Construction Projects and Surety Bonds
We often counsel consumer and commercial clients on property rights. Often, those discussions begin with a primer on property law. This blog entry breaks down construction projects and surety bonds. In three prior entries we discussed types of ownership estates as well as the method of ownership, then the forms of deeds, mortgage rights and responsibilities and finally mechanic’s liens. If you find these articles helpful, or if you have additional questions, please don’t hesitate to contact us.
Indiana does not require payment bonds to be posted on private projects, although some municipalities require surety bonds to secure against code violations. Conversely, public bonds do require surety bonds. If a bond is posted the deadlines for filing a claim and filing suit will be outlined in the bond. It is also essential that regardless of the statutory deadlines, you should always read the bond. If the bond enlarges these time periods, the deadlines in the bond will control.
- Public projects
There are four different types of public projects in Indiana. It’s important to know which type of project you are working on so that you are aware of your statutory rights and obligations. The four types of projects are:
a. Title 4 State Projects – Indiana Code §4-13.6-1-1 et seq.
Title 4 projects are Indiana state public works projects solicited by the Indiana Department of Administration, the Public Works Division. Unless the bond provides for a greater period of time, a claimant must file a claim with the Public Works Division and the surety within 60 days from the last date labor was performed, material furnished or service rendered. If you have submitted your notice of claim and have not yet been paid, you must wait at least 30 days before filing suit against the surety to recover under the Bond. However, any suit must be brought against the surety within 1 year after final settlement of the contract with the contractor.
b. Title 5 State Projects – Indiana Code §5-16-1-1 et seq.
Any Indiana state public works project not covered under Title 4 or Title 8 are Title 5 projects. In order to make a claim against the bond on a Title 5 project, the claimant must file a verified claim with the state agency that commissioned the project within 60 days after completing labor or furnishing materials. The state agency will furnish a copy of the claim to the surety. The claimant must then wait at least 30 days. If payment has not been received a suit may be filed against the surety. Any suit against the surety must be brought within 60 days from the date of the final completion and acceptance of the project.
c. Title 8 Indiana Department of Transportation Projects – Indiana Code §8-23-9-1 seq.
Title 8 covers any project for the Indiana Department of Transportation. In order to make a claim on a bond posted for a Title 8 project, a claimant must within 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due. The claimant must wait at least 60 days after furnishing the statement to file suit against the surety. The claimant must bring any action within 18 months from the date of final acceptance of the project by the Commissioner.
d. Title 36 Local Government Projects – Indiana Code §36-1-12-1 seq.
Title 36 projects are projects for local governments, political subdivisions or their agencies. A claimant must within 60 days of last performing labor or furnishing material file with the local government board a signed statement of the amount due. The board will forward the statement to the surety. The claimant must then wait 30 days. If payment has not been received, a suit may be filed against the surety. Any suit against the surety must be brought within 60 days after the date of the final completion and acceptance of the project.
|Project Type||Notice of Bond Claim Deadline||Grace period before filing suit||Suit Against the Surety Deadline|
|Title 4||60 days from the last date of labor performed, material furnished or services rendered||30 days after filing notice to file suit against the surety||1 year from final settlement with the contractor|
|Title 5||60 days after completion of labor or service or within 60 days after last item of material was furnished||30 days after filing notice to file suit against the surety||60 days from the date of final completion and acceptance of the project|
|Title 8||1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due||60 days after furnishing the statement to file suit against the surety||18 months from the date of final acceptance of the project by the Commissioner|
|Title 36||60 days from the date of last performing labor or furnishing materials||30 days after filing the notice of claim||60 days after the date of final completion and acceptance of the project|
- The Payment and Performance Bonds
Payment and performance bonds are typically issued on American Institute of Architects (“AIA”) Form A312, and modified as necessary. The A312 bond was modified in 2010. The modification was necessitated by the decision in Bramble case, Nat’l Union Fire Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005). As sureties are generally aware, Bramble held that a surety may waive its defenses for any portion of a payment bond claim if the surety does not strictly comply with Section 6 of the A312 payment bond which required that a surety state the amounts that are undisputed and the basis for challenging any amounts that are disputed within 45 days after receipt of the claim. A surety must also pay or arrange for payment of any undisputed amount. Following Bramble, the AIA modified the A312 bonds. A survey of the payment and performance bonds follows.
a. A312 – 2010 Payment Bond
The revised A312-2010 bond form Sections 7.1 and 7.2 increases the timeframe for a surety to respond and arrange for payment of undisputed amounts to a claimant from 45 days to 60 days. New Section 7.3 expressly provides that a surety’s failure to discharge its obligations under Section 7.1 and 7.2 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a Claim, except as to undisputed amounts for which the Surety and Claimant have reached agreement. However, if a Surety does fail in its obligations under Section 7.1 or 7.2 the Surety must indemnify the Claimant for reasonable attorney’s fees incurred to recover any sums found to be due and owing to the Claimant.
