Do You Need a Bond?

How do you know if a job is bonded?

A payment bond secures your right to be paid on a construction project. Instead of a lien on the property, if the job is bonded, your claim exists against that payment bond.

There are two ways to know if a job is bonded:

1. A copy of the bond should be posted at the job site;
2. A copy of the bond is likely recorded with the Notice of Commencement, so if you have access to the public records of the county where you’re doing work, you can pull up the Notice of Commencement and see if the job is bonded.

Let’s talk about the very specific steps with which you need to comply in order to have a valid and enforceable bond claim.

Within 45 days of your first work on the job.

You need to send what is called a Preliminary Notice or Notice to Contractor. A Preliminary Notice is a document very similar to a Notice to Owner. This document should be sent by you to the bonded contractor and his or her surety, advising them that you intend to look to that bond in order to be paid. Only those who do not have a direct contract with the bonded contractor need to send this Preliminary Notice.

This means that if you are a subcontractor, to a bonded general contractor, you do not need to send this preliminary notice; however, I strongly encourage that you do so.Sometimes, you don’t know a job is bonded and the 45 days to send that Preliminary Notice may have expired. But fear not, if that bond was not recorded with the Notice of Commencement, and you had no reason to know the job was bonded, your 45 days won’t start to run until you have actual notice that the job was bonded.

Next, within 90 days of your last work on the job.

You need to send what’s called a Notice of Nonpayment. A Notice of Nonpayment, similar to a lien, is a document that’s sent to the bonded contractor and his or her surety, advising them that you’re owed money on a job and you intend to look to the bond to be paid.

Finally, in order to assert your claim against the payment bond.

You need to file suit against that payment bond surety within 1 year of your last work on the job. This differs from a situation where you may be foreclosing a lien. In that case, you have one year from the recording date of the Claim of Lien. With a bond, you have only one year from the last date of work – that could be a spread of as much as 90 days. Don’t mix up the two rules.

You surely don’t want to squander your claim against a surety bond; that bond is there to guarantee that you can get paid for the work that you do on a particular job. Don’t lose that opportunity.

Payment Bond Payout

The American Institute of Architects produces contract and bond forms regularly utilized by the construction industry. Payment and performance bond form A311 was introduced by the AIA in 1970 and imposes a series of notification requirements upon a payment bond claimant seeking recovery. It was not until the AIA’s introduction of payment and performance bond form A312 in 1984 that sureties were faced with reciprocal notification requirements. But what good are mandatory payment bond provisions without the potential for enforcement? Said another way, why are payment bond provisions strictly construed against bond claimants when provisions imposing duties on the surety are regularly treated with leniency or altogether ignored? After the recent Wadsworth decision rendered by the Court of Special Appeals of Maryland, this may no longer be the case.

Payment Bond Duties Imposed on Claimants and Sureties

The AIA A312 payment bond imposes a series of duties on both claimants and the surety.

Specifically, A312 provides in pertinent part:

• 4. The Surety shall have no obligation to Claimants under this Bond until:
  • 4.1 Claimants who are employed by or have a direct contract with the Contractor have given notice to the Surety and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim.
• 6. When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions:
  • 6.1 Send an answer to the Claimant, with a copy to the Owner, within 45 after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.
  • 6.2 Pay or arrange for payment of any undisputed amounts. (emphasis added).

The word “may” denotes a permissive term rather than the mandatory connotation of the word “shall.” Paragraph four of A312 states that, “The Surety shall have no obligation to Claimants under this Bond until…,” indicating that an obligation shall be imposed upon the surety when the conditions of paragraph four have been complied with. (emphasis added).

The payment bond goes on to state in paragraph six, “When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions:

Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed [and] pay or arrange for payment of any undisputed amounts.” (emphasis added). Pursuant to the express language of A312, mandatory notification requirements are imposed upon both the claimant and the surety.

Travelers Indemnity Co. v. National Gypsum Co.,

Courts across the country have typically held that the failure of a claimant to timely comply with the applicable notice requirements of a payment bond renders the claimant’s right to recover under the bond a nullity. In the characteristic case of Travelers Indemnity Co. v. National Gypsum Co., National Gypsum sought to recover on a payment bond after not receiving payment for materials it had supplied. The notice provision of the bond provided that no claimant could bring an action for payment on the bond unless that claimant “shall have given written notice to any of the two following: The Principal, the Owner, or the Surety above named, within ninety (90) days after the claimant did or performed the last of the work or labor, or furnished the last of the materials for which said claim is made….” The Florida Third District Court of Appeal held that National Gypsum’s failure to meet the mandatory condition precedent of supplying timely written notice as prescribed by the terms of the bond precluded its recovery thereon. On appeal, the Florida Supreme Court affirmed the decision, declaring that there was “no reason to allow National Gypsum to enjoy the benefits of the bond without bearing its burdens as well.” This principle of reciprocity is generally echoed by courts throughout the country.

