All Is Not Lost: The Making of a Common Law Bond
Enter into a formal contract with any public authority for the construction or repair of a public building or structure or for performance of other public work and you will need to have a payment and performance bond in place, so say most state statutes. The bond customarily requires the contractor to perform as contractually prescribed, both as to time and manner of work, and as importantly, to promptly make payments to all persons whose claims are related to the prosecution of the contracted work.
Generally, a claimant who doesn’t have his or her own subcontract with the contractor must notify the contractor that he/she intends to look to the bond for protection, and must do so within 45 days of beginning work or supplying materials. Likewise, this same subcontractor usually has 90 days after completing performance to advise both contractor and surety in writing of non-payment, and thereafter has one year to initiate legal action.
But what if the subcontractor fails to strictly comply with the notice requirements of the applicable state statute or if the bond is not clearly drafted by the surety – does that subcontractor still have any recourse? Some courts have said yes, finding that in certain instances a common law bond can be formulated and enforced.
What is a Common Law Bond?
In its simplest form, a common law bond is one which for whatever reason may not meet the exacting and specific requirements of a statutory bond. A bond will also be construed as a common law bond if it provides coverage in excess of the minimum statutory requirements. Twenty years ago, the Third District Court of Appeal in Florida made clear that “the primary test in determining whether a bond is a statutory bond or a common law bond depends upon an examination of the obligations imposed upon the principal and its surety. The test requires a comparison of the minimum requirements enunciated in the statute and the language contained within the bond.” Florida Keys Community College v. Insurance Company of North America, 456 So. 2d 1250 (Fla. 3d DCA 1984).
Finding that a common law bond does exist comes with one large advantage, an expanded statute of limitations – 5 years versus the 1 year customarily prescribed for statutory bonds. And courts have continued to be lenient in allowing an expanded basis for sustaining a common law bond as opposed to the strictly narrow construction required and imposed by statutory bonds. In reversing a trial court, a District Court of Appeal in Florida recently held that it remains “Florida’s policy to construe any ambiguity in a bond in favor of granting the broadest possible coverage to those intended to be benefited by protection of the bond…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 v. The Great American Insurance Company, 807 So.2d 750 (Fla 4th DCA 2002).
All is not necessarily lost because of a failure to properly notice the surety or to timely file suit on a statutory bond, especially if the bond is not precisely drafted by the surety. Courts, while not in unison on this issue, have generally taken the position that construction bonds are contracts of insurance, and therefore ambiguities will be construed in favor of granting coverage to those intended to benefit under a given bond. Drafter beware.