We frequently discuss bond claims on this blog, as this is the mechanics lien remedy available to contractors and suppliers on state and federal projects. When working on a project owned by or controlled by the government, those unpaid for services rendered are able to file a claim against a payment bond, as opposed to liening the property itself.
In the past, I’ve always focused on the laws governing these payment bond claims, as the federal government and each state government have such laws. However, there is another layer to these claims, and that’s the terms of the payment bond claim itself. This post explains why these terms exist and when they matter.
Did You Realize Payment Bonds Have Contractual Terms?
Payment bonds always have legal terms. Many potential bond claimants overlook this because there is so much focus on the state or federal rules governing the bond claim, but nevertheless, they exist, and there are a handful of situations that can arise when your bond claim is compromised because of a failure to comply with the terms of the bond.
It’s important, therefore, to get a copy of the payment bond as soon as possible. We’ve written about how you can obtain a copy of the surety bond in the past. It’s a very easy process: just ask for it.
Once you get a copy, it’s important to review it, and make note of your potential obligations under the bond in making a claim. These bonding companies are – at heart – insurance companies, and if you’ve ever dealt with an insurance company you know that getting a claim paid is sometimes more about complying with the policy’s technical provisions than having an actual worthwhile claim. This is true for payment bonds as well. Proceed with care.
When Payment Bond Terms and State or Federal Law Conflicts
Now, let’s get to the heart of this post. Let’s say you have made your claim in perfect compliance with state or federal laws (by sending any required notices and making any required claims, on time). What happens if the terms of a payment bond conflict with the state or federal laws? Which prevails?
The overwhelming majority answer to this question is that the legal standards prevail. Under the US Miller Act, and most state Little Miller Acts, any provisions within a payment bond that conflict with the legal requirements are rendered null and void. As such, sticking to the state or federal legal requirements is a pretty safe practice.
Realize that this general rule does not negate the payment bond terms that do not conflict with federal or state law. Those terms remain valid, which loops you back to the start of this post and the lesson: get the bond and read it.
However, just like anything in the mechanics lien and payment bond world, there are always exceptions. Here are two example exceptions.
Most states require bond claims to be foreclosed upon within a certain time period – the statutory period. If the statute in that state requires bond claim foreclosures within 1 or 2 years, any provision within a payment bond requiring foreclosure in a shorter time will be rendered null and void, as conflicting with state or federal law.
This is not the case in Kentucky, which bucks the trend in two ways.
First, it does not establish a specific time period to file a bond claim foreclosure action. Therefore, the general rule is that payment bond claimants have 15 years to file a lawsuit to enforce their bond claims, which is the general statutory limitations period.
Second, however, Kentucky does not prohibit a payment bond from restricting the time period to enforce a payment bond claim by the terms of the bond. Bond claimants, therefore, ought to be very cautious in Kentucky. If the bond’s terms require a foreclosure in 6 months, 1 year, or some other period, the bond claimant must comply with that time period to enforce its claim.
Rhode Island has virtually the very same exception, only in reverse. In Rhode Island the payment bond terms cannot make the foreclosure period shorter, but it can make it longer. The statute in question is Rhode Island Statute § 37-12-5, which specifically provides a standard foreclosure period of 2 years and authorizes a payment bond to include terms that alters (in favor of the claimant) this statutory period:
No suit instituted under § 37-12-2 shall be commenced after the expiration of two (2) years, or under the maximum time limit as contained within any labor or material payment bond required under § 37-12-1, whichever period is longer, after the day on which the last of the labor was furnished or performed or material or equipment was furnished or supplied by any person claiming under the section.
A lot of other states may actually allow such foreclosure period extensions, but Rhode Island is one of the only states (that I know of) that specifically allows for this in their statute.