Notwithstanding courts’ rather strict construction of payment bond provisions against potential claimants, the same level of scrutiny has not been imposed as to the provisions which apply to the surety. Such inequities stand contrary to established maxims of contract interpretation. Specifically, courts generally view construction bonds as contracts of insurance, and therefore in construing the terms of these contracts, they must be read and interpreted strictly against the bonding company which prepared them. In addition, any ambiguity as to the nature of the bond must be construed against the surety company and in favor of granting the broadest possible coverage to those intended to benefit under the terms of the bond, such as subcontractors and other claimants.[6]

Such patent disparities are magnified in view of the claimants’ exclusion from the surety selection process. Claimants have no input regarding the selection of the surety, nor are they permitted to negotiate the terms of the bond. Given the claimants’ inability to secure alternate means of financial security, the payment bond is tantamount to a contract of adhesion; claimants have no right to object, protest, or modify its terms. These issues become more significant on public works or other projects where a claimant is not legally entitled or otherwise permitted to secure payment through a lien on the improved property. However, the tide may be turning as a result of a very recent decision.

On September 9, 2004, the first published opinion construing the AIA A312 “45-day” payment bond provision was released by the Court of Special Appeals of Maryland. This case sets the stage for the imposition of surety accountability, in conformity with the mandatory payment bond provisions of A312. In National Union Fire Insurance Company of Pittsburg, et al. v. Wadsworth Golf Construction Co. of the Midwest d/b/a Wadsworth Golf Construction Co.,[8] National Union Fire Insurance Company of Pittsburg, Federal Insurance Company, and Fidelity and Deposit Company of Maryland issued an AIA A312 payment and performance bond for the construction of an 18-hole golf course. The general contractor, Clark Construction Group, Inc., retained the services of Wadsworth Golf Construction Company, as subcontractor, to excavate the site and perform rough grading work. Wadsworth was not paid all amounts due and therefore, on March 23, 2002, timely notified the sureties of its claim against the payment bond.

On April 5, 2002, the lead surety sent Wadsworth a letter requesting that Wadsworth complete a proof of claim and provide additional information supporting its claim. As is customary, the letter furnished by the lead surety stated, “Please be advised that this action is taken at this time without waiver of or prejudice to any of the rights and defenses, past or present, known or unknown which either the above referenced Surety (National Union Fire Insurance Company) or Principal (The Clark Construction Group, Inc.) may have in this matter.” Notwithstanding this reservation of rights, on May 3, 2002, Wadsworth complied and provided the surety an executed proof of claim along with supporting documentation.

Shortly thereafter, the surety notified Wadsworth by letter that it had received the documents, and that it would “immediately take this matter up with the above referenced Principal (The Clark Construction Group, Inc.), in order to ascertain their position on [the] claim as presented.” The letter further stated that the surety would be in contact with Wadsworth “in due course regarding [Clark’s] position on the Proof of Claim….” Wadsworth, despite having sent a second letter on July 23, 2002, requesting an answer to its claim, received no further information from the sureties. On November 6, 2002, Wadsworth filed a single count complaint against the sureties in the Circuit Court for Dorchester County.

At the trial court level, Wadsworth moved for summary judgment based on the 45-day provision of the payment bond. At the hearing on the motion, the court stated:

I’m going to grant the motion for summary judgment on behalf of Wadsworth … I think that under the terms of the bond itself that they [the Sureties] are estopped from now contesting because there was not a response within the time set forth in the payment bond.

On appeal, the sureties asserted three defenses in support of their contention that the trial court erred in granting summary judgment in favor of Wadsworth. First, payment was not yet due to Wadsworth because Clark, as general contractor, had not yet received final payment from the owner (i.e. the pay-when-paid defense). Second, the express language of the bond did not set forth consequences for a surety’s failure to answer a claim within 45 days of receiving it. Finally, the failure to timely respond to Wadsworth’s claim did not manifest an intentional or implied intent to waive any right to defend against said claim.

Just as the trial court was not persuaded by any of the sureties’ arguments, the Court of Special Appeals of Maryland also viewed the sureties’ defenses with skepticism. The Court nullified appellants’ first argument in holding that any defense premised on the premature nature of Wadsworth’s claim could have been asserted by the sureties’ within 45 days of receipt of Wadsworth’s claim upon the surety bond.

The Court discarded the sureties’ second defense, noting Wadsworth’s compliance with the notice requirements of paragraph four of the payment bond. The Court stated that had the sureties wanted a “non-forfeiture of defenses” provision to be included in the bond, they certainly could have included such a provision in their own bond form.

In addressing the sureties’ final defense, the Court acknowledged that appellants did not expressly waive their right to dispute Wadsworth’s claim. Notwithstanding, the Court determined that “the conduct of the Sureties supports the inference of their intention to relinquish their rights under the payment bond, reflecting an implied waiver of their right to defend against non-payment of the claim.”

Addressing the Sureties’ Defenses

After specifically addressing each of the sureties’ defenses, the Court summarized its reasoning and holding as follows:

We are persuaded that Paragraph 6 of the payment bond, read alone and in the context of the remainder of the bond, provides the surety 45 days to dispute a subcontractor’s claim for payment and, if the surety does not answer within that time period, the surety waives its right thereafter to dispute the claim. This construction of the payment bond, moreover, comports with the purpose of such instruments, which is to insure that claimants who perform work are paid for their work in the event that the principal does not pay… To interpret the bond as permitting the Sureties to ignore the period within which to respond to Wadsworth’s claim, only then to raise defenses to the claim upon Wadsworth’s filing of its suit, runs contrary to the bond’s purpose of safeguarding the suppliers of goods and labor. Nor can we imagine a reason for inclusion of the 45-day provision in the bond other than that it is there to be relied upon by the claimant and adhered to by the surety. Furthermore, to read the time period within which the surety “shall” respond to the claims in any way other than as imposing a mandatory time limit upon the surety for contesting the claim borders on the nonsensical, as it renders the 45-day time requirement essentially nugatory.

