in a position to pay unless the subcontractor received payment), the prime contractor still argued that the supplier should have notified the prime contractor of the subcontractor’s delinquent account as a means to mitigate damages.

For more information on a supplier’s burden of proof in a Miller Act action, please see: https://floridaconstru.wpengine.com/suppliers-burden-of-proof-in-a-miller-act-payment-bond-claim/.

IMPORTANT BULLET POINTS FOR PAYMENT BONDS ON FLORIDA PUBLIC PROJECTS (FLA. STAT. s. 255.05)

Posted on June 28, 2014June 28, 2014 by Edward Garber

Contractors that work on Florida state and local government construction projects (non-FDOT projects) must be familiar with Florida Statute s. 255.05. This statute governs the payment bond (and performance bond) the general contractor is required to provide for public projects in excess of $200,000. (No payment bond is statutorily required for projects in the amount of $100,000 or less and the public body has discretion waiving the bond requirement for projects in the amount of $200,000 or less.)

Here are important bullet points regarding payment bonds for public projects required by s. 255.05:

The general contractor (hired by the public body) is required to execute and record the payment bond (and performance bond) in the public records where the project is located. Fla. Stat. s. 255.05(1).

The public body is not supposed to make payment to the contractor until it receives a certified copy of the recorded bond. Fla. Stat. s. 255.05(1)(b).

The bond must state on the front page the “name, principal business address, and phone number of the contractor, the surety, the owner of the property being improved and, if different from the owner, the contracting public entity.” Fla. Stat. s. 255.05(1)(a). The bond should also contain reference to s. 255.05 and contain reference to the notice and time limitation provisions in subsections (2) and (10) (as referenced in subsequent bullet points). Fla. Stat. s. 255.05(6). Notwithstanding, the payment bond “shall be construed and deemed statutory payment bonds…and such bonds shall not under any circumstances be converted into common law bonds.” Fla. Stat. s. 255.05(4).

Any provision in payment bonds issued after October 1, 2012 that “further restricts the classes of persons protected by the bond, which restricts the venue of any proceeding relating to such bond, which limits or expands the effective duration of the bond, or which adds conditions precedent to the enforcement of a claim against the bond beyond those provided in this section is unenforceable.” Fla. Stat. s. 255.05(1)(e).

“A claimant, except a laborer, who is not in privity with the contractor shall, before commencing or not later than 45 days after commencing to furnish labor, services, or materials for the prosecution of the work, furnish the contractor with a written notice that he or she intends to look to the bond for protection.” Fla. Stat. s. 255.05(2)(a)(2). This is the same notice of intent to look to the bond required by those not in privity with the general contractor that have issued payment bonds on private projects (see https://floridaconstru.wpengine.com/serving-preliminary-lien-payment-bond-notices-on-private-projects/). Note, however, that the timing of serving this notice would be different if the payment bond were issued on an FDOT project (see https://floridaconstru.wpengine.com/payment-bonds-and-preliminary-notice-requierments-for-florida-department-of-transportation-fdot-projects/).

A claimant not in privity with the general contractor shall serve a written notice of nonpayment on the contractor and surety no later than 90 days after final furnishing. Fla. Stat. s. 255.05(2)(a)(2). The notice must specify the portion of the nonpayment amount designated as retainage. Id. Note, however, that this requirement differs from payment bonds for private projects where all claimants are required to serve the notice of nonpayment even if in privity with the general contractor. Here, only those claimants not in privity with the general contractor need to serve the written notice of nonpayment.

A claimant has one year from final furnishing to file an action on the payment bond. Fla. Stat. s. 255.05(10). However, there is an exception for retainage:

“An action for recovery of retainage must be instituted against the contractor or the surety within 1 year after the performance of the labor or completion of delivery of the materials or supplies; however, such an action may not be instituted until one of the following conditions is satisfied:

(a) The public entity has paid out the claimant’s retainage to the contractor, and the time provided under s. 218.735 or s. 255.073(3) for payment of that retainage to the claimant has expired;

(b) The claimant has completed all work required under its contract and 70 days have passed since the contractor sent its final payment request to the public entity; or

(c) At least 160 days have passed since reaching substantial completion of the construction services purchased, as defined in the contract, or if not defined in the contract, since reaching beneficial occupancy or use of the project.

(d) The claimant has asked the contractor, in writing, for any of the following information and the contractor has failed to respond to the claimant’s request, in writing, within 10 days after receipt of the request:

1. Whether the project has reached substantial completion, as that term is defined in the contract, or if not defined in the contract, if beneficial occupancy or use of the project has occurred.

2. Whether the contractor has received payment of the claimant’s retainage, and if so, the date the retainage was received by the contractor.

3. Whether the contractor has sent its final payment request to the public entity, and if so, the date on which the final payment request was sent.

If none of the conditions described in paragraph (a), paragraph (b), paragraph (c), or paragraph (d) is satisfied and an action for recovery of retainage cannot be instituted within the 1-year limitation period set forth in this subsection, this limitation period shall be extended until 120 days after one of these conditions is satisfied.”

