If they’ve been in the game long enough, subcontractors and suppliers all eventually run into difficulties getting paid for their work and materials by those who contracted for them. The option of suing for payment isn’t always attractive and won’t always be fruitful (e.g., when a general contractor goes under). For those occasions, wouldn’t it be nice to have a third party with deep pockets step up and guarantee payment? That is precisely what a payment bond is supposed to do. In exchange for the contractor’s payment of a premium and a written promise to indemnify any losses (secured by a pledge of assets and personal guarantees of the contractor’s principals), a bonding company will put its own credit on the line.
On some private construction projects and on virtually all public construction projects, general contractors are required to furnish a bond, typically issued by an insurance company, for the benefit of those who supply labor and materials to the job. In the public setting this is a matter of statute (RSA 447:16-18 for state and municipal work, 40 U.S.C. §§ 3131-3134 for federal work), intended as a substitute for mechanic’s liens, which do not attach to public buildings.
Bond claims are subject to strictly-enforced notice requirements. Under the federal statute the claim must be made by giving written notice to the contractor within 90 days of the claimant’s last day of work or furnishing of materials. The state statute is more generous: a claim must be filed with the appropriate governmental body “within 90 days after completion and acceptance of the project by the contracting party.” The express terms of the bond may have additional notice provisions and deadlines – but if these differ from the statutory provisions, the statutory provisions will control for any bond given on a project that is subject to the statute.
One important difference between payment bonds on federal projects and payment bonds on state or municipal projects lies in who can claim under them. The federal project payment bond covers persons having "a direct relationship with the principal or a subcontractor of the principal;" lower tiers are shut out. The state statute has no such limitation.
A payment bond guarantees payment of what the contractor actually owes, and that amount may be in dispute. If the contractor purchasing the bond disputes the claim in whole or in part, the bonding company will typically do some investigation to determine how much is justly due―including asking for a sworn itemization of the claim and supporting documents, and getting its principal’s side of the story documented as well. If a good faith investigation leaves the matter unclear, it’s a safe bet that the bonding company won’t pay the amount in dispute without its principal’s consent, which usually means that a lawsuit must be filed on the bond. Those lawsuits have their own separate statutory and/or contractual requirements and deadlines.
Procedural defenses like insufficient notice or untimeliness aside, it is often said that a bonding company has all of the defenses to payment that the general contractor has (bankruptcy being the most notable exception). That may be overstating things. Thus far no reported New Hampshire case has ruled on a key question that has divided courts in other states: if there is a “pay-if-paid” provision in the subcontract and the general contractor hasn’t been paid by the owner, can the bonding company also hide behind the “pay-if-paid” clause and avoid paying the sub? The issue is nuanced; I will elaborate in a future blog. It may seem unfair to the bonded contractor to require the bonding company to pay in such circumstances, given that the contractor must reimburse the bonding company for every penny paid out on a claim, despite not having been paid itself. But there are a few precedents reaching that result.
A payment bond takes the place of a mechanic’s lien only in the public works arena; the availability of a payment bond on a private project does not prevent simultaneous pursuit of a mechanic’s lien remedy. Even on a state or local government project, a bond does not preclude the claimant from also getting a lien on the monies due or to become due from the awarding authority to the general contractor under RSA 447:15. And in my experience, liening the money is the more powerful choice.
On some private construction projects and on virtually all public construction projects, general contractors are required to furnish a bond, typically issued by an insurance company, for the benefit of those who supply labor and materials to the job. In the public setting this is a matter of statute (RSA 447:16-18 for state and municipal work, 40 U.S.C. §§ 3131-3134 for federal work), intended as a substitute for mechanic’s liens, which do not attach to public buildings.
Bond claims are subject to strictly-enforced notice requirements. Under the federal statute the claim must be made by giving written notice to the contractor within 90 days of the claimant’s last day of work or furnishing of materials. The state statute is more generous: a claim must be filed with the appropriate governmental body “within 90 days after completion and acceptance of the project by the contracting party.” The express terms of the bond may have additional notice provisions and deadlines – but if these differ from the statutory provisions, the statutory provisions will control for any bond given on a project that is subject to the statute.
One important difference between payment bonds on federal projects and payment bonds on state or municipal projects lies in who can claim under them. The federal project payment bond covers persons having "a direct relationship with the principal or a subcontractor of the principal;" lower tiers are shut out. The state statute has no such limitation.
A payment bond guarantees payment of what the contractor actually owes, and that amount may be in dispute. If the contractor purchasing the bond disputes the claim in whole or in part, the bonding company will typically do some investigation to determine how much is justly due―including asking for a sworn itemization of the claim and supporting documents, and getting its principal’s side of the story documented as well. If a good faith investigation leaves the matter unclear, it’s a safe bet that the bonding company won’t pay the amount in dispute without its principal’s consent, which usually means that a lawsuit must be filed on the bond. Those lawsuits have their own separate statutory and/or contractual requirements and deadlines.
Procedural defenses like insufficient notice or untimeliness aside, it is often said that a bonding company has all of the defenses to payment that the general contractor has (bankruptcy being the most notable exception). That may be overstating things. Thus far no reported New Hampshire case has ruled on a key question that has divided courts in other states: if there is a “pay-if-paid” provision in the subcontract and the general contractor hasn’t been paid by the owner, can the bonding company also hide behind the “pay-if-paid” clause and avoid paying the sub? The issue is nuanced; I will elaborate in a future blog. It may seem unfair to the bonded contractor to require the bonding company to pay in such circumstances, given that the contractor must reimburse the bonding company for every penny paid out on a claim, despite not having been paid itself. But there are a few precedents reaching that result.
A payment bond takes the place of a mechanic’s lien only in the public works arena; the availability of a payment bond on a private project does not prevent simultaneous pursuit of a mechanic’s lien remedy. Even on a state or local government project, a bond does not preclude the claimant from also getting a lien on the monies due or to become due from the awarding authority to the general contractor under RSA 447:15. And in my experience, liening the money is the more powerful choice.
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