Payment Bond Claims

From the Mo-Kan Construction Law Blog by Lee Brumitt

It bears repeating that a mechanic’s lien is a contractor’s best friend. Mechanic’s liens should never be waived or compromised. However, there are instances when a lien is unavailable to protect a contractor’s payment rights. For instance, when the property upon which construction is taking place is a public property or quasi-public property, contractors are prohibited from filing mechanic’s liens. In other words, you can’t lien the King’s property. However, when the work is on public property, payment bonds are required to protect those supplying labor and/or materials from non-payment. Additionally, on some private projects, payment bonds can be legally substituted for lien rights.

A payment bond is a guarantee by a surety of a contractor’s obligation to pay its subs and suppliers. Not all unpaid contractors or suppliers are eligible to file a claim on a bond. As a general rule, those parties in direct contract with a general contractor or subcontractor are eligible to file a claim. In other words, third tier suppliers of subcontractors are normally eligible. However, bond rights erode the further away the contractor or supplier is from the general contractor. Fourth-tier subs or suppliers are typically not eligible. The language in the payment bond relevant state or federal statutes can further restrict those who are eligible. It is important to read the bond language to understand eligibility.

Bonds also include provisions reciting the time within which claims must be made. Most bonds restrict the time within which those who are not under direct contract with the bonded contractor must make a claim. Generally speaking, those parties have only 90 days from the last date of labor or material to make a claim. That period of time cannot be extended by punch list, repair work, or warranty work. Other parties under direct contract with the principal contractor are generally not restricted. However, bonds can vary the time within which any party must give notice. Miller Act bonds currently require notice within 90 days.

When the claim on a bond is made, the terms of the bond will identify the information that should be provided with the claim. At a minimum, bond claimants should give notice of the amount claimed, the party to whom the materials were furnished, and the work performed or materials provided. Upon receipt of a claim, the surety will commonly require the claimant to provide a sworn proof of claim with a copy of contract documents, pay applications, payment ledgers, delivery tickets, notice of non-payment to the contractor, etc. Given that normal practice, it is a best practice for the bond claimant to send such information and documents with the original claim and supply any additional documents requested by the surety.

The terms of the bond will state to whom notice must be given and by what method. As a safe practice, a claimant should give notice to the owner, the general contractor, the party which owes the claimant money (if it is different than the general contractor), and the surety. Notice should be given by certified mail, at a minimum, to insure that the bond claim is received by all parties.

Like notice provisions, bonds commonly include terms reciting when suit must be filed. These contractual statutes of limitation are void in Missouri but are considered valid under Kansas law. In Missouri, suits on bond claims must be filed within the five-year statute of limitations. Typical bond provisions and the Federal Miller Act require suit to be filed within one year after the last date work was performed or materials were provided.

Because it is sometimes difficult to get a copy of a payment bond after a project goes sour, and there are disputes between parties regarding payments owed, it is a best practice to get a copy of applicable bonds at commencement of project. Review that bond language and know applicable time deadlines. Don’t waive bond rights by signing overbroad lien/bond waivers as discussed in my Lien Waivers post. If it becomes necessary to file a bond claim, follow to the “T” the requirements for making bond claims as set forth in the bond itself.

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