From a practitioner’s perspective, the Wadsworth decision may alter the conduct of claimants and their counsel. A careful reading of the case reveals that the Court may have counted the 45 days not from the claimant’s initial notice against the bond (the notice of nonpayment), but from the surety’s receipt of the proof of claim. Interestingly, claimants and their counsel routinely ignore the surety’s proof of claim form. Perhaps this is because it requires the claimant to make affirmative statements beyond the scope of the claim (as to warranties or the like), or it may be that neither the bond itself nor any applicable state payment bond statutes require such a proof of claim. In any event, under a strict reading of the Wadsworth case, submission of the proof of claim is not only critical, but it may be the trigger which starts the 45 days running.

Aspects of The Court’s Decision

The authors of this work contend that this aspect of the decision is flawed. Applying the same logic used by the Wadsworth Court, one would reasonably believe that all that is necessary to assert the claim is compliance with paragraph 4.1 of the payment bond. The bond contains no reference to a “proof of claim.” All the bond requires is a notice stating that a claim is being made and, with substantial accuracy, the amount of the claim. This type of notice is typically referred to as a “notice of nonpayment” and is simply a brief letter to the surety, owner, and contractor setting forth the name and address of the owner, contractor, and claimant, the name and location of the project, a description of the claimant’s work, and the amount being claimed.

In light of the Wadsworth decision, it may be prudent to alter the method of asserting claims against AIA A312 payment bond sureties. One modification may be to provide the surety with all customary supporting information at the time the claim is made. In addition to providing a notice of nonpayment, claimants and their counsel may wish to contemporaneously provide the surety with an executed and notarized generic proof of claim and all supporting documents including the subcontract, payment applications, and relevant correspondence. The result will be the commencement of the “45 day countdown” without incurring additional delay inherent in the surety’s customary request for additional information.

It is essential that courts in all jurisdictions look to the Wadsworth holding for guidance when construing the AIA A312 payment bond language. Prior to Wadsworth, countless claimants have been deprived of their right to timely and expeditiously recover under a payment bond. This nullification of claimants’ rights, however, is not the source of discrepancy. Rather, it is the failure to apply the same strict-constructionist standards to sureties that reeks of inequity. As a claimant’s right to recover under a bond is dependent upon compliance with the notice requirements thereof, no greater hardship is imposed upon the surety in requiring timely compliance with those requirements imposed upon the surety by the express terms of its own bond. The holding in Wadsworth is worthy of praise and imitation – accurate interpretation and enforcement of payment bond language is the focus; fairness and equity is the result.

Not All Bonds Are The Same

Too often in the law, great advancements are encountered by greater obstacles. It is no secret that Florida’s construction industry is booming, yet so is the litigious nature of the Sunshine State. While construction litigation may be spawned by a variety of sources, the primary path to the courtroom is most often paved by a pen, not a pulley. Ambiguous drafting of documents, including general contracts, subcontracts, performance bonds, and so forth, is the predominant cause for the intimate relationship between the construction industry and the legal system. This article shall serve to facilitate a better understanding of what constitutes a statutory bond issued for the construction or repair of a public building, and a common law performance bond serving the same or a similar purpose. The former is subject to the requirements and limitations of F.S. §255.05; the latter is unfettered by exacting statutory constraints.

F.S. §255.05 requires the acquisition of a payment and performance bond by any person entering into a formal contract with any public authority (i.e., the state of Florida, city of Miami, Miami-Dade County, etc.) or political subdivision thereof, for the construction or repair of a public building or public work.

Section 255.05(4) goes on to state that the payment provisions of all bonds furnished for public works contracts shall, regardless of form, be construed and deemed statutory bond provisions. Section 255.05, added by the Florida Legislature in 1980 in response to growing concerns of sureties that “common law bond arguments” were frequently being used to evade the notice requirements of §255.05(2), seemingly eliminates the sustenance of common law bonds. Notwithstanding, Florida case law reveals that common law bonds are still very much a part of today’s construction industry. The real challenge lies in distinguishing a common law bond from a statutory bond.

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.”

Is it statutory bond or a common law bond?

The solution, in its most rudimentary form, is as follows:

Statutory bonds are those which meet the minimum requirement of §255.05; common law bonds are those which provide coverage in excess of the minimum statutory requirements.5

This apparently simple solution, however, does not always equate to simple application thereof. An examination of those cases addressing the complexities inherent in such application shall better illustrate the nuances that differentiate statutory from common law bonds.

In United Bonding Insurance Co. v. City of Holly Hill, 249 So. 2d 720 (Fla. 1st DCA 1971), the City of Holly Hill entered into a contract with Rowell Construction Company for the construction of a sanitary sewer system, the terms of which required Rowell to furnish a bond for such work. Rowell procured a performance bond from United Bonding Insurance Company which met the minimum requirements of the contract, but also provided additional coverage agreeing to indemnify and save harmless the city from, among other things, all labor performed in the work, whether by subcontractor or otherwise. Martin Brick & Sand Company, as subcontractor, furnished certain materials to Rowell, as contractor, for use in the performance of the contract. Consequent to not receiving payment, Martin instituted suit on the performance bond issued by United for recovery of the amount due from Rowell.

