By: John Perten
March 26, 2020
It is likely that with the COVID-19 crisis, many projects will be delayed or cancelled. It is also likely that given the financial impact on contractors and developers, many parties will be unable to meet their financial and performance obligations even when the crisis abates. If there is a bond in place, this may provide an avenue for relief – even in the event of an underlying bankruptcy. Or, you may be entitled to a mechanics lien to secure your right to payment. So, now’s the time to review the pertinent documents and get everything lined up so that if you do need to file a claim, you are ready to go.
While there are many types of bonds in the construction world, the most typical are payment bonds and performance bonds. Payment bonds act essentially like an insurance policy in the event that you are not paid in accordance with your contract. Performance bonds generally protect the owner in that if a contractor fails to perform under its contract, the surety will pay for someone else to complete the contract. While bonds are atypical in residential projects, they are more common in larger commercial projects. On the public side, many states (including Massachusetts), have a statutory requirement for the posting of bonds if working on a public project. Though there is substantial overlap, common law (private) bonds and statutory bonds, may not be identical. It is important, therefore, to review the verbiage of the actual bond itself, your underlying contract, and any applicable statute in order to determine what coverage, if any, a bond provides. We are here to assist with that review.
The first place to look to determine your rights under a bond is at the bond document itself. It is essential that, if you do not already have it, you request a copy of any bond that might provide you with coverage. Then, determine whether there are any applicable statutes and whether they impose any additional requirements or expand coverage beyond what is stated in the bond itself. Typically, the right to file a bond claim is contingent upon strict notice requirements. The window for making a bond claim is often very short. So that you do not have to act hastily, here’s a checklist of things to consider:
- Are you a covered claimant under the terms of the bond? The bond will tell you who is covered. Often, lower tiered subcontractors (i.e. sub-subs), are not covered. The statute, if any, may broaden coverage.
- What is actually covered? Labor? Material? Both? All or just some? Again, the bond itself and any applicable statute will help with this analysis
- Has there been an event of default? You will need to review a copy of your contract to determine what the obligations are and whether there has been a breach.
- What notice is required? Typically, bonds require that notice of the default be provided to the breaching party and to the surety. The statute too might have notice requirements. Failure to give proper notice could result in losing whatever coverage you might have had.
- What is the timing? How quickly do you have to give notice? How quickly do you have to file suit if it comes to that? Usually, there is a relatively short statute of limitations (window) in which to file suit on a surety bond.
Doing your homework now, well in advance of when you have to assert your claim, will go a long way to recovery.
If you don’t get paid, you may also have rights under the mechanics lien law. This may be in addition to whatever rights you may have under a payment bond. Mechanics liens are strictly statutory and give you a right to foreclose on the owner’s property if you have not been paid, provided that you strictly follow the statute. Every state has its own mechanics lien statute (and there may be lien bonds in place which are yet another avenue for recovery). If you are working on a project and payment is likely to be an issue, now is the time to familiarize yourself with the lien laws of the state where the project is located. Again, a brief check list of questions to consider:
- Who is eligible to assert a lien? This will typically be answered by the pertinent statute.
- Do I have to wait for a default, or can I start the lien process even before there is an issue? This will depend on the state statute. In Massachusetts, for example, you can start the lien process even before there is a problem and the earlier you start, the more likely that you will maximize your potential recovery.
- Do I need a written contract or can I lien on a handshake agreement? Massachusetts, for example, only gives lien rights to those with written contracts.
- What is covered by the lien? Labor? Material? Wages? Attorneys’ fees?
- Are there any notice requirements? Failure to give timely notice could invalidate any lien.
- What is the timing – for notice, recording lien documents, or filing suit?
- How much can I recover? Some states cap the amount of recovery. If you don’t already have one, take the time now to prepare a detailed accounting.
- Who actually owns the property on which you worked? Request (or locate online) a copy of the underlying deed.
We can help you work through all these issues. They requirements are very technical and, because liens are statutory creatures, there is not much room for deviation.