Now, what happens if the recorded bond does not specifically reference s. 255.05 or the notice and time provisions of the statute as required by the statute in s. 255.05(6)? This issue was decided by the Florida Supreme Court in American Home Assur. Co. v. Plaza Materials Corp., 908 So.2d 360, 370 (Fla. 2005), where the Court held:

“[W]e conclude that the notice and time limitation provisions of section 255.05(2) may be enforceable, even where the statutory payment bond at issue does not contain reference to those notice and time limitation provisions in accordance with section 255.05(6). Once the claimant upon the bond makes a prima facie showing that the bond is facially deficient within the context of the statute and establishes by a preponderance of the evidence that the claimant did not have actual notice of the provision, the surety is estopped from attempting to enforce those provisions.”

In other words, the bond is not going to be converted into a common law bond which would deem the required notice provisions unenforceable. This showing by a claimant is actually a challenging hurdle to overcome, especially for a claimant that performs work on public projects and should know the notice requirements for public payment bonds!

Now, what happens if the bond is not recorded in the public records? The same holding and potential hurdle would likely apply. See Ardaman & Associates, Inc. v. Travelers Cas. And Sur. Co. of America, 2009 WL 161203 (N.D.Fla. 2009) (relying on the Florida Supreme Court’s decision in American Home Assur. to find that a payment bond not recorded on an FDOT project pursuant to Florida Statute s. 337.18 should be subject to the same analysis).

PAYMENT BONDS AND PRELIMINARY NOTICE REQUIREMENTS FOR FLORIDA DEPARTMENT OF TRANSPORTATION (FDOT) PROJECTS

Posted on June 21, 2014June 21, 2014 by Edward Garber

Payment and performance bonds for Florida Department of Transportation (“FDOT”) projects are governed under Florida Statute s. 337.18. These bonds are statutorily required for contract prices greater than $250,000 and the FDOT can waive the bond requirement for projects with a contract price of $250,000 or less if it determines the project will not endanger the public health, safety, or property. (Payment bonds and performance bonds for other public projects, or non-FDOT projects, are governed under Florida Statute s. 255.05, and will not be specifically discussed in this posting.)

Section 337.18 contains the following relevant provisions applicable to FDOT payment bonds:

(1)(b) Before beginning any work under the contract, the contractor shall maintain a copy of the payment and performance bond required under this section at its principal place of business and at the job-site office, if one is established, and the contractor shall provide a copy of the payment and performance bond within 5 days after receiving a written request for the bond. A copy of the payment and performance bond required under this section may also be obtained directly from the department by making a request pursuant to chapter 119. A claimant has a right of action against the contractor and surety for the amount due him or her, including unpaid finance charges due under the claimant’s contract. The action may not involve the department in any expense.

(1)(c) A claimant, except a laborer, who is not in privity with the contractor shall, before commencing or not later than 90 days after commencing to furnish labor, materials, or supplies for the prosecution of the work, furnish the contractor with a notice that he or she intends to look to the bond for protection. A claimant who is not in privity with the contractor and who has not received payment for his or her labor, materials, or supplies shall deliver to the contractor and to the surety written notice of the performance of the labor or delivery of the materials or supplies and of the nonpayment. The notice of nonpayment may be served at any time during the progress of the work or thereafter but not before 45 days after the first furnishing of labor, services, or materials, and not later than 90 days after the final furnishing of the labor, services, or materials by the claimant or, with respect to rental equipment, not later than 90 days after the date that the rental equipment was last on the job site available for use. An action by a claimant, except a laborer, who is not in privity with the contractor for the labor, materials, or supplies may not be instituted against the contractor or the surety unless both notices have been given.

(1)(d) An action must be instituted by a claimant, whether in privity with the contractor or not, against the contractor or the surety on the payment bond or the payment provisions of a combined payment and performance bond within 365 days after the final acceptance of the contract work by the department.

(1)(e) When a contractor has furnished a payment bond pursuant to this section, he or she may, when the department makes any payment to the contractor, serve a written demand on any claimant who is not in privity with the contractor for a written statement under oath of his or her account showing the nature of the labor or services performed to date, if any; the materials furnished; the materials to be furnished, if known; the amount paid on account to date; the amount due; and the amount to become due, if known, as of the date of the statement by the claimant. Any such demand to a claimant who is not in privity with the contractor must be served on the claimant at the address and to the attention of any person who is designated to receive the demand in the notice to the contractor served by the claimant. The failure or refusal to furnish the statement does not deprive the claimant of his or her rights under the bond if the demand is not served at the address of the claimant or directed to the attention of the person designated to receive the demand in the notice to contractor.The failure to furnish the statement within 60 days after the demand, or the furnishing of a false or fraudulent statement, deprives the claimant who fails to furnish the statement, or who furnishes the false or fraudulent statement, of his or her rights under the bond.

(1)(f) The bonds provided for in this section are statutory bonds. The provisions of s.255.05 are not applicable to bonds issued pursuant to this section.

The application of s. 337.18 was discussed in Ardaman & Associates, Inc. v. Travelers Cas. and Sur. Co. of America, 2009 WL 161203 (N.D.Fla. 2009), that involved a FDOT bridge restoration project. FDOT hired the design-builder to replace damaged structures on a dual bridge that spanned Escambia Bay. The design-builder hired the engineering firm and the engineering firm engaged a geotechnical engineer. The geotechnical engineer sued for payment for services performed under the engineer that hired it as well as additional services it performed pursuant to an oral agreement directly with the design-builder.