United’s entire defense was predicated upon the time limitations of F.S. §255.05(2), as Martin brought its suit more than one year after delivery of the materials furnished. United’s reliance upon the aforementioned statute, however, was thwarted by appellee’s reliance on the same, §255.05(6). F.S. §255.05(6) states, “All bonds executed pursuant to this section shall make reference to this section by number and shall contain reference to the notice and time limitation provisions of this section.”

The First District Court of Appeal opined:

It is our view that had appellant surety company intended that the performance bond which it issued to Rowell be a statutory bond given for the sole purpose of meeting the minimum requirements of F.S. Section 255.05, F.S.A., it would have so provided in the bond itself and specified the time limitation of one year within which suits could be brought against it on the bond as restricted by the statute. By granting extensive coverage in excess of that required by the statute, it is not unreasonable to construe the bond involved herein as a common law undertaking subject to liability at the suit of any materialman if commenced within the time allowed by the general statute of limitations.7 Any ambiguity which may exist in this regard must be construed against appellant surety company and in favor of granting the broadest possible coverage to those intended to be benefited by the protection of the bond.8

In affirming the trial court’s construction of the bond in question as a common law bond not subject to the time limitations of F.S. §255.05(2), the United Bonding ruling stands, in pertinent part, for the proposition that ambiguous language within a bond will be construed strongly against a compensated surety and in favor of the obligees or beneficiaries under the bond, i.e., the owner, laborers, and materialmen for whose benefit the bond was executed.9 As a general rule of construction, Florida views construction bonds as contracts of insurance, and therefore, in constructing the terms of these contracts, they must be read and interpreted strictly against the bonding company which prepared them.

Interpretation of Construction Bonds

The proclivity for narrow interpretation of construction bonds continued in Southwest Florida Water Management District ex rel. Thermal Acoustic Corp. v. Miller Construction Co., Inc. of Leesburg, 355 So. 2d 1258 (Fla. 2d DCA 1978). In Southwest Florida, an unpaid material supplier to a subcontractor initiated suit against a performance, payment, and guaranty bond furnished pursuant to a public works contract. Citing a number of fallacies exemplifying the bond’s failure to comply with the requirements of F.S. §255.05, including its lack of specific reference to §255.05, and the absence of any notice requirement or time limitations for bringing an action on the bond, the Second District Court of Appeal reversed the trial court’s dismissal of the complaint, holding that the second amended complaint alleged sufficient ultimate facts to establish a claim under a common law bond.

In so holding, the court declared:

The primary purpose of [F.S. § 255.05] is to afford additional protection to persons who perform labor or furnish materials to a public works project on which they cannot acquire a lien. But not every bond furnished incident to a public works project falls within the ambit of the statute. Rather, the courts recognize a distinction between a statutory bond issued in connection with such a project and a common law bond. A bond, even though furnished pursuant to a public works contract, will be construed as a common law bond if it is written on a more expanded basis than required by Section 255.05, Florida Statutes (1975). Moreover, ambiguities in the form of such a bond must be construed in favor of granting the broadest possible coverage to those intended to be benefited by its protection.

The strict constructionist view did appear to loosen its reign over construction bonds with the First District Court of Appeal’s ruling in State of Florida, Department of Transportation ex rel. Consolidated Pipe & Supply Company, Inc. v. Houdaille Industries, Inc., 372 So. 2d 1177 (Fla. 1st DCA 1979). In Houdaille, the court held that the failure of a performance bond to include specific reference to the notice provisions and time limitations of F.S. §255.05(2) did not recast a statutory bond into the common law arena. The court distinguished the facts in Houdaille from those in United Bonding and Southwest Florida, noting that the performance bonds in both of the later cases failed to refer to §255.05, failed to include time limitations for bringing suit on the bond, and granted broader coverage than that required under §255.05.13 The bond in Houdaille, however, specifically cited §255.05 and did not expand the principal’s obligation to laborers and suppliers beyond that which is required under §255.05.14 Notwithstanding, the Houdaille court may have reached a different conclusion had this case come before it subsequent to the 1980 amendments to F.S. §255.05. Included in said amendments was the aforementioned subsection (6), which requires that all bonds executed pursuant to §255.05 include reference to the notice and time limitation provisions of §255.05(2).

Motor City Electric Co. v. The Ohio Casualty Insurance Co.

In Motor City Electric Co. v. The Ohio Casualty Insurance Co., 374 So. 2d 1068 (Fla. 3d DCA 1979), a material supplier to a subcontractor asserted a claim against a bond furnished in accordance with a public works project. The bond in question did contain language incorporating F.S. §§255.05 and 713.23, and as such, the trial court dismissed the complaint for failure to initiate the action within the one-year statute of limitations provided for in those statutes. The Third District Court of Appeal reversed, noting that §255.05 only applies to those persons in direct privity with the designated public authorities; it does not apply to those instances where the principal on the bond is not in privity with the owner but rather was required to secure the bond as a condition of its subcontract. The court held that the bond in question was a common law bond, permitting the material supplier to seek recovery as a third-party beneficiary.

“A third party may recover on a surety bond under appropriate circumstances where that bond is intended for his benefit as well as for the benefit of the formal parties thereto.”17 In other words, subcontractor and lower tier payment bonds furnished pursuant to a public works contract are, due to a lack of privity, inherently common law bonds, not subject to the notice provisions and time limitations of F.S. §255.05.

