The construction payment process has a fairness problem. All too often, construction payment fairness is marginalized by parties leveraging their respective positions on the contracting chain, in an attempt to gain some sort of real or perceived advantage. Slow payments, over-reaching lien waivers, the risk of non-payment or default, and the convoluted process of construction payment in general all add to the frustration. The nature of the process lends itself to fairness issues, and with parties understandably trying to protect themselves, when a payment mishap occurs, somebody ends up holding the short end of the stick.
While every situation is different, and generally made up of complex facts and convoluted scenarios, the general trend is for courts (and the statutes they interpret) to fall on the side of protecting the bottom of the payment chain against non-payment from parties above. In a recent Minnesota case a court did exactly this, even at the expense of an innocent surety.
The Case & Decision
The court determined that the deadline to assert a bond claim against a surety can be suspended . . . even if the surety is innocent. In Minn. Laborers Health & Welfare Fund v. Granite Re, Inc., 844 N.W.2d 509 (Minn. 2014), the court determined that the deadline to assert a bond claim against a surety can be suspended if the facts giving rise to the claim are fraudulently concealed, even if the surety is innocent and had no knowledge of the fraudulent concealment. In the particular case at issue, a surety issued a payment bond to EnviroTech Remediation Services, Inc. (“EnviroTech”) on a bridge demolition project. EnviroTech was required to make certain contributions to employee benefit plans, but failed to do so – to the tune of $245,000. To compound the error, EnviroTech also fraudulently concealed their payroll records for the project at issue.
When the concealment was discovered, a claim was made against the bond, but the deadline to make a claim (one year from project completion) had passed. The trial court granted summary judgment in favor of the surety, but the appeals court overturned and the Minnesota Supreme Court agreed with the appeals court (with some caveats). In so deciding, the court rejected the arguments that the surety’s lack of knowledge of (or participation in) the fraud should excuse it from having the limitations period tolled during the fraudulent concealment.
In other words, the time to file a claim was not ticking during the time of fraudulent activity.
What does this mean for construction payment fairness?
This may seem unfair to the innocent surety, as it shows a clear favoritism in protecting the right to payment for lower-tiered parties. The court did, however, balance the decision by providing a “loophole,” and noting that a surety in this type of situation could protect itself by “including a contractual provision that specifically precluded tolling based on fraudulent concealment” in the bond agreement itself.
This loophole provides protection to the innocent surety by allowing it to contract out of this type of situation before it ever arises – while still attempting to promote construction payment fairness for unpaid lower-tier parties in the event that it isn’t.
The practical result of this decision is likely that sureties in Minnesota will start to include this particular type of limiting language in their contracts, but in cases where they don’t, the courts have shown a willingness to protect lower-tiered parties even against upper-tier parties who are innocent. Also, as a practical matter, this decision means that parties will have to be careful to examine the language of the agreement/bond in order to determine the potential liability.