By: Sheats & Bailey, PLLC
Hardly a week passes that our firm is not asked to file a claim on a payment bond for one of our clients. A claim on a payment bond, like a mechanic’s lien, can be an effective device for getting you paid. It is not the only legal tool at your disposal, but it can be a very effective tool. This article will provide a few things you need to know about making a claim on a payment bond.
Payment bonds are required by Section 137 of the State Finance Law on public projects. Payment bonds are not a guarantee of payment; they are an undertaking by a surety which provides that a company providing work or materials for a project will have added security beyond the assets or liquidity of the contractor with whom you have a contract. In other words, the payment bond provides another deep pocket from which to get your money. I am sure you have encountered or heard of fellow subcontractors/suppliers that performed work/supplied materials, but never got paid because the upstream contractor went out of business. A claim on a payment bond can prevent that from happening to you.
In order to place a valid claim on a payment bond on a public project you need to be mindful of certain time limitations. An action against a payment bond on a public project must be brought within one year from when the project was completed and accepted. If your action is brought against the bond after the one-year statute of limitations expires then the action may be dismissed.
If you are a second-tier subcontractor/supplier on a project then you must also provide an additional notice by certified mail, return receipt requested, to the up-line contractors, owner, and the surety. The notice must generally provide a description of the work, the party you had a contract with, the amount of money due to you, your initial contract price and when the money was due. Second tier subcontractors must give that notice within 120 days of when they last supplied labor or materials to the project. Although there are exceptions, the failure to provide the notice may prevent you from asserting a claim on the bond.
Sometimes private owners, like hospitals, universities, and museums, require contractors to provide a payment bond for their projects. Private improvement bonds typically contain similar, but not identical, notice provisions and statutes of limitations as outlined above. Often, the payment bonds on private projects require notice from second tier subcontractors/suppliers within 90, not 120 days, of when they last supplied labor/materials.
Considering the tight time frames to make a claim on a bond, the best thing to do is get a copy of the bond for your records early in the project. Have your PM and/or accounts receivable person calendar the statute of limitations within the bond and any notice requirements. If you want to find out who the surety is then call the architect of record or send the public owner a Freedom of Information request; it is little more than a letter stating that the request is “pursuant to the Freedom of Information Law.”
People often ask if they should file a mechanic’s lien or make a claim on the bond. Why not do both? However, there are a few advantages to making a claim on the payment bond. Very often an action against a payment bond will be a less cumbersome and less expensive way to recover your money than filing and foreclosing a mechanic’s lien. Plus, the existence of a lien fund (i.e., does the owner owe money to the GC) is immaterial to a payment bond claim, but is necessary to prove to lien foreclose. Likewise, the presence of any other claimants on the bond or those with other mechanic’s liens are immaterial. A payment bond action can be as simple as your company versus the surety
For more information or assistance contact Sheats & Bailey, PLLC, Tel: (315) 676-7314, www.TheConstructionLaw.com.
The information provided in this article is not intended to serve as specific legal advice for any particular situation. Competent legal and experienced counsel should be consulted.