As the statutory scheme for construction bonds issued for public works continued to develop through various amendments to F.S. §255.05, aforementioned subsection (4), cloaked in its potent, almost threatening verbiage, seemingly lost some of its virility following the Fifth District Court of Appeal’s holding in Martin Paving Company v. United Pacific Insurance Company, 646 So. 2d 268 (Fla. 5th DCA 1994). In Martin Paving, a sub-subcontractor brought an action against the surety for the general contractor under a public construction payment bond. The bond, however, had not been recorded in the public records of the county where the improvement was located, a requirement under F.S. §255.05(1).19 In reversing summary judgment granted in favor of United Pacific, the court stated that subparagraph (4) of §255.05 is expressly limited to “bonds furnished for public work contracts described in subsection (1).” The court held that “unless subsection (1) is complied with, subsection (4) does not operate to require the claimant’s compliance with subsection (2).”

The court went on to declare:

The same result is reached by application of common sense. Here Martin claims to have followed the statutory path to discover the bond in order to comply with the requirements for perfecting a claim. Because of the failure of others, Martin did not find the bond in time to timely assert its claim. The current statutory scheme plainly does not contemplate that the principal and surety can defeat a payment bond claim by avoiding detection. The amended statutory procedure is simple enough for the surety and principal to follow in order to insure the coveted protections of subsection (2) of 255.05. If they cannot follow the procedure, they cannot expect the claimant to do so either. In such a case, the claim is governed by the terms of the bond.

Notwithstanding its ruling in Martin Paving, the Fifth District Court of Appeal regressed from its strict constructionist view of §255.05 in Florida Crushed Stone Company v. American Home Assurance Company, 815 So. 2d 715 (Fla. 5th DCA 2002). The court professed that its statement in Martin Paving, that “unless subsection (1) is complied with, subsection (4) does not operate to require the claimant’s compliance with subsection (2),” does not mean “that in all cases in which the bond fails to provide all statutorily required information that the provisions of subsection (2) automatically become inapplicable.”

With knowing recognition of the surety’s failure to include within its bond certain provisions required by subsections (1) and (6) of F.S. §255.05, the court affirmed final judgment in favor of the surety, reasoning that the claimant’s failure to comply with the requirements of §255.05(2) was not a result of the surety’s prior noncompliance.

American Home Assurance Co. v. APAC-Florida, Inc.

In American Home Assurance Co. v. APAC-Florida, Inc., 834 So. 2d 369 (Fla. 2d DCA 2003), the Second District Court of Appeal certified that its decision conflicts with that of the Fifth District in Florida Crushed Stone. The Second District reaffirmed its position in American Home Assurance Co. v. Plaza Materials Corp., 826 So. 2d 358 (Fla. 2d DCA 2002), by holding that “a surety may not invoke the notice requirements and the shorter statute of limitations provided in section 255.05(2), Florida Statutes (1995), if it agrees to be surety on a bond that fails to comply with the mandatory notice provisions in §255.05(6).”

The court went on to express its concern: “We do not believe that the surety should be entitled to force claimants to participate in a jury trial on the issue of whether the omission in the bond misled them when the surety could have avoided the entire issue by requiring a bond in compliance with the notice provisions.”

The Second District’s concern is one that should be embraced by every contracting member of the construction industry. Each of the cases referenced above might never had reached the courthouse steps had it not been for ambiguous drafting. Recall, ambiguities will be construed in favor of granting the broadest possible coverage to those intended to be benefited by its protection. A minor error in drafting could lead to a major transition in form: statutory bond to common law bond; one-year statute of limitations to five-year statute of limitations. The maxim “time equals money” has forced its way into every facet of the business world, and the construction industry is certainly no different. Take the time to read applicable Florida Statutes and draft documents accordingly; the money you save is your own.

1 When the contract is for $100,000 or less, no payment and performance bond is required. In addition, note that Fla. Stat. §713.23 governs any form of bond (as opposed to a bond exclusively associated with public entities) given by a contractor for the improvement of real property, conditioned to pay for labor, services, and material used for said improvement.

2 Fla. Stat. §255.05 (2) provides in pertinent part: “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, 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. No action for the labor, materials, or supplies may be instituted against the contractor or the surety unless both notices have been given . . . . An action, except for an action exclusively for recovery of retainage, must be instituted against the contractor or the surety on the payment bond or the payment provisions of a combined payment and performance bond within 1 year after the performance of the labor or completion of delivery of the materials or supplies . . . . The time periods for service of a notice of nonpayment or for bringing an action against a contractor or a surety shall be measured from the last day of furnishing labor, services, or materials by the claimant . . . .”

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).

Is it a Statutory Bond or a Common Law?

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 4^th 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.

Bond Protection Under the Miller Act

What is The Miller Act

The Federal Miller Act protects certain subcontractors, laborers and suppliers that provide labor or materials for the construction, alteration or repair of federal projects against the risk of nonpayment. Claimants that improve a federally owned project cannot record a claim of lien against the improvement. For example, despite its potential value on the open market, the Washington Monument cannot be foreclosed on by a subcontractor that performed certain construction improvements at the landmark.

