Michael Yelle | Ahlers, Cressman & Sleight
Similar to the changes made by the Washington Legislature last year, the Oregon Legislature recently changed its retention law. Oregon public works agencies and large commercial project owners are now required to accept surety bonds in lieu of withholding retainage on construction projects. There is also no longer a requirement to deposit retention funds in an interest-bearing escrow account.
The owner or public agency must accept the bond in lieu of retainage unless specific grounds exist. For example, public agencies must find there is “good cause” for rejection of the bond based on the “unique project circumstances. Private owners have less discretion to reject a bond and if the bond meets the statutory requirements, per ORS 701.435(1)(a) “the owner and lender shall accept” the bond “in lieu of all or any portion of the retainage…”
Courts have not analyzed when “good cause” exists for public agencies to reject bonds or exactly what will allow a private owner to reject a bond. However, an agency or owner cannot have a general policy to reject retention bonds. The statute does not provide next steps if the contractor disagrees with a decision to reject the bond. It may be necessary to proceed under the contract’s dispute resolution procedure or it may be more appropriate to take the issue directly to the courts.
The retention bond does not need to be for the entire amount retained. The contractor may provide a bond “for all or any portion” of the amount retained or to be retained. If a retention bond is used, it should be in the form provided in ORS 701.435.
Nor is a contractor required to provide any retention bond, in which case the owner or agency may still withhold retention. Since there is no longer a requirement that retention be held in an interest-bearing escrow account, retention can now be held in an interest-bearing account at a bank or other financial institution. Earnings from this account will still accrue to the contractor. A contractor may also provide an owner with an irrevocable letter of credit for all or a portion of the retention. The new statute also leaves open the possibility that other instruments – if approved by the Oregon Department of Administrative Services – can also be acceptable.
In addition to contractors, Oregon law also gives subcontractors and suppliers the option of providing a retention bond – even if the contractor does not bond their own retention. If this occurs, the contractor must post the bond with the owner or agency on the subcontractor’s or supplier’s behalf.
The attorneys at ACS are happy to answer any questions you may have or provide any legal assistance you may need regarding this new change in Oregon’s retention statute.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.