The design-builder and its surety moved to dismiss the bond claim because the geotechnical engineer was supposed to serve its notice of intent to look to the bond pursuant to Fla. Stat. s. 337.18(1)(c) no later than 90 days after it commenced work and it did not serve this statutory notice until two years after it commenced work. The geotechnical engineer countered that it did not have to serve the statutory notice of intent to look to the bond on the design-builder because (a) it entered into an oral agreement to perform additional services with the design-builder and, thus, was not required to serve the preliminary notice since it became in privity of contract with the design-builder and (b) the bond was never recorded in the official records and, therefore, the surety should be estopped from enforcing any statutory preliminary notice requirement. (At the time of this lawsuit the statute required the bond to be recorded; this recording requirement has subsequently been removed from the statute and is no longer required for FDOT payment bonds.)

The Northern District disagreed with the geotechnical engineer’s first argument that the engineer did not need to serve the preliminary notice for the work it performed directly under the engineer that hired it. The statute required the geotechnical engineer to serve the preliminary notice for this work since it was not in direct privity with the design-builder (contractor) when it performed this work. In other words, the failure of the geotechnical engineer to serve this preliminary notice would deprive it of amounts it was seeking against the payment bond for work it directly performed under the engineer that hired it.

The Northern District further disagreed with the geotechnical engineer’s second argument that the engineer did not need to serve the required preliminary notice because the bond was never recorded. (Although, as shown above in the statutory language, this recording requirement has been removed for FDOT payment bonds, it is still a requirement for payment bonds for other Florida public projects issued pursuant to s. 255.05.) The Northern District held that the geotechnical engineer must allege (and ultimately prove) that its failure to timely serve the preliminary notice was caused by the design-builder’s failure to record the bond in the public records. (Notably, this burden of proof is very, very challenging, especially for an entity that has performed public construction work and knows a payment bond is a requirement.)

Finally, the geotechnical engineer, as another argument to overcome its failure to timely serve the preliminary notice, contended that the payment bond should be deemed a common law bond because it was not properly recorded. If the bond was deemed a common law bond than statutory notice requirements and time limitations would not be strictly construed. The Northern District disagreed with this argument and held that the payment bond at-issue specifically referenced section 337.18 and the statute specifically states that the bond is a statutory bond.

Valuable take-aways:

Do not neglect serving your preliminary notice to enforce your bond rights. Know that the requirements of a FDOT project are different than other public projects governed under Florida Statute s. 255.05. The key is to know that preliminary notice needs to be served and serve it immediately. Work with your notice company or counsel to ensure the required preliminary notice is correctly served based on the construction project you are undertaking. For more information on a preliminary notice company and preliminary notice requirements for private projects, please see: https://floridaconstru.wpengine.com/serving-preliminary-lien-payment-bond-notices-on-private-projects/.

The best course of action is really never to argue that a statutory payment bond for a public project is a common law bond. It presents a challenging hurdle for the claimant. Indeed, section 255.05 (again, for non-FDOT public projects) provides that “such bonds shall not under any circumstances be converted into common law bonds.” Fla. Stat. s. 255.05(4). Interestingly, and for whatever reason, s. 337.18 does not contain this added language although it does provide that the bonds provided per this section are statutory bonds.

The provisions of s. 255.05 are not applicable to the FDOT payment bond issued pursuant to s. 337.18. While the court may look to cases interpreting s. 255.05 for guidance, the fact remains that the statute explicitly distinguishes itself from the s. 255.05 bond requirements. Be aware of this when performing a FDOT project.

SERVING PRELIMINARY LIEN / PAYMENT BOND NOTICES ON PRIVATE PROJECTS

Posted on June 19, 2014June 19, 2014 by Edward Garber

Subcontractors and suppliers need to know the preliminary notices (such as a Notice to Owner for liens or Notice to Contractor for payment bonds) that need to be served to preserve their lien or payment bond rights on private projects.

A. Obtaining a Copy of the Notice of Commencement

The first thing a potential lienor should do is obtain the Notice of Commencement for the project (or any Amended Notice of Commencement). The Notice of Commencement will be recorded in the official records where the project is located and will provide a potential lienor with a description of the real property, the owner’s information, the contractor’s information, the construction lender’s information, whether the contractor has a payment bond (which should be recorded with the Notice of Commencement), and persons other than the owner that the Notice to Owner needs to be served on.