How Do You Comply

To reduce the inherent risk to the owner, prime contractor and potential claimants on a federal project, the Miller Act requires a payment bond to be issued by the prime contractor and its surety on most federal government construction projects exceeding $100,000. As such, any subcontractor, laborer or supplier performing federal work should have a basic understanding of how to comply with and use the Miller Act to increase the likelihood of payment during a dispute. If the claimant’s customer is under­funded or bankrupt, a bond claim may be the only viable means of collection. In these instances, making a proper Miller Act payment bond claim is critical to securing payment. Conversely, the prime contractor and its surety must understand the Miller Act’s payment bond provisions to separate valid and bogus bond claims.

Who is a Proper Claimant

Keep in mind who may be a proper claimant under the Miller Act. For example, a subcontractor, material supplier or laborer performing under a contract with the prime contractor (i.e., a first-tier claimant) can make a Miller Act bond claim. A sub-subcontractor, a laborer or material supplier working under a contract with one of the prime contractor’s subcontractors (i.e., second-tier claimant) also can make a Miller Act bond claim. However, no claimant below the second tier of contractual privity can make a Miller Act bond claim. For example, a material supplier to a material supplier has no rights under the Miller Act. As a result, an entity below the second tier should price its work with the understanding that it will not have an available remedy under the Miller Act.

What Notices Are Required

Failing to correctly and timely serve the proper notice under the Miller Act may mean “game over” to a bond claimant’s action, even if its work was performed perfectly.

For example, prior to filing a lawsuit to enforce its payment bond claim, a second ­tier claimant must notify the prime contractor by stating with “substantial accuracy” the amount claimed and to whom the material or labor was furnished. The notice must be provided to the prime contractor within 90 days of the second ­tier claimant’s last date of work on the project. Because various federal court opinions differ on whether the notice must be received or merely served by the 90th day, claimants should aim to complete the notification process well before the deadline.

No notice is required by a party that contracts directly with the prime contractor because the prime contractor is presumed to know if its subcontractors, laborers or suppliers are unpaid. Though the Miller Act contains no such requirement, some states, such as Florida, require a claimant to serve a “notice to owner” or “notice to contractor” within a certain time after beginning work on the project prior to perfecting a bond or lien claim.

Filing Suit

Both first-tier and second-tier claimants are required to file a lawsuit to enforce the payment bond claim within one year of the claimant’s last work on the project. The timing of the notice provision and the one-year statute of limitations prevent the prime contractor and surety from being served with stale claims.

Waivers of various claims, including but not limited to Miller Act payment bond claims, are not uncommon in contract documents provided to a claimant before work begins. However, the waiver of a claimant’s right to bring a lawsuit against the Miller Act payment bond is valid only after the claimant performs the work covered by the waiver. It also must be in writing and executed by the claimant that wants its right to be waived.

The Miller Act is a valuable resource if used correctly and timely.

Checklist for a 255.05 Bond

Contractors working on public projects should be familiar with the requirements of Florida Statute §255.05.

Here is what a 255.05 bond needs to state on its face:

While the following items are not required to be on the face page of the bond, they should be somewhere within the bond:

In addition to the technical requirements above, substantively, the bond cannot:

Fail to address each of these provisions and your bond may not be enforceable.

Surety Obligations

What are a surety’s rights and obligations in disputing a subcontractor’s claim made under a payment bond? More particularly, what is the effect of a general contractor’s payment bond surety’s failure to fulfill a contractual provision requiring it to answer a subcontractor’s payment claim within 45 days after receiving the claim?

The terms of a standard surety bond form provide that the surety must “[s]end an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed”. This language requires that a surety set forth those portions of the claim that it intends to dispute within the 45-day period.

This provision was added to promote timely payment of claims under the bond. It protects subcontractors who, through no fault of their own, are forced to absorb the risk of non-payment by the contractor and the owner for an extended period of time.

What Can a Surety Do?

Two recent cases out of Virginia and Maryland may be part of a national trend and rule that a surety has only one opportunity to raise its defenses to a subcontractor’s claim. If the surety fails to do so, the entire claim will be deemed undisputed. Also, if a surety raises certain defenses to payment within the 45-day contractual period, it is stuck with those defenses through the course of any litigation and cannot raise any new defenses. The argument that a surety could simply dispute a claim through inaction, i.e. failing to answer within the 45-day period, was rejected. The Virginia case held that the surety could, however, raise technical legal defenses during litigation and is not precluded from conducting discovery and raising facts that relate to the bases of contention properly raised in the contractual period.

Practically speaking, when a subcontractor makes a claim under a payment bond, it should calendar a deadline for the surety to respond within the time period provided in the contract. If the surety fails to raise any defenses or otherwise respond within this period it may lose its right to raise defenses to payment. If the surety does raise defenses, those defenses may very well be the only ones it will be allowed to use in the course of the parties’ dealings, including any litigation.

These court rulings protect subcontractors who seek recovery under payment bonds, and hamper the ability of a surety to drag its feet in paying legitimate claims.

Applicable Statutes of Limitations

Statutes of limitations set out the time frame for bringing a lawsuit. File after the established time and you’ll be out of luck. It is therefore important to properly analyze the facts of your claim so you can select and calendar the correct time period within which to file. Sometimes, however, the applicable circumstances do not easily allow for such a calculation. When a builder made a claim against the plumber’s surety on a performance bond, it believed it was doing so within the applicable statute of limitations.

