Payment and Performance Surety Bonds in Construction Projects: Perspectives of Owners, Contractors and Sureties

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Payment and Performance Surety Bonds in Construction Projects: Perspectives of Owners, Contractors and Sureties Asserting and Defending Surety Bond Claims and Exploring a Cost Effective Alternative to Protect Rights or Maximize Recovery TUESDAY, AUGUST 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Christopher L. McCloskey, Partner, Bricker & Eckler, Columbus, Ohio Michele Leo Hintson, Esq., Partner, Schumaker Loop & Kendrick, Tampa, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Construction Surety Issues Bricker & Eckler LLP Columbus Cincinnati-Dayton Cleveland Marietta Presents: Construction Surety Issues Performance Bonds August 5, 2014 Chris McCloskey, Esq.

6 Construction Surety Issues Who are the parties to a surety bond? Surety A company licensed to issue surety bonds. Principal Contractor whose contract is being bonded. Obligee The Owner for whom the Work is being performed. 6

7 Construction Surety Issues The Surety as a silent partner A surety bond is an obligation by which a company (Surety) agrees to compensate an owner (Obligee) if its contractor (Principal) fails to perform its obligations under its contract with the Obligee. SURETY OWNER/OBLIGEE SURETY BOND Bonded Contract CONTRACTOR/PRINCIPAL 7

8 Construction Surety Issues RTFB Read the Fabulous Bond Bonds are Contracts Terms of the Bond Control Notice Provisions AIA A312 5: When the Owner has satisfied the conditions of Section 3 [Notice Provision], the Surety shall promptly and at the Surety s expense take one of the following actions. 8

9 Construction Surety Issues Public Projects Require Surety Bonds Public surety bonds are governed by the provisions of the applicable statute. (See, e.g., ORC ) If the terms and conditions of the surety bond for a public project vary from the statutory form of bond requirements, the statutory requirements are read into the bond and prevail over the bond language. See Southern Surety Co. v. Chambers (1926), 115 Ohio St

10 Construction Surety Issues Bonds Are Not Insurance Bond Covers the work of the contract. AIA A312 9: The Surety shall not be liable to the Owner or others for obligations of the Contractor that are unrelated to the Construction Contract. Surety will look to the Principal for reimbursement of any amounts paid to the Obligee under its indemnity agreement. 10

11 Construction Surety Issues Bonds Are Not Insurance Insurance (CGL) Typically does not cover the work itself. Exception: Builder s Risk Insurance. Covers acts or omissions of Contractor that cause injury or damage other than to the work itself. Insurance does not seek reimbursement from the Contractor. 11

12 Construction Surety Issues Types of Claims against Surety Bonds During construction Contractor s failure to perform contract. After Construction Defective work discovered after completion. One-year call back period. General warranty claims (up to 8 years). Requires proof that work was defective when it was installed not enough that it simply failed. 12

13 Construction Surety Issues How is performance guaranteed? It is not!! Indemnity is the surety s obligation it is a financial promise. Financial - indemnity The Contractor s furnishing labor, equipment and materials in conformance with the Contract Documents. Warranties AIA A201, 3.5: The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects. 13

14 Construction Surety Issues What is the surety s risk? Penal Sum of the bond in most cases this is a fixed $$ amount the amount of the original Contract + authorized Change Orders. Exceptions: If Surety takes over project. If Surety acts in bad faith giving rise to extracontractual liability. 14

15 Construction Surety Issues When May the Surety Get Involved? Contractor declared in material default. Maybe sooner Surety may work in background to help Contractor. If suppliers or subcontractors file claims and Owner has not yet declared default. 15

16 Construction Surety Issues When is the Surety Liable on its Bond? When the Contractor is in material default under the bonded Contract, and When the Contractor has been declared by the Owner to be in default, and When the surety has been properly notified of the default, and When the Owner is not in material breach of the Contract. 16

17 Construction Surety Issues The Surety s Obligation To Investigate Duty to investigate is triggered by Owner s declaration and notice of material default. Investigation must proceed within a reasonable time under the circumstances. Investigation must be sufficient for the Surety to decide how to proceed. Owner and Contractor must cooperate to provide information for the investigation. 17

18 Construction Surety Issues Notice of Default Should be sent to both the Contractor and the Surety. Should state the reasons for default. Should be sent in accordance with the Contract notice provisions. Certified mail or other proof of service recommended. 18

19 Construction Surety Issues Factors affecting the Surety s Decision The nature of the default. The cost to cure the default. Time pressures on performance. Bankruptcy of the Contractor. Whether the Surety is adequately indemnified by the Contractor at the time of default. The Contractor s position regarding the default. 19

20 Construction Surety Issues Surety s Options Do nothing. Finance the Contractor. Take over and complete the Contract. Tender a replacement Contractor to take over the Contract. Allow the Owner to complete the Contract and pay for the difference between the amount unpaid under the Contract and the cost of completion, if any. Tender the penal sum of the bond to the Owner. 20

21 Construction Surety Issues Surety s Options Do nothing. Surety loses control of completion/correction costs. Difficult to challenge costs. Obligee has duty to mitigate damages. Does not mean lowest possible cost. Surety s loss limited to penal sum of its bond. 21

22 Construction Surety Issues Surety s Options Finance the Contractor Is this option better than termination? Why is the Contractor in financial distress? What is the Contractor s history? Is the Contractor capable of performing? How strong is the indemnity protection? How strong is the Contractor s will to complete the job? What measures can the Surety take to protect itself? 22

