Chris Broughton | ConsensusDocs
Introduction:
Time is of the essence in the construction industry, and failing to provide timely notice of your payment bond claim can end your chance of recovery. Payment bonds guarantee payment for the subcontractors and suppliers who provide labor or materials on covered construction projects. Federal and state statutes governing payment bonds on public projects and the specific terms of non-statutory, private payment bonds have strict notice and timing requirements. Claimants who fail to provide timely notice can forfeit their chance of recovery. This article provides a brief overview of the notice requirements for payment bond claims – who has to give notice, what notice is required, and when you have to give notice.
Payment bond protection is a frequent feature in construction. Payment bonds are required on most federal construction projects of over $100,000 under the federal Miller Act. Similar state statutes, typically referred to as “Little Miller Acts,” also require payment bonds on most state and local construction projects. Owners on private projects may require their general contractor to provide a payment bond to protect the property from liens. Finally, general contractors may also require subcontractors to provide payment bonds on public or private projects.
There is a lot of potential payment bond protection out there, but as always, the devil is in the details. Each controlling statute (federal or state) and the specific terms of the payment bond, especially with a non-statutory bond, may have similar, but different, requirements for who has to give notice, who the notice goes to, the content of the notice and, of course, the deadline for giving notice.
Due to these important distinctions, you should always consult the law that governs your project and check the specific notice provisions in the payment bond on which you relied. On public projects, the Miller Act or applicable Little Miller Act takes precedent over the wording of the statutory bond. On private projects and subcontractor non-statutory, payment bonds on public projects, the terms of that private payment bond are likely to govern.
This article cannot address all the variations, subtleties, or court interpretations of these notice requirement. This article addresses the basics and mainly seeks to alert the reader to the key elements and the need to check the federal or state law and/or the specific terms of the payment bond early to make certain you do not learn of a deadline only after you missed it and lost your rights under the payment bond.
Miller Act
The federal Miller Act requires general contractors on federal government projects to furnish a payment bond to guarantee payment for subcontractors, suppliers, laborers and materialmen who provide work on construction contracts valued at $100,000 or more.[1] The bond’s value must equal the contract price, unless the contracting officer determines that it’s impractical to procure a bond in that amount. In those rare cases, the contracting officer will determine an alternate amount.
The purpose of the Miller Act is to provide an alternate route of recovery for unpaid subcontractors, laborers, suppliers, and materialmen to their traditional remedy on private projects. On private projects, those parties typically have statutory protection under state law to file a mechanic’s lien against the property to recover for unpaid work or materials. However, federal government property cannot be subject to a mechanic’s lien. Thus, the bond replaces the traditional mechanic’s lien that parties normally have on a private project.
While the Miller Act is intended to protect subcontractors, suppliers, materialmen, and laborers on government projects, there is a very important catch – there are strict notice and timing requirements to enforce claims against the Miller Act payment bond. Claimants who miss the notice deadline can forfeit otherwise valid claims.
The applicable notice requirements differ depending on each party’s contractual relationship on the project. First-tier subcontractors and suppliers — those who directly contract with the general contractor — do not have to provide notice before filing suit against the payment bond. First-tier subcontractors and suppliers only have to wait until 90 days after labor was performed or materials were supplied. After the 90 day “grace period” is over, the first-tier subcontractor or supplier can file a claim directly against the payment bond. However, the claim must be filed within one year after the last labor was performed or last materials were supplied to the project.
Under the Miller Act, second-tier subcontractors — parties who subcontract with or provide materials to a first-tier subcontractor or supplier — are required to provide written notice to the general contractor of their claims within 90 days after they last performed work or supplied materials or equipment to the project. Second-tier contractors also have to file suit within one year after they last supplied labor or materials to the project.
Payment bond protection under the Miller Act only extends to second-tier subcontractors and suppliers. Those on the third tier, such as a supplier or subcontractor of a second-tier subcontractor, and those even further down the contractual chain do not have a claim against the bond. For suppliers, payment bond protection does not extend beyond a supplier to a first-tier subcontractor. Suppliers to suppliers are not protected. In other words, for those parties not covered by the Miller Act, even if they provide proper notice, they will have no claim against the payment bond.
