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Items To Consider When a Subcontractor, Sub-Subcontractor and/or Supplier Files Against A Contractor’s Payment Bond


It has happened to every contractor at some time or another when working on a public construction project in Massachusetts. Despite following all best practices in managing the work of, and the payments to, its subcontractors, subsubcontractors and/or suppliers, one of those subcontractors, sub-subcontractors and/or suppliers contends that it is owed money and it files a claim against the contractor’s payment bond. When that occurs, it is useful for the contractor to have familiarity with the law in Massachusetts regarding payment bonds so that it can use that law to help it and its surety deal successfully with the claim. This is particularly true because ultimate responsibility for the payment bond claim rests almost always with the contractor because of its indemnity obligation to the surety, and so it behooves the contractor to know what defenses its surety has to payment bond claims so that it can work to resolve and/or eliminate those claims as inexpensively and quickly as possible.

PAYMENT BONDS

Massachusetts General Laws c. 149, § 29 requires a payment bond for the construction, repair or demolition of public works and public buildings when a contract exceeds $5,000 in the case of contracts with the Commonwealth of Massachusetts, or $2,000 in the case of all other contracts. This statute applies to all state, county and municipal projects in Massachusetts. Since the amount of almost all public construction contracts exceeds the $5,000/$2,000 threshold, payment bonds are required on virtually all public construction projects in Massachusetts. Although General Laws c. 149, § 29 provides that the payment bond must be in an amount not less than one half the total contract price, the typical practice of most public owners is to require that the payment bond be in the full amount of the contract price.

General Laws c. 149, § 29 does not set forth the form in which the payment bond must be; rather, it sets forth who may claim under the payment bond, and how that claim must be presented. Oftentimes, the public owner will have a required payment bond form which it includes in the bid documents. The contractor and its surety should take note of any such required payment bond form; oftentimes, as in the case of the A312 payment bond form issued by the AIA which public owners often use, the form puts specific requirements on the surety when a payment bond claim is made (in particular to the time frames in which the surety is required to respond to the claim) which the contractor should be aware of and be prepared to assist the surety when and if a claim is made. When the public owner does not specify a payment bond form in the bid documents, the contractor and its surety can provide the payment bond in whatever form they decide upon, keeping in mind that the actual payment bond form furnished by the contractor and its surety cannot limit the rights set forth in General Laws c. 149, § 29.

LABOR AND MATERIALS COVERED

General Laws c. 149, § 29 requires the payment bond to cover a variety of expenses related to the project, including: a) labor and materials used or employed in the project; b) specifically fabricated materials, unsuitable for use elsewhere, whether or not they are delivered to or incorporated into the project; c) transportation costs for materials; d) rental costs of equipment; and e) payments to health and welfare plans, unemployment benefit plans and other fringe benefits provided for in collective bargaining agreements. In Massachusetts public construction projects, the payment bond allows recovery for downstream subcontractors and suppliers at any level. This stands in contrast to payment bonds on federal construction projects which are governed by the Miller Act (40 U.S.C. §.§ 270a et seq.) where only first and second tier subcontractors and suppliers can recover.

NOTICE

If the claimant is a subcontractor that has a contractual relationship with the contractor furnishing the payment bond, no notice of claim is required. If the claimant has a contractual relationship with a subcontractor, but not with the contractor furnishing the payment bond, the claimant must give notice to the contractor within 65 days after the date on which the claimant last performed labor or furnished labor or materials. The notice must state the amount claimed and the name of the party for whom the labor or materials were supplied.

General Laws c. 149, § 29 does not require that this notice of claim be sent to the public owner or the contractor’s surety. General Laws c. 149, § 29 requires that the claimant who has to give notice of the claim (i.e., the claimant who does not have a contractual relationship with the contractor furnishing the payment bond) give that notice directly to the contractor. The purpose of the notice requirement is to alert the contractor that payment will be expected directly from it rather than from the subcontractor with whom the claimant has dealt directly. This serves an important function since the contractor and its surety can be liable on the payment bond to a claimant despite the fact that the contractor has already paid the subcontractor in full for the work and material for which the claim is being made. The notice requirement enables the contractor to avoid double liability by fixing a date beyond which, absent notice, it will no longer be liable for its subcontractors’ debts. Thus, after expiration of the 65 day time period for the payment bond claimant to give notice of the claim, the contractor can make payment to its subcontractors knowing that it will not thereafter be liable for any claims by those who supplied labor and material to the subcontractors.

So, when a payment bond claim is made by a subsubcontractor or supplier, the contractor should investigate whether that claimant provided notice of the claim to the contractor within 65 days of when that claimant last worked on the project, and, if it did not, that is grounds to have the claim dismissed.

