Surety Bond Quarterly - Summer 2015 - 16

Feature

Can Public
Owners be
Held Liable to

Subcontractors and
Suppliers for Failure to Require
General Contractors to Obtain
Required Payment Bonds?
IT'S A TROUBLING scenario. After
months of
promises
from
the
general contractor that
payment
would be
issued soon,
that it is
BY TODD REGAN
about
to
negotiate a large change order with
the owner, and that "they haven't
been paid yet either," the subcontractor simply can't wait any longer.
The subcontractor has been financing the project for months by paying
its own employees and suppliers,
without receiving the continually
promised progress payments. Finally,
the subcontractor asks the owner's
representative for a copy of the payment bond, only to hear something it
never even considered: the general
contractor never posted the payment
bond required by law. To make matters worse, because it's a municipal

16

project, it doesn't have the right to file
a mechanic's lien; and the prime contractor is heading towards bankruptcy.
Unfortunately, subcontractors do
find themselves in this predicament.
Despite the requirements of the federal Miller Act, 40 U.S.C. § 3131, et
seq., and the similar state laws, the
statutorily required payment bonds
are not always in place. Perhaps the
school board failed to appreciate
that the project was subject to the
statutory bonding requirements.
Perhaps the city council neglected
to check if the prime contractor actually submitted the required bonds.
Perhaps the contracting officer failed
to ensure that the bond was issued
by a licensed surety authorized to
do business in the state. Perhaps the
surety became insolvent after the
project started and the owner failed
to require a new bond. Regardless of
the reason, subcontractors might perform work on public projects with the
assumption that their right to payment
is secured, only to find out too late -
after the prime contractor defaults on
its payment obligations - that there

SURETY BOND QUARTERLY | SUMMER 2015

is no payment bond in place. What
then is the unpaid subcontractor's
remedy?
Bond producers and other surety
professionals should take note that,
under certain circumstances, subcontractors and suppliers may have a
right of recovery directly against the
public owner for failing to ensure that
the required payment bond is posted.
Whether the subcontractor has such a
right of recovery, or whether it is left
out in the cold, varies widely across
jurisdictions.
The issue of whether to allow a
subcontractor to hold a public owner
directly liable for failing to require
a payment bond invokes a conflict
between two fundamental principles
underlying the statutory bonding
requirements: protecting the payment rights of subcontractors and
suppliers performing public work versus protecting the public coffers from
claims for payment. A rule imposing
liability on public owners for failing to
ensure that the required bonding is in
place has the dual benefit of protecting subcontractors and giving public



