Foot Dragging Can be Costly, Especially for Sureties
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.