B. Preliminary Notices for Liens- the Notice to Owner

If there is no payment bond recorded with the Notice of Commencement, then the potential lienor knows it wants to preserve its lien rights. Entities not in privity of contract with the owner will need to serve a Notice to Owner. The Notice to Owner must set “forth the lienor’s name and address, a description sufficient for identification of the real property, and the nature of the services or materials furnished or to be furnished.” Fla. Stat. s. 713.06(2). A statutory form is included in Florida’s Lien Law (Florida States Chapter 713) and set forth at the bottom of this posting. Importantly, the Notice to Owner must be served by the potential lienor “before commencing, or not later than 45 days after commencing, to furnish his or her labor, services, or materials.” Fla. Stat. s. 713.06(2). The key is that the Notice to Owner must be served within 45 days of the entity’s initial furnishing. For instance, a supplier’s initial furnishing is when the materials arrive on site. However, a supplier of specially fabricated material’s initial furnishing is when the supplier started fabrication irrespective of when the materials arrived on site. A company supplying construction rental equipment’s initial furnishing is when the rental equipment arrived on site. And, a subcontractor’s initial furnishing is when it first starts to furnish labor, services, or materials for the project. Again, there is no reason to delay serving the Notice to Owner – it should be served immediately as a matter of course.

A copy of the Notice to Owner should be served on the contractor if the potential lienor was not hired by the contractor in addition to the potential lienor’s customer’s customer. In other words: “A sub-subcontractor or a materialman to a subcontractor must serve a copy of the notice on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor must serve a copy of the notice to owner on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor shall serve the notice to owner on the subcontractor [potential lienor’s customer’s customer] if the materialman knows the name and address of the subcontractor.” Fla. Stat. 713.06(2). (Lien rights, however, are not automatic in that the further removed an entity is from the owner may impact whether or not that entity has lien rights. For example, a sub-sub-subcontractor does not have lien rights and a supplier to a supplier is not going to have lien rights. On the other hand, sub-subcontractors will have lien rights and a supplier to a sub-subcontractor should also have lien rights.)

C. Preliminary Notices for Payment Bonds-the Notice to Contractor and the Notice of Nonpayment

Now, if there is a payment bond in place, the owner’s property is exempt from liens and the entities should look to the payment bond for payment. In this case, entities not in privity of contract with the general / prime contractor “before beginning or within 45 days after beginning to furnish labor, materials, or supplies…shall serve the contractor with notice in writing that the lienor will look to the contractor’s bond for protection on the work.” Fla. Stat. s. 713.23(1)(c). Similar to the Notice to Owner, this Notice to Contractor of the potential lienor’s intent to look to the bond must be served within 45 days of initial furnishing. A statutory form for this notice is also included in Florida’s Lien Law and further set forth at the bottom of this posting. Importantly, if a lienor is unsure and/or wants to preserve both lien and payment bond rights the lienor can combine the Notice to Owner form with the Notice to Contractor form by calling the Notice to Owner form “NOTICE TO OWNER/NOTICE TO CONTRACTOR.” This is actually common as it kills two birds with one stone in the event the lienor is unsure and wants to preserve both lien and bond rights.

However, unlike perfecting a lien claim, potential lienors looking to recover under a payment bond for a private project must serve a Notice of Nonpayment to the contractor and payment bond surety within 90 days of finial furnishing at the project. (As it relates primarily to subcontractors, “The failure of a lienor to receive retainage sums not in excess of 10 percent of the value of labor, services, or materials furnished by the lienor is not considered a nonpayment requiring the service of the notice provided under this paragraph. Fla. Stat. s. 713.23(1)(d).) This Notice of Nonpayment even needs to be served by the subcontractor/supplier in privity of contract with the general contractor (even though the preliminary Notice to Contractor does not need to be served by the subcontractor/supplier in privity of contract with the general contractor). Final furnishing refers to the last date the lienor furnished labor, services or materials (excluding warranty or punchlist work). With respect to companies that furnish rental equipment, this final furnishing date is measured from the last date the rental equipment was on the project site and available for use.

Understanding the specific preliminary notices that need to be served and the timing of these notices is important to ensure that a subcontractor, supplier, etc. is properly preserving their lien or bond rights.

D. Preliminary Notice Companies

There are numerous companies that cost effectively assist subcontractors and suppliers with serving preliminary notices as a matter of course based on the information provided by the subcontractor and supplier. This is important to ensure the company preserves lien and bond rights!

One such emerging company that can assist with the generation, preparation and service of preliminary notices is FileMyPrelim (www.filemyprelim.com) with its cool, innovative web-based platform called PrelimTracker (www.prelimtracker.com). FileMyPrelim and PrelimTracker have developed a preliminary notice service and tracking platform that adapts to a construction industry that is evolving with the generation and transmission of electronic documentation. What is really cool is that by using FileMyPrelim, the lienor’s data is stored and tracked with PrelimTracker. Because these preliminary notices (whether it is a Notice to Owner, Notice to Contractor, etc.) are linked to PrelimTracker, the general contractor, the owner, and even the owner’s construction lender can universally track those entities that served the preliminary notices jointly on this web-based platform. By doing this, the general contractor, owner, and lender are all on the same page to ensure that those entities that preserved lien rights are properly transmitting releases of lien in consideration of progress payments (so that their lien rights are released through a specified date) and that a final release of lien is given in consideration of final payment to that lienor. In fact, PrelimTracker can generate the lienor’s release of lien based on the information provided by the lienor and transmit it electronically with a secure electronic signature. This allows all of the lienor’s releases to be stored and tracked in a platform accessible to the project team. Even if a lien could not be recorded against the owner’s project because the general contractor furnished a payment bond, PrelimTracker could track the preliminary notices from lienors served through FileMyPrelim preserving payment bond rights to ensure the general contractor is obtaining releases of lien from those entities. (Keep in mind, PrelimTracker provides value as it pulls data compiled in FileMyPrelim to report critical lien related documents.) Check out the website links to learn more about this emerging technology that can serve as a beneficial tool to the entire project team.