Another significant revision of the A312 Payment Bond is the claim submission process. Section 5 requires claimants to submit “Claims” to the surety, not just “Notice” of a claim. Section 16.1 of the Bond defines “Claim” which requires a Claimant to submit a written statement and at a minimum the following:
- The name of the Claimant;
- The name of the person for whom the labor was done, or materials or equipment furnished;
- A copy of the agreement or purchase order pursuant to which labor, materials or equipment was furnished for use in the performance of the Construction Contract;
- A brief description of the labor, materials or equipment furnished;
- The date on which the Claimant last performed labor or last furnished materials or equipment for use in the performance of the Construction Contract;
- The total amount earned by the Claimant for labor, materials, or equipment furnished as of the date of the Claim;
- The total amount of previous payments received by the Claimant; and
- The total amount due and unpaid to the Claimant for the labor, materials or equipment furnished as of the date of the Claim.
The changes to the claims process is intended to prevent claimants from submitting bare bones notice of claim in the hopes that a surety will be unable to timely respond.
b. A312 – 2010 Performance Bond
The most significant change in the Performance Bond form involves the process for an Owner to declare a Contractor in default and to make a claim under the Performance Bond. Under the old Bond form a Surety was not obligated to perform until the Owner notified the Contractor and its Surety of its intention to declare the Contractor in default and attempted to arrange a meeting with both parties. This meeting had to be held within 15 days after receipt of the claim notice. The Owner could not then declare a contractor in default or terminate the contractor until 20 days after the Contractor and Surety received notice of the default as described above.
Section 3 of the 2010 Performance Bond form no longer requires the Owner to jump through these hoops in order to declare the Contractor in default and assert a claim under the Bond.
Instead, under revised Paragraph 3.1, the Owner may request a meeting in its notice to the Surety, but isn’t required to do so. If the Owner does not make this request, the Surety may within 5 business days after receipt of the notice request the conference. If the Surety requests the conference, then the Owner must attend within 10 business days of the Surety’s receipt of the notice. Additionally, the A312-2010 Performance Bond no longer requires a waiting period before the Owner can declare the Contractor in default or terminate the Contractor.
The most important aspect to the new claims process under the A312-2010 Performance Bond is new Section 4. This section states:
Failure on the part of the Owner to comply with the notice requirement in Section 3.1 shall not constitute a failure to comply with a condition precedent to the Surety’s obligations, or release the Surety from its obligations, except to the extent the Surety demonstrates actual prejudice.
Failure by an Owner to comply with the notice requirement is not a free pass, even under the new Bond form. Most jurisdictions already have case law protecting a Surety where an Owner fails to give proper notice. For example, in Dragon Construction Company v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. 3d 1997), where an Owner terminated a contractor and replaced the contractor without giving notice the Surety the Illinois Appeals Court held:
since the (owner) replaced (contractor) with (replacement contractor) before informing (surety) that (contractor) was to be terminated and without consulting (surety) as to the successor, (surety) was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. (surety) would be entitled to select, or at the very least participate in selecting, the lowest bidding contractor to complete the project in order to mitigate its damages under the performance bond. Surely, (surety) would not have issued the surety bonds if it did not have the authority to protect itself through the selection of the successor contractor.
Generally under this line of cases, a Surety does not have to show prejudice before being discharged under the Bond. Performance Bond A312-2010, however, requires a Surety to show that it has been prejudiced by the Owner’s actions if proper notice was not given to the Surety under Paragraph 3.1. What constitutes actual prejudice is unclear. A Surety may be prejudiced if it was not given an opportunity to participate and mitigate its damages. This standard could then be read in conjunction with current case law. As the Dragon court states a Surety is entitled to mitigate its damages and it would not have issued the surety bonds if it did not have the authority to protect itself. Or it may be that a Surety must show quantifiable damages in order to demonstrate prejudice.
For a thorough discussion of these issues, or if you have other questions regarding your property rights, please contact Melissa DeGroff, Harley Means, Jen Watt, Steve Runyan, or one of our other attorneys here to discuss your situation. It would be our pleasure to assist you.
Also, check out our Doing Business in Indiana: A Reference Guide to Business Law in the Hoosier State for more information on various laws of the State of Indiana as of January 1, 2017.
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