The builder calculated that began to run from the date final payment was made to the plumber, but the plumber countered that the statute didn’t begin to run until the entire project was completed and accepted by the owner. The court sided with the plumber. As this was an action on a subcontract, the date of the entire project’s completion was inconsequential. It was the date the plumber’s work was done that mattered here.

How do I get paid after sending notification to the surety?

You did the work but didn’t get paid. So you sent your notice of nonpayment and backup documents. Why won’t the bonding company pay? Why is it taking so long?

It’s important to understand that a surety doesn’t work like insurance. When you have a car accident, you submit a claim to your insurance company, and they cut a check. Most sureties, on the other hand, will not pay you voluntarily unless the principal, the bonded contractor, agrees to pay you first.

Hold up. If the contractor agreed to pay you, you wouldn’t have submitted a claim in the first place, right? There lies the tension, between the surety and the principal. This is the reason you haven’t been cut a check. Delays are highly likely. But there are steps to follow and signs to watch for to put yourself in the best position possible to get paid.

First, be aware of bond claim rules and deadlines, and have a system in place to send timely notices.

For private bonded projects

If you have a direct contract with the bonded prime contractor (you are a sub on the job):

• You do not need to send a first notice to the owner/contractor. However, you should. We recommend having in place a system that automatically processes notices to owners/contractors on every job over a certain amount of money.
• You need to send notice of nonpayment to the surety or contractor within 90 days of your last day of work or last delivery of materials. This is a hard count – every weekday, weekend day and holidays, too. If the 90^th day is a weekend or holiday, it will roll to the next business day. Take note, the surety and the contractor must receive notice by the 90th That doesn’t mean you can wait until the 90th day to mail it.
• You need to file any suit on the payment bond within one year from your last work on the job or the last delivery of materials.

If you do not have a direct contract with the bonded prime contractor (you are a sub-sub or a material supplier to a sub):

• You need to send first a notice to the owner/contractor within 45 days of your first work on the job or delivery of materials. This must be received by the 45^th day, and every weekday, weekend day and holiday counts. If the 45^th day falls on weekend or legal holiday, it rolls to the next business day.
• You need to send notice of nonpayment to the surety or contractor within 90 days of your last day of work or last delivery of materials. Again, every weekday, weekend day and holiday counts. If the 90^th day falls on a weekend or legal holiday, it rolls to the next business day.
• You need to file any suit on the payment bond within one year from your last work on the job or the last delivery of materials.
• Check for subcontractor bonds. If you are a sub-sub, the subcontractor may have its own bond you can make a claim against, in addition to your claim against the prime contractor’s bond. Sub bond timelines are set by whatever it says in the bond. Request the bond in writing from the prime contractor, who is more likely to give you copy than the sub with whom you have a contract.

For State Public Bonded Projects

If you have a direct contract with the bonded prime contractor (you are a sub on the job):

• You do not need to send a first notice to the owner/contractor. However, you should. We recommend having in place a system that automatically processes notices to owners/contractors on every job over a certain amount of money.
• No notice of nonpayment required to be sent, but you should still send within 90 days.
• You need to file any suit on the payment bond within one year from your last work on the job or the last delivery of materials.

If you do not have a direct contract with the bonded prime contractor (you are a sub-sub or a material supplier to a sub):

• You need to send a first notice to the owner/contractor within 45 days of your first work on the job or delivery of materials. This must be received by the 45^th day, and every weekday, weekend day and holiday is counted. If the 45^th day falls on weekend or legal holiday, it rolls to the next business day.
• You need to send notice of nonpayment to the surety or contractor within 90 days of your last day of work or last delivery of materials. Again, every weekday, weekend day and holiday are counted. If the 90^th day falls on a weekend or legal holiday, it rolls to the next business day.
• You need to file any suit on the payment bond within one year from your last work on the job or the last delivery of materials.
• Check for subcontractor bonds. If you are a sub-sub, the sub-contractor may have its own bond against which you can make a claim, in addition to your claim against the prime contractor’s bond. Sub bond timelines are set by whatever it says in the bond. Request the bond in writing from the prime contractor, who is more likely to give you copy than the sub with whom you have a contract.

With these rules firmly in mind, know also that sending your notice of nonpayment to the surety only starts the claim process. It’s just the beginning. Once you submit, you will typically receive a response, a communication of thank-you-very-much-and-we-will-investigate.

Typically, you will also be asked for more information and a “proof of claim.” This is a sworn statement that includes specific hours, labor, materials, dates, etc.

In Florida, there is no obligation to provide that “proof of claim.” We often advise clients not to send it. In our experience, most sureties are using that “proof of claim” not to support the claim but quite the opposite. It will be used to find reasons to deny your claim. Sending it is your call, but in most instances, we don’t see it advancing the claim process.

Keeping in mind the surety doesn’t want to pay unless the contractor does, what do you need to do at this point?

Be watchful for any document you are sent that shortens the time you have in which to file suit. There are procedural mechanisms that can indeed curtail this window. Receiving a “notice of contest” means they are trying to do just that.

Also beware of the surety waiting you out. You have a year to file suit. Perhaps every couple months you receive a letter saying the matter is still being investigated. Then it’s 13 months from your last work, and the next letter says the claim was denied because it’s time-barred: You can no longer sue us. The suggested deadline to watch is that tenth month, if not sooner. If you haven’t made meaningful progress by then to get paid, consider filing a lawsuit.