E. Preliminary Notice Forms

Preliminary Notice for Liens

WARNING! FLORIDA’S CONSTRUCTION LIEN LAW ALLOWS SOME UNPAID CONTRACTORS, SUBCONTRACTORS, AND MATERIAL SUPPLIERS TO FILE LIENS AGAINST YOUR PROPERTY EVEN IF YOU HAVE MADE PAYMENT IN FULL.

UNDER FLORIDA LAW, YOUR FAILURE TO MAKE SURE THAT WE ARE PAID MAY RESULT IN A LIEN AGAINST YOUR PROPERTY AND YOUR PAYING TWICE.

TO AVOID A LIEN AND PAYING TWICE, YOU MUST OBTAIN A WRITTEN RELEASE FROM US EVERY TIME YOU PAY YOUR CONTRACTOR.

NOTICE TO OWNER

To (Owner’s name and address)

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

(General description of services or materials) for the improvement of the real property identified as (property description) under an order given by____________.

Florida law prescribes the serving of this notice and restricts your right to make payments under your contract in accordance with Section 713.06, Florida Statutes.

IMPORTANT INFORMATION FOR

YOUR PROTECTION

Under Florida’s laws, those who work on your property or provide materials and are not paid have a right to enforce their claim for payment against your property. This claim is known as a construction lien.

If your contractor fails to pay subcontractors or material suppliers or neglects to make other legally required payments, the people who are owed money may look to your property for payment, EVEN IF YOU HAVE PAID YOUR CONTRACTOR IN FULL.

PROTECT YOURSELF:

–RECOGNIZE that this Notice to Owner may result in a lien against your property unless all those supplying a Notice to Owner have been paid.

–LEARN more about the Construction Lien Law, Chapter 713, Part I, Florida Statutes, and the meaning of this notice by contacting an attorney or the Florida Department of Business and Professional Regulation.

(Lienor’s Signature)

(Lienor’s Name)

(Lienor’s Address)

Copies to: (Those persons listed in Section 713.06(2)(a) and (b), Florida Statutes)

Preliminary Notices for Payment Bonds

NOTICE TO CONTRACTOR

To (name and address of contractor)

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

(general description of services or materials) for the improvement of the real property identified as (property description) under an order given by (lienor’s customer) .

This notice is to inform you that the undersigned intends to look to the contractor’s bond to secure payment for the furnishing of materials or services for the improvement of the real property.

(name of lienor)

(signature of lienor or lienor’s representative)

(date)

(lienor’s address)

NOTICE OF NONPAYMENT

To (name of contractor and address)

(name of surety and address)

The undersigned notifies you that he or she has furnished (describe labor, services, or materials) for the improvement of the real property identified as (property description) The amount now due and unpaid is $___.

(signature and address of lienor)

A SUPPLIER AND SUBCONTRACTOR’S PURSUIT OF ATTORNEY’S FEES IN MILLER ACT PAYMENT BOND ACTION

Posted on May 29, 2014May 29, 2014 by Edward Garber

While the Miller Act does not provide a statutory basis for the recovery of attorney’s fees, this does not mean that attorney’s fees cannot be recovered in a Miller Act payment bond action against the surety and prime contractor. If the underlying contract between the claimant and its customer provides for the recovery of attorney’s fees, this can support a basis to recover attorney’s fees against the surety and prime contractor in a Miller Act payment bond action.

The Eleventh Circuit in U.S. f/u/b/o Southeastern Municipal Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11^th Cir. 1989), held that a subcontractor’s supplier could recover attorney’s fees against the Miller Act surety based on a contractual provision between the supplier and the subcontractor. Other federal circuits have found similarly. See GE Supply v. C&G Enterprises, Inc., 212 F.3d 14 (1^st Cir. 2000) (supplier to prime contractor entitled to recover attorney’s fees based on attorney’s fees provision included in invoices sent to contractor with each delivery); U.S. f/u/b/o Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4^th Cir. 1996) (surety liable to supplier for attorney’s fees and interest based on subcontractor’s credit application with supplier); U.S. f/u/b/o Carter Equipment Co., Inc. v. H.R. Morgan, Inc., 554 F.2d 164 (5^th Cir. 1977) (finding that equipment rental supplier to subcontractor could recover attorney’s fees against surety based on contractual provision between supplier and subcontractor).