Table of Contents for the Digital Edition of Surety Bond Quarterly - Summer 2015

NASBP Upcoming Meetings & Events
2015-2016 NASBP Executive Committee
From the CEO - There is Poetry in Surety Claims, Surely
Practical Insights: What You Need to Know - Hiding in Plain Sight: Specifications as a Source of Risk
Profile: President Susan Hecker
Developing Your Leadership Vision
Liability Issues - Can Public Owners be Held Liable to Subcontractors and Suppliers for Failure to Require General Contractors to Obtain Required Payment Bond?
An Introduction to Probate Bonds
Class Act - Surety Team’s Cooperative Efforts Enable School to Open on Time
NASBP’s Attorney Advisory Council - Participants Opine on Current Risk Management Challenges and Business Opportunities
The AIA Describes Updated and Expanded Design-Build Documents Family
Contractor Practices That may Result in Construction Claims to Recover for Delays and increased Costs
NASBP Annual Meeting Speakers - Veterans can benefit private sector, but need help finding jobs
Index to Advertisers
Surety Bond Quarterly - Summer 2015 - cover1
Surety Bond Quarterly - Summer 2015 - cover2
Surety Bond Quarterly - Summer 2015 - 3
Surety Bond Quarterly - Summer 2015 - 4
Surety Bond Quarterly - Summer 2015 - 5
Surety Bond Quarterly - Summer 2015 - 6
Surety Bond Quarterly - Summer 2015 - 2015-2016 NASBP Executive Committee
Surety Bond Quarterly - Summer 2015 - From the CEO - There is Poetry in Surety Claims, Surely
Surety Bond Quarterly - Summer 2015 - 9
Surety Bond Quarterly - Summer 2015 - Practical Insights: What You Need to Know - Hiding in Plain Sight: Specifications as a Source of Risk
Surety Bond Quarterly - Summer 2015 - 11
Surety Bond Quarterly - Summer 2015 - Profile: President Susan Hecker
Surety Bond Quarterly - Summer 2015 - 13
Surety Bond Quarterly - Summer 2015 - Developing Your Leadership Vision
Surety Bond Quarterly - Summer 2015 - 15
Surety Bond Quarterly - Summer 2015 - Liability Issues - Can Public Owners be Held Liable to Subcontractors and Suppliers for Failure to Require General Contractors to Obtain Required Payment Bond?
Surety Bond Quarterly - Summer 2015 - 17
Surety Bond Quarterly - Summer 2015 - 18
Surety Bond Quarterly - Summer 2015 - 19
Surety Bond Quarterly - Summer 2015 - 20
Surety Bond Quarterly - Summer 2015 - 21
Surety Bond Quarterly - Summer 2015 - An Introduction to Probate Bonds
Surety Bond Quarterly - Summer 2015 - 23
Surety Bond Quarterly - Summer 2015 - 24
Surety Bond Quarterly - Summer 2015 - 25
Surety Bond Quarterly - Summer 2015 - 26
Surety Bond Quarterly - Summer 2015 - Class Act - Surety Team’s Cooperative Efforts Enable School to Open on Time
Surety Bond Quarterly - Summer 2015 - 28
Surety Bond Quarterly - Summer 2015 - 29
Surety Bond Quarterly - Summer 2015 - NASBP’s Attorney Advisory Council - Participants Opine on Current Risk Management Challenges and Business Opportunities
Surety Bond Quarterly - Summer 2015 - 31
Surety Bond Quarterly - Summer 2015 - The AIA Describes Updated and Expanded Design-Build Documents Family
Surety Bond Quarterly - Summer 2015 - 33
Surety Bond Quarterly - Summer 2015 - Contractor Practices That may Result in Construction Claims to Recover for Delays and increased Costs
Surety Bond Quarterly - Summer 2015 - 35
Surety Bond Quarterly - Summer 2015 - NASBP Annual Meeting Speakers - Veterans can benefit private sector, but need help finding jobs
Surety Bond Quarterly - Summer 2015 - 37
Surety Bond Quarterly - Summer 2015 - Index to Advertisers
Surety Bond Quarterly - Summer 2015 - cover3
Surety Bond Quarterly - Summer 2015 - cover4
Surety Bond Quarterly - Summer 2015 - outsert1
Surety Bond Quarterly - Summer 2015 - outsert2
Surety Bond Quarterly - Summer 2015 - 43
Surety Bond Quarterly - Summer 2015 - 44
https://www.nxtbook.com/naylor/SBPQ/SBPQ0118
https://www.nxtbook.com/naylor/SBPQ/SBPQ0417
https://www.nxtbook.com/naylor/SBPQ/SBPQ0317
https://www.nxtbook.com/naylor/SBPQ/SBPQ0217
https://www.nxtbook.com/naylor/SBPQ/SBPQ0117
https://www.nxtbook.com/naylor/SBPQ/SBPQ0416
https://www.nxtbook.com/naylor/SBPQ/SBPQ0316
https://www.nxtbook.com/naylor/SBPQ/SBPQ0216
https://www.nxtbook.com/naylor/SBPQ/SBPQ0116
https://www.nxtbook.com/naylor/SBPQ/SBPQ0415
https://www.nxtbook.com/naylor/SBPQ/SBPQ0315
https://www.nxtbook.com/naylor/SBPQ/SBPQ0215
https://www.nxtbook.com/naylor/SBPQ/SBPQ0115
https://www.nxtbook.com/naylor/SBPQ/SBPQ0414
https://www.nxtbook.com/naylor/SBPQ/SBPQ0314
https://www.nxtbook.com/naylor/SBPQ/SBPQ0214
https://www.nxtbookmedia.com