Construction Law

Contractors Beware: Know the Terms of Your Payment Bond

By Sean Russel

Two recent court decisions strictly interpreting language contained in the AIA A312 Payment Bond form ("the Bond") have had a significant impact on general contractors and sureties. The courts in National Union v. Bramble (FL) and J.C. Gibson v. XL Specialty (MD), strictly interpreted the requirements contained in Paragraph 6 of the Bond. Paragraph 6 creates obligations for a surety in responding to a bond claim. Specifically, Paragraph 6 requires a surety to, within 45 days of a receiving a claim, respond to the claimant stating the undisputed amounts and the basis for challenging any disputed amounts.

In both decisions, the courts ordered the sureties to pay the claims (regardless of the validity of the claims) based on the sureties' failure to strictly comply with the Paragraph 6 of the Bond. General contractors should be aware of the strict notice requirements contained in their payment bonds with which they, along with their sureties, are expected to comply. The main concern for general contractors arises from the indemnification obligation to the surety that is regularly included in a surety bond. A surety's failure to comply with Paragraph 6 creates significant liability for the general contractor under the indemnification provision, as the general contractor usually agrees to indemnify the surety for any amounts that the surety pays on behalf of the general contractor.

Although there are currently no similar published decisions in Washington, it seems likely that a Washington court would reach the same conclusion as in National Union and Gibson. To avoid being a test case in Washington, general contractors should consider these issues pre-bid and carefully review the language of their payment bonds prior to contracting.

The AIA has recognized the problems created by recent court decisions such as National Union and Gibson, and has published a notice of amendment, recommending modifications to the existing A312 Payment Bond form. The recommendations are only recommendations at this point. Permanent revisions, if any, will likely be made in 2009. At this point, the recommended modifications include:

• Increasing the number of days for the surety's response from 45 days to 60 days
• Adding language stating that "failure to discharge obligations" does not act as a waiver of the surety's defenses but will allow a claimant to seek reasonable attorney's fees as a sanction for such failure.

For a more detailed analysis of these decisions, click here.

Full post as published by Construction Law Blog on September 22, 2008 (boomark / email).