Generally, warranty or repair work will not extend the deadline to file notice.[2] However, where materials or equipment are supplied to the same project under multiple contracts or purchase orders, the notice period runs from the date of last the materials or equipment were last furnished to the project.[3]
For parties subject to the Miller Act notice requirements, proper notice is a condition precedent to filing a civil action to recover against the bond.[4] The purpose of the notice is to inform the general contractor of claims against their subcontractors by those further down the stream.[5] Notice is not required for first-tier subcontractors because there is less risk of unknown claims. The general contractor, as the contracting party, should know whether its first-tier subcontractors have been paid for their work. Furthermore, notice to the surety is not required.[6]
The notice must be in writing and include the name of the subcontractor or supplier to whom the labor was performed, materials were supplied, and state with “substantial accuracy” the amount of the claim.[7]
The claimant must serve the notice in the following manner:
(a) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor’s residence; or
(b) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons. [8]
Oral notice alone is generally not sufficient, although in one case oral notice was sufficient when the general contractor acknowledged the notice in writing.[9] Courts may be lenient as to manner of written notice as long as the contractor receives actual notice of the claim.[10] A federal district court held that an equipment supplier satisfied its notice requirements by email. The court concluded that the email provided actual notice to the general contractor, included sufficient information about the amount owed to the supplier, and the email included verification that the notice was actually received.[11]
State Little Miller Acts
The notice provisions under state Little Miller Acts appear similar to the federal Miller Act and may be virtually identical in some instances. Nevertheless, there can be important differences that can determine whether or not notice is proper and the claim is valid. In addition to notice requirements, the coverage of state Little Miller Act payment bonds may be different than the federal Miller Act – exactly who and how far down the chain of privity coverage extends.
North Carolina’s Little Miller Act, like its federal counterpart, requires first-tier subcontractors to wait 90 days after labor was performed or materials were supplied before filing suit to recover against the payment bond.[12] However, second-tier subcontractors, suppliers, materialmen and the like do not have to send notice to the general contractor until 120 days after labor was performed or materials were supplied to the project.[13]
State requirements may vary depending the type of work or materials supplied to the project. Under Massachusetts’ Little Miller Act, second-tier subcontractors are required to provide notice to the general contractor within 65 days after labor was performed or materials were provided to the project. If any portion of the claim covers specially fabricated materials, the claimant must provide notice to the general contractor within 20 days after receiving written approval for use of the material.[14]
In some states, potential claimants have to provide preliminary notice to preserve their payment bond claims. Under Georgia law, the general contractor can trigger the preliminary notice requirement by filing a notice of commencement with the clerk of the superior court where the project is located within 15 days after starting work on the project. The general contractor must provide a copy of the notice of commencement within 10 days after receiving a request from any subcontractor, supplier, materialman or other party on the project.[15] If the general contractor timely files and sends the notice of commencement to requesting parties, then any second-tier subcontractor must provide written notice to the general contractor within 30 days after the notice of commencement is filed or 30 days after first labor was performed or materials were supplied, whichever is later.[16]
In California, second-tier subcontractors are required to provide preliminary notice to the public entity and general contractor within twenty days after first providing labor or materials on the project. If the claimant fails to send its preliminary notice, then the claimant can preserve its claim by sending notice to the surety and the principal on the bond within 15 days after the notice of completion is recorded. If the general contractor fails to record the notice of completion, then the claimant’s time period to provide notice to the surety and principal on the bond extends to 75 days after work is completed. [17]
There can also be differences in the deadline to enforce a claim against a contractor’s payment bond. Under Georgia’s Little Miller Act, claimants are required to file suit against the payment bond within one year of actual completion and acceptance of the work by the public authority.[18] The Supreme Court of Georgia has interpreted this to run from substantial completion with only punch-list items remaining.[19] Recall that the limitations periods under the Miller Act, many other state Little Miller Acts, and private payment bonds are tied to when the claimant last supplied labor or materials and not the timing of project substantial completion. This distinction again underscores the need to be aware of the controlling statutory requirement on public projects and the terms of the payment bond at issue.