Practice the 60-60 rule. Sixty days from the last work submit the notice of nonpayment. For 60 days thereafter, badger your customer and the surety for payment. Make frequent calls. Send emails persistently. Mail letters regularly. In our experience, the louder and more aggressive you can be, the more likely it is you will get paid.

If that doesn’t work, submit your information to a construction lawyer to begin the collection process through a lawsuit. We often file a single-count claim against the bonding company. Unless they have a good defense, they most often want to make this go away. They can evade your personal requests, but when you sue, if they do not assert a defense within 20 days, you win, and they lose.

The delay game comes to an end when you file suit. The surety, through the principal, negotiates to settle the claim, often a swift process. There might be a legitimate reason to hold off on the collection process. Perhaps you have a $20,000 bill and you have ten times that amount of work still out with the same contractor. However, you shouldn’t wait for the sake of waiting. The faster you undertake collection efforts, the faster you will get paid.

Getting paid after sending notification to the surety is possible, but you need to strictly comply with the applicable rules.  And be persistent.

Get Paid On A Public Project That Has No Bond

Ensuring you get paid on a public project can be tricky if there’s no bond.  As a subcontractor, a sub-subcontractor or a supplier, you may consider yourself lucky to have been selected for a public job. Why?  Because in the event you are not paid, you believe you can put your faith in payment bonds, a type of debt security that municipalities use to finance new projects and improvements.  But it doesn’t always work out that way.

You deliver materials. You do your work. You aren’t paid. Then you learn there is no bond. Unfortunately, you learn this too late, as you have already done the work and you are already owed money. Now what?

Before we move forward, let’s take a step back. What do you know about bonds?

What public projects need bonds?

In Florida, for a public job between $1 and $200,000, the municipality or school board responsible does not have to procure a bond. On projects of this scale, it’s highly likely there is no bond, so this work is where the risk lies. When the job is between $200,000 and $400,000, it’s optional for a municipality to have a bond. Any job greater than $400,000 must have a bond.

If you work on federal projects, which are governed by the Miller Act, those over $100,000 must be bonded.

Why is it different for a public versus a private job?

On private projects, you have the right to record a lien on the property. If you don’t get paid, and you have followed the notice requirements that the lien law requires, you have recourse. You can look to the property.

On public jobs you have no lien rights.  So if there is no bond, where does that leave you?  Your recovery will be based on your customer and your contract. If you have concerns about your customer’s ability to pay you on a public job, or concerns about your contract, you should address these issues before you start the job.

What does it mean to think ahead on a public job?

Verify, do not assume, that a job is bonded. Obtain a copy of the bond. Asking the general contractor who has the contract with the agency might be all that is involved. Just call. Keep in mind this may not be your direct customer.

Another way to obtain a copy of the bond is to submit a formal request to the public agency. This is done under the Freedom of Information Act (FOIA). Any municipal agency is required to give that to you, within a reasonable amount of time, if you make a FOIA request. Each county or school board operates a bit differently, so you may need to get specifics via call, email, going to an office in person, or a combination of all three.

You can also check public records. A copy of the bond should be recorded in the public records where the project is located. Google “public records (name of the county) county.” Once there, search by the contractor or the guarantor’s name. The bond should show up if it has been recorded and indexed properly. Keep in mind that it can take two days to three weeks for documents to appear in public records. It’s likely the fastest and easiest approach is to get in touch with a municipal agency directly and request a copy of the bond.

Avoid pay-when-paid provisions in your contracts.  Under this scenario, if the owner does not pay the general contractor, that general contractor has no duty to pay a sub or sub-subcontractor. Your rights are very limited by having this risky provision in your contract.

Do include a stop-work provision in your contract. This means if you have a written agreement, which ideally you should – include a provision stating that, to the extent you are not paid in a timely manner, you have the right to slow or stop work. This doesn’t guarantee you get paid, but it stops the bleeding as the project continues and you aren’t being compensated.

Consider limiting your credit risk. For example, if you are going to deliver $150,000 materials on a job that has no bond, you may decide you won’t ship materials over $25,000 if you aren’t getting paid. Once the materials are in hand and the work is done, there’s no going back. Make these contractual decisions in advance to protect yourself.

When it is too late to protect yourself, how do you get paid on an unbonded project that isn’t paying?

Your recourse is two-fold. First, you can file suit for breach of contract for non-payment. You did work; you were not paid; you file a lawsuit. Secondly, you may sue the next level up in the work chain as well, so long as that link is not the government. So, a sub-subcontractor can sue the subcontractor, but also may be able to sue the general contractor for “unjust enrichment.” That means the GC may have taken payment from customer but has not paid you. The GC has received a benefit – been “unjustly enriched” – from your work and materials.

The risk in this claim is that sometimes a general contractor indeed got paid, but that money is being withheld because of a claim against a subcontractor. Perhaps work was defective or late, or more hiring had to be done to correct something. The GC may think he has not been unjustly enriched because the work was not done as promised. All in all, there are many factual issues to sort out to determine who is right.

Clearly, an eyes-open decision should be made as to whether to take the risk of working on a project without a bond. Consider the various outcomes before signing a contract. If it’s too late, a lawyer can advise you on possible next steps to get the money you earned.