In pursuing a Miller Act action, it is good practice to look at the underlying contract, purchase order, or documentation forming the agreement to determine if there is a contractual basis to recover attorney’s fees. If there is, this basis should be specifically pled in the complaint against the Miller Act surety (as well as the prime contractor as the principal of the bond) to support a basis to recover attorney’s fees. This contractual basis should not be overlooked. In addition, suppliers and subcontractors on federal projects may want to ensure that such a contractual basis is included in their respective agreements in the event that a Miller Act action needs to be pursued. While suppliers will typically have a contractual provision in their agreement with their customer that allows them to recover attorney’s fees in collection efforts, there are circumstances where a prime contractor may not want to include an attorney’s fees provision in its subcontract. One reason for this may be because the prime contractor does not want to give the subcontractor a basis to recover attorney’s fees in a Miller Act action. Although this may not help the prime contractor in a lawsuit initiated by the subcontractor’s supplier (where there is a contractual provision for attorney’s fees between the supplier and subcontractor), the lack of a contractual basis could force a subcontractor to consider how it wants to proceed knowing it does not have a basis to recover attorney’s fees in its Miller Act action.

LIQUIDATED DAMAGES PROVISIONS IN SUBCONTRACTS (PARTICULARLY SUBCONTRACTS FOR PUBLIC PROJECTS)

Posted on May 18, 2014May 18, 2014 by Edward Garber

The assessment of liquidated damages should be a consideration to contractors on all projects, specifically public (federal and state) projects where the prime contract routinely contains a liquidated damages provision for delays to the completion of the project. Many times, the subcontract will contain a provision that will allow the prime contractor to pass-through liquidated damages assessed by the government (owner) to the responsible subcontractor. Well, what if the government did not assess liquidated damages? Can the prime contractor still assess liquidated damages against a responsible subcontractor in accordance with the subcontract? The opinion in U.S. f/u/b/o James B. Donahey, Inc. v. Dick Corp., 2010 WL 4666747 (N.D.Fla. 2010), would allow a prime contractor to assess liquidated damages against a subcontractor even if the government did not assess liquidated damages against the prime contractor.

In this case, a prime contractor entered into a contract to design and build four buildings at the Pensacola Navy Station and provided a Miller Act payment bond. The prime contractor hired a subcontractor to perform the plumbing and mechanical work. Due to delays the general contractor believed were caused by the subcontractor, it withheld substantial payment from the subcontractor. The prime contractor contended that the subcontractor caused 63 days of delay to the occupancy of the Visitors Quarters building and 32 days of delay to the Aviation Rescue Swimmers School building. The subcontract provided that in the event of delays, liquidated damages would be assessed in the amount of $5,400 per day for delay to the Aviation Rescue Swimmers School and $24,898 per day for delay to the Visitors Quarters.

The subcontractor filed a Miller Act lawsuit against the prime contractor and its surety (amongst other causes of actions). The prime contractor filed a counterclaim based on the liquidated damages that it assessed against the subcontractor, an amount in excess of what it was withholding. The subcontractor moved for summary judgment arguing that the liquidated damages provision was unenforceable (and the prime contractor could not assess liquidated damages) because the provision was a pass-through provision; thus, because the government did not assess liquidated damages against the prime contractor, the prime contractor could not assess liquidated damages against the subcontractor. The subcontractor further argued that the liquidated damages provision is unenforceable because it is being treated as a penalty because the subcontractor is not being provided the benefit of extensions of time granted by the government to the prime contractor that would negate delays. The prime contractor countered that nothing in the subcontract stated that liquidated damages could only operate as a pass-through claim, that being that the government had to assess liquidated damages before the prime contractor could assess liquidated damages against the subcontractor. The prime contractor further countered that the extensions of time granted by the government were irrelevant since they did not pertain to the subcontractor’s scope of work or affect the subcontractor’s milestone completion dates.

The Northern District of Florida agreed with the prime contractor and denied the subcontractor’s motion for summary judgment because it found the liquidated damages provision enforceable. The Northern District explained as it pertained to the subcontractor’s Miller Act payment bond claim:

“In considering a Miller Act claim, the trier of fact must thus look to the subcontract to determine the amount due. ‘[I]f the subcontract provides for a condition precedent to payment, or a part thereof, which is not fulfilled, the subcontractor cannot recover labor and material expenditures against the surety on the payment bond.’ In other words, if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense. Because there is a genuine issue of material fact regarding the timeliness of Donaghey’s [subcontractor] performance and, therefore, Donaghey’s entitlement to the amounts withheld by Dick [prime contractor], summary judgment is inappropriate as to Donaghey’s Miller Act claim.”

Dick Corporation, 2010 WL at *3 quoting U.S. f/u/b/o Harrington v. Trione, 97 F.Supp. 522, 527 (D.C.Colo. 1951).

Stated differently, the Miller Act payment bond surety was entitled to rely on the prime contractor’s assessment of liquidated damages as a set-off / recoupment defense to the subcontractor’s Miller Act claim. Also, if there were other conditions precedent that the subcontractor failed to comply with, the Miller Act surety would be entitled to many of these defenses as well.

The Northern District further maintained that a liquidated damages provision under Florida law will be enforceable if the provision does not operate as a penalty, meaning damages upon a breach must not be readily ascertainable at the time of the contract and must not be grossly disproportionate to any damages reasonably expected to follow from the breach. Dick Corporation, 2010 WL at *4 quoting Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 4^th DCA 2008). The Court held that the liquidated damages provision did not operate as a penalty and it was not intended to operate only as a pass-through mechanism. See, e.g., U.S. f/u/b/o Sunbeam Equip. Corp. v. Commercial Constr. Corp., 741 F.2d 326, 328 (11^th Cir. 1984) (“The fact that the Navy did not assess liquidated damages as such against Commercial [prime contractor], would not foreclose recovery of delay damages, if Commercial could demonstrate that damages arising out of the subcontract with Sunbeam [subcontractor] were not otherwise compensated.”)

