Payment bonds exist to secure payment rights for parties on a construction project in the event that the contractor defaults on its payment obligations. While any project can be bonded, bonds are generally found on public works, where a bond is normally required for all projects over a certain value. This is because public property cannot be liened, so a bond or deposit of money is required to provide security in place of a lien on the property itself. Like most everything in this arena, the value of the prime contract required to necessitate a bond varies from state to state. Federal projects, however, are governed by the Miller Act no matter where the physical work is taking place, and all federal projects over $100,000 are required to be bonded.
While the security of payment bond is nice for the parties on the project protected by that bond, it leaves certain parties out in the cold. For example, on Miller Act projects, sub-subs, suppliers to subs-subs ,and suppliers to suppliers have no right to make a claim on the bond. Are these parties completely unprotected, or are there ways to contract for protection?
Can Bond Rights Be Assigned?
One potential way in which a party without a direct right to make a claim against the bond may attempt to navigate around that particular roadblock is to have a party who does have a right to make a bond claim assign that right to the party that doesn’t. However, whether or not that solution is viable is dependent on many factors.
The general American rule is that all contractual rights are assign-able provided none of the following conditions are met: 1) the contract has clear language explicitly prohibiting assignment; 2) the assignment would substantially and materially change the obligor’s duty and/or materially effect an insurer’s burden or risk; 3) the assignment would materially reduce the contract’s value; or 4) the assignment is forbidden by statute or public policy.
Many surety bonds, similar to insurance policies, have language purporting to expressly forbid the assignment of rights. Courts, however, may or may not accept the contractual language as prohibiting all assignments, despite the language attempting to do so. In an Ohio case, the court allowed an assignment of rights under a performance bond, but tailored the opinion fairly narrowly. In that case, the court noted that” the policies supporting contractual freedom to limit assignment do not apply when the obligee is assigning only a cause of action and does not itself owe performance of any duties”. That is, the right to proceed against the bond is assignable, but only when the obligee (assignor) has taken all of the steps necessary to give rise to the duty of the surety to perform according to the terms of the bond itself. How this applies to rights to proceed against a payment bond is debatable, but may provide some guidance.
Even after this has been accomplished, however, there is still the question of what exactly is assigned. It is a clear rule that a party can assign only their own rights and/or duties. That is, an assignment of rights under a contract cannot create “new” rights not present in the contract itself, it merely shifts those rights to a different party. Therefore, when the right to recover from a bond is the assignment at issue, there can be some interesting problems.
The right to make a claim against the bond on a project is, among other technical requirements, conditioned upon the fact that the party making the claim has not been paid. Which, when you think about it, is clear. If the party gets paid, there is no need to seek payment from the bond in the first place. So, in order for a non-protected party to recover from the bond if the bond claim is assignable, does that mean that what is being assigned is the “position in the project” rather than the right to make a claim itself? For example take a supplier(B) to a supplier(A) on a Miller Act project. Supplier(A) has a right to make a claim against the bond if unpaid for the materials provided. That right is conditioned upon 1) the supplying of those materials; and 2) not being paid. Therefore, if supplier(A) is paid, he no longer has any rights against the bond to assign, and if he isn’t paid it will be much more unlikely that he will want to assign his rights to supplier(B).
Sample Assignment Available: Here