REQUIREMENTS FOR FILING SUIT

A claimant that has not been paid within 65 days after payment is due may file suit in Superior Court to enforce the payment bond. Suit must be brought within one year after the claimant last performed work or supplied materials. The one year limitation period runs from when the claimant completes its work on the project in its entirety, not from when it completed the particular work that it was not paid for.

The one year suit litigation is strictly enforced by the courts. Claimants who miss this deadline sometimes try to revive an expired payment bond claim by returning to the project on its own to perform some additional work. In such cases, the standard applied by the courts is: “Work actually called for by the contract or continuing employment, performed in good faith with the intention of completing the job, though done with the ulterior purpose of saving the lien and postponed until long after the bulk of the work has been completed, will permit the filing of the statement within sixty days after the date of the last work. But work done under a new and independent arrangement, made after the original contract or continuing employment has ended, or a gratuitous preformance of work not contracted for, does not set the time running so as to preserve a lien for earlier work.” Peerless Unit Ventilation Co. Inc. v. D’Amore Construction Co., 283 Mass. 121, 124-125 (1933)(citations omitted) (emphasis added).

General Laws c. 149, § 29 provides for a speedy trial on the request of any party and requires the court to award reasonable attorney fees if the claimant prevails. The surety is entitled to an evidentiary hearing on the reasonableness of the attorney fees sought by the claimant if it requests one. The amount of the attorney fees to be awarded rests within the sound discretion of the trial judge. The award of reasonable attorney fees need not be proportioned strictly to the award obtained.

The attorney fees provision in General Laws c. 149, § 29 serves the payment bond claimant a powerful leg up over the contractor and its surety defending against such claim. The contractor would do well to try to resolve the lawsuit quickly if at all possible in order to minimize the claimant’s claim for attorney fees. Also, if the contractor has an arbitration provision in its subcontract with the subcontractor who has filed a lawsuit on the payment bond, the contractor should move to stay the lawsuit and compel arbitration because in Massachusetts the attorney fees incurred by the payment bond claimant are not recoverable; rather, the only attorney fees recoverable are those incurred by the payment bond claim in filing the lawsuit.

AVAILABILITY OF PAY-WHEN-PAID DEFENSE

Most contractors insert pay-when-paid provisions in their subcontracts. In order to be enforceable, the pay-when-paid provision must expressly and clearly state that payment from the owner is a condition precedent to payment from the contractor to a subcontractor. On public construction projects in Massachusetts, the availability to the surety of a pay-when-paid defense depends on whether the claimant is a filed sub-bidder (G.L. c.149, § 44F(1)). When dealing with a filed sub-bidder, payments are regulated pursuant to G.L. c.30, § 39F, which distinguishes between periodic and final payments. G.L. c.30, § 39F(1)(a), dealing with periodic payments, states in relevant part that “forthwith after the general contractor receives payment… the general contractor shall pay each subcontractor… .” In contrast, G.L. c.30, § 39F(1)(b), dealing with final payments, states in relevant part that “not later than the 65th day after each subcontractor substantially completes his work… the entire balance due under the subcontract … shall be due [to the subcontractor]… .”

Accordingly, G.L. c.30, § 39F makes a distinction between the timing for payment of periodic and final payments to filed sub-bid subcontractors. With respect to periodic payments, G.L. c.30, § 39F(1)(a) can be interpreted as a statutory “pay-when-paid” provision, as the contractor is not obligated to remit payment to the subcontractor until “after the general contractor receives payment.” Both the contractor and its surety, then, can assert pay-when-paid defense if the claimant is suing for unpaid periodic billings. However, the defense is unavailable to the surety when the claimant is suing for a final payment, as the application of a contractual pay-when-paid provision has been found to be contrary to G.L. c.30, § 39F(1)(b) and therefore void. See Bayer & Mingolla Industries, Inc. v. A.J. Orlando Contracting Co., Inc., 6 Mass. App. Ct. 1, 3-4 (1978) (defendant’s argument that release of retainage is contingent upon final payment from the public owner is contrary to G.L. c.30, § 39F and therefore void).

With a non-filed sub-bidder on a public construction project, a pay-when-paid provision set forth in the underlying contract between the contractor and the claimant is enforceable by the contractor and its surety as a defense to payment if the pay-when-paid provision expressly and clearly states that payment from the owner is a condition precedent to payment from the contractor to the subcontractor.

CONCLUSION

A contractor on a public construction project in Massachusetts has every incentive to be pro-active when one of its subcontractors, sub-subcontractors or suppliers make a claim on its payment bond. The contractor’s surety will look to pass along under the indemnity agreement that it has with the contractor every expense and/or payment that the surety might incur and/or make on the claim. The contractor’s goal, then, should be to minimize those surety expenses and/or payments, and one of the best ways to do that is to know the law on payment bonds and have to use that law to its benefit when and where possible.