There are three important take-aways from this opinion:

Liquidated damages provisions in subcontracts can operate as more than a pass-through provision for liquidated damages assessed by the government (owner). These provisions can operate as a mechanism to assess liquidated damages against the subcontractor even if the government / owner has not assessed liquidated damages against the prime contractor. Prime contractors and subcontractors need to keep this in mind when drafting and negotiating liquidated damages provisions. If the intent is for the provision to only operate as a pass-through provision, this intent should be clearly stated in the subcontract. If the intent is for it to operate more than as a pass-through provision, then this risk needs to be considered by the subcontractor.

Liquidated damages are typically going to be deemed enforceable if they are not intended to operate as a penalty.

A Miller Act payment bond surety will be entitled to rely on set-off / recoupment affirmative defenses contained within the subcontract including, without limitation, the prime contractor’s assessment of liquidated damages or other delay damages against the subcontractor pursuant to the subcontract.

SUPPLIER’S BURDEN OF PROOF IN A MILLER ACT PAYMENT BOND CLAIM

Posted on May 10, 2014May 10, 2014 by Edward Garber

Unknown What does a supplier need to do to prove a Miller Act payment bond claim? A supplier must prove the following elements:

“(1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing [of the Miller Act].” Jems Fabrication, Inc., USA v. Fidelity & Deposit Co. of Maryland, 2014 WL 1689249 (5^th Cir. 2014).

As you can see, the burden of proof for a supplier in a Miller Act claim is not overly challenging, especially if the supplier has delivery or shipping tickets establishing that it delivered materials to the specific project and/or that its customer ordered the materials for the specific project. If there is a purchase order with the supplier and its customer for the project that would also help support that the materials were supplied for purposes of that project. And, if the supplier’s customer’s contract / subcontract requires the customer to supply those same materials for the project, that also helps to support that the materials were intended for the prosecution of the work. But, importantly, it is irrelevant whether the supplier actually delivered the materials to the project or that the materials were incorporated into the project. See U.S. f/u/b/o Carlson v. Continental Cas. Co., 414 F.2d 431, 433 (5^th Cir. 1969) (affirming summary judgment in favor of supplier where supplier showed it had good faith that the materials were supplied for specific project although supplier did not establish that materials were actually incorporated into project).

But, even though the materials do not necessarily have to be incorporated into the project, the supplier’s claim will still be subject to the standard that the materials were supplied for the prosecution of the work provided for in the contract and that the supplier had a good faith belief that the materials were intended for the specified work. For example, in Erb Lumber Co. v. Gregory Industries, Ltd., 769 F.Supp. 221 (E.D.Mich. 1991), the supplier’s customer opened an account with the supplier for multiple projects. However the supplier’s claim for unpaid materials for the specific federal project at-issue included materials supplied AFTER the project was certified as complete and were likely used for one of its customer’s other projects. For this reason, the court expressed, “Indeed, given that contract work was certified as complete prior to any delivery materials by Erb [supplier], it is impossible for any of the materials to have been provided in prosecution of the contract work….Good faith delivery is not a substitute for supplying materials in prosecution of work provided for in the contract.” Erb Lumber, 769 F.Supp. at 225.

If you are a supplier, it is important to understand your burden of proof and the elements you need to prove in a Miller Act payment bond claim. If you are a surety or prime contractor defending the surety, it is also important to understand the supplier’s burden of proof to appropriately defend the claim and evaluate a potential resolution to the claim if it appears clear the materials supplied were used in the prosecution of the work.

For more information on the preservation of a Miller Act payment bond claim, please see: https://floridaconstru.wpengine.com/miller-act-payment-bond-and-third-tier-subs-or-suppliers/.

CAN A JOINT VENTURER / PARTNER OF PRIME CONTRACTOR RECOVER UNDER THE MILLER ACT PAYMENT BOND

Posted on May 4, 2014May 4, 2014 by Edward Garber

Forming joint ventures / partnerships for a specific public construction project is common. Sometimes, a joint venture relationship arises between entities by virtue of agreements and the conduct of the parties demonstrating they are, in actuality, operating as a partnership for a specific project. Well, what happens if a payment dispute arises on a federal project between the partners — can one of the partners assert a Miller Act bond claim? Typically, the answer is no, as the Ninth Circuit in U.S. f/u/b/o Briggs v. Grubb, 358 F.2d 508, 512 (9th Cir. 1996), explained:

“While a Miller Act payment bond does make the surety liable for labor and materials furnished by a subcontractor when the contractor under the bond defaults, such a bond does not make the surety liable for monies expended on the contract by a partner or joint venturer of the contractor under the bond.”

