By: Thomas S. Tripodianos Published: December 2007

Notice Under Private Payment Bonus

Question. Where, the Supplier and Subcontractor had an open account relationship, did each invoice represent a separate contract requiring notice of nonpayment in order to recover under a payment bond?

answer. NO. The timeliness of a supplier’s claim for payment under a private payment bond, on a project which is not a public improvement project and which is therefore not governed by State Finance Law § 137, is measured by the final delivery of materials for which claim is made1.

Supplier, contracted to supply construction material to, Subcontractor, for the construction of an apartment building, which was not a public improvement project. To assure payment for all labor, material, and equipment furnished for use in the performance of the entire project, General Contractor obtained a private payment bond.

Supplier supplied construction hardware and supplies to Subcontractor for use on the project. When Subcontractor, failed to make payment for that material, Supplier provided notice of its claim to the Surety, and requested payment under the payment bond.

The surety denied that portion of the claim relating to goods supplied longer than ninety days before the Notice of Claim, on the ground that Supplier's notice of claim was untimely as to materials supplied before that date. The Surety asserted that Supplier had an “open account” arrangement for the delivery of material for Subcontractor and therefore, under the Surety's interpretation of the notice provisions of the payment bond, Supplier was required to give notice within 90 days of each separate delivery of materials to the project. Supplier asserted that its arrangement with Subcontractor was not an open account; rather, the 78 deliveries of material by Supplier to Subcontractor were part of Supplier's comprehensive agreement with Subcontractor to supply all the general construction material for Subcontractor's portion of the project.
The payment bond provided in this case was issued on a standard form developed and copyrighted by the American Institute of Architects, known as form A312. In order for the sureties to have an obligation to a claimant who does not have a direct contract with the contractor, that claimant must “[h]ave furnished written notice to the contractor and sent a copy, or notice thereof, to the Owner, within 90 days after having last performed labor or last furnished materials or equipment included in the claim stating, with substantial accuracy, the amount of the claim and the name of the party to whom the materials were furnished or supplied or for whom the labor was done or performed.” It is the phrase “having last performed labor or last furnished materials or equipment included in the claim” that is at issue in this case.

The notice provision significantly simplifies the procedures for laborers and material suppliers to obtain prompt payment for their services or goods, eliminating the necessity of their first exhausting remedies under the Labor Law or the Lien Law. The notice provisions also benefit contractors in investigating claims and withholding payments to subcontractors on these claims.

While arguments could be presented on both sides of the question of whether the notice requirements are triggered by each separate invoice in an open account arrangement or by the final delivery by the claimant the argument advanced by the surety would unduly burden suppliers, and owners and would provide marginal additional protection to general contractors, as it would require a separate notice no matter the volume of deliveries or the amount owed for each delivery on an open account.

The notice provided by Supplier within 90 days of its last delivery to Subcontractor was timely without regard to whether Supplier and Subcontractor had a master contract or were working under an open account.

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