Private Payment Bonds
In addition to payment bonds required by law on public projects, private owners may require their general contractor to provide a payment bond to protect the property from liens. General contractors on public or private projects may also require their subcontractors to provide payment bonds.
The ConsensusDocs 261 is one of the more frequently used payment bond forms. Under the ConsensusDocs 261, “Claimant” is defined as any party that either has a direct contract with the Contractor or has a contract with a subcontractor that has a direct contract with the Contractor. Any Claimant who has not been paid in full after ninety days (90) since labor or work was performed or materials were provided has a claim against the payment bond.
Claimants who are in direct privity with the contractor are not required to provide preliminary notice before filing suit to enforce their claim. Contrarily, Claimants who are not in direct privity with the contractor are required to provide written notice of non-payment to the Contractor, Owner, and Surety within 90 days after labor was performed or materials were supplied to the project. The notice must state with “substantial accuracy” the amount claimed and include the name of the party to whom the materials were furnished or for whom the work or labor was performed.
The Claimant must provide its written notice through any means that provides third party verification, or serve it in a manner in which process may be served in the state where the project is located. Additionally, either type of Claimant must file suit to enforce their payment bond claim within one year from the date on which the Claimant last performed labor or furnished materials or equipment to the project.
Conclusion
Payment bonds are for the protection of subcontractors or suppliers, but that security can easily be lost. Subcontractors and suppliers should take the basic precautions of learning the notice requirements that apply to the payment bond before payment trouble so that the claimant has the opportunity to comply with those requirements.
[1] 40 U.S.C. § 3131 (b) (general cite – et. seq.)
[2] United States ex rel. Olson v. W.H. Cates Constr. Co., 972 F.2d 987 (8th Cir. 1992); S. Steel. Co. v. United Pac. Ins. Co., 935 F.2d 1201 (11th Cir. 1991); United States ex rel Magna Masonry, Inc. v. R.T. Woodfield, Inc., 709 F.2d 249, 251 (4th Cir. 1983); United States ex rel. State Electric Supply Co. v. Hesselden Constr. Co., 404 F.2d 774 (10th Cir. 1969).
[3] Ramona Equip. Rental, Inc. v. Carolina Cas. Ins. Co., 755 F.3d 1063 (9th Cir. 2014); United States ex rel. Water Works Supply Crop. v.. George Hyman Constr. Co., 131 F.3d 28 (1st Cir. 1997); United States ex rel. A&M Pretroleum, Inc. v. Santa Fe Engineers, Inc., 822 F.2d 547 (5th Cir. 1987); Noland Co. v. Allied Contractors, Inc., 273 F.2d 917 (4th Cir. 1959).
[4] United States ex rel. John D. Aher Co. v. J.F. White Contracting Co., 648 F.2d 29, 31 (1st Cir. 1981).
[5] Id [6] Continental Casualty Co v. United States, 305 F.2d 794, 797 (8th Cir. 1962).
[7] 40 U.S.C. § 3131 (b)(2). [8] 40 U.S.C.§ 3133(b)(2)(A)-(B).
[9] Houston Fire & Casualty Ins. Co. v. United States, 217 F.2d 727, 729 (5th Cir. 1954).
[10] Maccaferri Gabions, Inc. v. Dynateria Inc., 91 F.3d 1431, 1437 (11th Cir. 1996) (stating that courts have become “somewhat lenient” about the method of notice given).
[11] United States ex rel. v. Fid. & Deposit Co. of Md., 2013 U.S. Dist. LEXIS 127869, at *12 – 13 (D. Md. Sept. 9, 2013).
[12] N.C. Gen. Stat. § 44A-27(a). [13] N.C. Gen. Stat.§ 44A-27 (b).
[14] Mass. Gen. Laws. Ch. 149, § 29. [15] O.C.G.A. § 13-10-62(a).
[16] O.C.G.A. § 13-10-63 (a)(2). [17] Cal. Civ. Code § 9560 (b). [18] O.C.G.A. § 36-91-95.
[19] United States Fid. & Guar. Co. v. Rome Concrete Pipe Co., 353 S.E.2d 15, 16, n.1. (1987).