In this case, the government awarded the prime contract for a project in California to an Oregon-based contractor. The contractor provided Miller Act performance and payment bonds. The contractor, however, had never undertaken a project in California. As the project commenced, the contractor sought assistance and entered into an agreement with a California-based contractor (that was also a bidder on the same project). Due to a payment dispute, the California-based contractor filed suit against the Oregon-based contractor (prime contractor) and its Miller Act payment bond surety. The agreement that was entered into and evidence of the conduct of the parties established that the California-based contractor did not serve as a subcontractor, but as a partner or joint venturer for purposes of the project. For this reason, the California-based contractor could not recover under the payment bond.

Recently, the Middle District of Florida in U.S. Surety Company v. Edgar, 2014 WL 1664818 (M.D.Fla. 2014), ruled on a motion to dismiss where the prime contractor argued that the Miller Act payment bond claim should be dismissed because it was a claim from its joint venturer. While the facts of this case are complex, a completion prime contractor on a federal project entered into an agreement with a subcontractor to perform, among other things, dredging and providing the necessary equipment. The completion contractor contended that this agreement reflected that the subcontractor was actually a joint venturer of the completion contractor for purposes of the project. As a result of a lack of progress, the government threatened to terminate the completion contractor. The subcontractor further claimed that it was not getting paid which resulted in it not paying its equipment suppliers. The completion contractor’s surety, in an effort to avoid the government terminating the prime contractor, entered into a settlement agreement with the subcontractor whereby the surety would pay the subcontractor’s equipment vendor and would tender payment to the subcontractor. The government, nevertheless, terminated the completion contractor and a complicated dispute arose whereby the completion contractor and its surety sued the subcontractor. The subcontractor countersued asserting a Miller Act payment bond claim. The prime contractor and its surety moved to dismiss the payment bond claim arguing that the subcontractor was actually a joint venturer pursuant to its agreement with the completion contractor and, thus, could not assert a payment bond claim. The court, although it had access to the agreement and the settlement agreement with the surety, denied the motion to dismiss (a very early stage in the proceeding) without considering all of the relevant evidence including the conduct of the parties that would exemplify the joint venture / partner relationship between the entities. Clearly, if the evidence establishes that the subcontractor is elevated to a joint venturer, then it will not be able to recover against the bond.

If parties are operating as joint venturers for a specific project (even if a true partnership has not been formed and the prime contract was not awarded to the joint venture), an agreement between the parties should unambiguously reflect this purpose, especially if a joint venture relationship is the intent of the prime contractor. The other party needs to appreciate that such an agreement in conjunction with conduct during the course of construction demonstrating it is operating as a partner could hinder its right to recover against a Miller Act payment bond if a payment dispute arises. Perhaps this is alright if there is a good agreement in place between the parties that explains how risks are allocated, how payment is to be made, and with a dispute resolution provision, provided there is no real concern over the solvency of the prime contractor.

RECOVERING SHARED SAVINGS (PROFIT) FROM A MILLER ACT SURETY

Posted on April 30, 2014April 30, 2014 by Edward Garber

Can a Miller Act payment bond claimant (e.g., subcontractor) recover shared savings from the payment bond surety? The opinion in Fisk Electric Company v. Fidelity and Deposit Company of Maryland, 2013 WL 592907 (E.D.La. 2013), answered this question in the affirmative.

In this case, a prime contractor on a federal pump station project entered into a purchase order agreement where its electrical subcontractor would supply a diesel generator for $2,644,005 which was later increased to $2,710,792. The prime contractor did not pay the subcontractor and the Miller Act payment bond surety tendered $2 Million but refused to pay the $710,792 delta. As a result, the subcontractor instituted an action against the payment bond. The surety contended that there was an issue of fact regarding the delta because it included an excessive amount (profit) over and above the actual cost of the generator that was in the form of shared savings. In other words, there was a shared savings incentive if the subcontractor was able to purchase the generator on the open market below a certain amount that was previously quoted to the prime contractor from another entity. The subcontractor was able to do so and this shared savings (profit) was built into the agreed price of the purchase order.

The Eastern District of Louisiana granted the subcontractor’s motion for summary judgment ruling that the subcontractor could recover the shared savings (profit) since “the amount properly recoverable under the Miller Act by a subcontractor is the agreed contract amount without regard to whether the amount may or may not include profits.” Fisk Electric Company, supra, at *4 quoting Price v. H.L. Coble Const. Co., 317 F.2d 312, 318 (5^th Cir. 1963). Indeed, the Ninth Circuit previously found that a subcontractor could recover from a Miller Act surety shared savings pursuant to a shared savings provision in the subcontract that required savings to be divided evenly. Taylor Constr., Inc. v. ABT Serv. Corp., 163 F.3d 1119 (9^th Cir. 1998).

Although the surety argued that summary judgment should not be granted because the subcontractor may have perpetrated a fraud based on its large markup which could have absolved the surety of obligations under the bond, the surety did not have any evidence to support its defense. As the court explained: “The mere fact that the negotiated price included an incentive in the form of shared savings is not, in and of itself, suggestive of anything improper.” Fisk Electric Company, supra, at *6.

Knowing what is recoverable under a Miller Act payment bond will allow a claimant to best present their damages and allow a surety or prime contractor defending the surety to evaluate their defenses to the payment bond claim.