23 Construction Surety Issues Surety s Options Take over and Complete the Contract Is this in the Surety s best interest? Maintain control of the costs. Mitigate the losses of all parties. Avoid costly litigation. Owners often prefer this option because time is of the essence. 23

24 Construction Surety Issues Surety s Options Tender a Replacement Contractor Sureties have good contacts in the industry. Access to qualified consultants. Surety will assist with negotiation. Obligee/Owner must agree. Surety will want to be released. Caveat: maintain bonded warranties. 24

25 Construction Surety Issues Surety s Options Allow Owner to Complete the Contract Sometimes no choice when time is critical and not enough time to fully investigate. Surety at risk of higher costs. Owner/Obligee at risk of litigation. Owner must proceed in reasonable manner. Owner has duty to mitigate damages, but not required to complete at lowest possible price. 25

26 Construction Surety Issues Surety s Options Tender penal sum of bond to the Owner Relieves the Surety of further obligation to the Obligee/Owner. May result in Surety s battle with the Contractor/Principal. Usually the result of thorough investigation. 26

27 Construction Surety Issues Christopher L. McCloskey Bricker & Eckler LLP 100 S. Third St. Columbus, Ohio

28 PAYMENT BONDS: COVERAGE ISSUES AND LITIGATION DISPUTES MICHELE LEO HINTSON SHUMAKER, LOOP & KENDRICK, LLP

29 Payment Bonds: Purpose and Structure Protect those supplying labor and/or materials on a Construction Project Surety is bound to make payments to those that its principal, or the contractor, is bound to contractually Payment bond claimant is not a party to the Bond 29

30 Payment Bonds: Types of Bonds Miller Act Bonds Little Miller Act Bonds Statutory Bonds Common Law Bonds 30

31 Payment Bonds: Miller Act Bond Product of Federal Statute Bonded Contract Must Exceed $100,000 Contract Must be for a Public Building or Public Work of the Federal Government The Obligee of the Bond is the U.S. Government 31

32 Payment Bonds: Miller Act Bond Conditions Precedent to Filing Suit Cannot File Suit until 90 days after the day on which the last labor or material performed or provided If no contractual privity with Contractor, must provide notice of non-payment Claim must be brought no later than one year after the day on which the last work performed or material supplied 32

33 Payment Bonds: Little Miller Act Every State in the Union has some form of public works law to protect Consumers Typically the provisions deviate from the Miller Act in the area of contract sum and notice requirements Ex. Fla. St

34 Payment Bonds: Statutory Bonds Created by Statute Unrelated to Public Contracts Provides the Obligee, or Owner, with another option for managing risk of nonpayment on a particular project Owners can also require this as a device to avoid Claims of Lien to be filed against Property Ex.: Fla. Stat

35 Payment Bonds: Common Law Bonds Not governed by Statute Largely manuscript Bonds Coverage is generally determined by applicable contract principles 35

36 Payment Bonds: Who is Covered A Claimant in Privity with the Principal is Always Covered Coverage for categories of second and lower tier claimants is the area of concern 36

37 Payment Bonds: Who is Covered Subcontractors Suppliers Laborers Assignees 37

38 Payment Bonds: What is Covered Labor- including, in some circumstances, a Professional s offsite labor Materials- including, in some circumstances food needed for the project, and those not yet incorporated into the Project Equipment- rental and in some cases, purchases 38

39 Payment Bonds: What is Covered Insurance Premiums or Loans Delay Damages Lost Profits Interest Attorneys Fees 39

40 Payment Bond: Surety Defenses Even technically valid claims may have defenses. 40

41 Payment Bonds: Surety Defenses A Surety Stands in the Shoes of its Principal The surety may assert any legal or factual defenses of its principal. 41

42 Payment Bonds: Surety Defenses Claimant s Material Breach A payment bond claimant s material breach is a defense that may be asserted by both the principal and the surety. 42

43 Payment Bonds: Surety Defenses Payment Payment is a defense to a claim, regardless of who makes the payment. 43

44 Payment Bonds: Surety Defenses Contractual Conditions Pay When Paid Clauses in Contracts Shifts the risk of owner non-payment to the subcontractors, if unequivocal. 44

45 Payment Bonds: Surety Defenses Pass Through Defenses (the disputes clause) Only the prime contractor is required to pursue administrative remedies against the government. 45

46 Payment Bonds: Surety Defenses No-Damage-for- Delay Clause Surety may assert a nodamage-for-delay clause so long as the delay is not caused by bad faith, interference, or gross negligence. 46

47 Payment Bonds: Surety Defenses Change Orders and Extras Surety may assert its principal s defenses to charges for extra work, and may assert a failure of compliance with contractual requirements such as a requirement for a written change order. 47

48 Payment Bond: Surety Defenses Waiver, Estoppel & Release Advance waiver unlikely Estopped usually requires fraud or negligence Release is effective if clear and supported by consideration 48

49 Payment Bonds: Surety Defenses Unlicensed Contractor If local law provides a defense to the prime contractor based upon the subcontractor s failure to be properly licensed, that defense is available to the surety 49

50 Payment Bonds: Surety Defenses Failure to Mitigate Damages A payment bond claimant has a duty to mitigate damages, unless the liable party has an equal opportunity to mitigate. 50

51 Payment Bonds: Surety Defenses Limitation to the Penal Sum The penal sum generally limits the surety s total potential liability with some exceptions. 51

52 Payment Bonds: Surety Defenses Carefully consider any potentially applicable defenses under local law READ THE BOND AND CONTRACT. 52

53 QUESTIONS? MICHELE LEO HINTSON SHUMAKER, LOOP & KENDRICK, LLP