In the construction industry, labor and material payment bonds are normally required to be furnished on public projects. Some private owners, particularly on large or institutional projects, may also require contractors to furnish payment bonds.
The primary purpose of a payment bond is to protect subcontractors, materialmen and laborers against the default of contractors. When the principal on the bond does not pay, the surety company can be forced to pay if the bond claimant has complied with the terms and conditions of the bond. Should a bond claimant fail to comply with these special terms and conditions, the surety will have no obligation to make payment, even if payment is otherwise due and owing from the surety’s principal.
The terms of the bond will normally determine: (1) who may make a claim; (2) what material and labor is covered by the bond; (3) when and to whom notice of the claim must be given; (4) when suit must be commenced; and (5) where suit must be commenced.
The recent New York case of Techcon Contracting, Inc. v. Incorporated Village of Lynbrook underscores the importance of reading the terms of the bond, and strictly complying with the special conditions set forth in the bond.
Techcon Contracting, Inc., a general contractor, entered into a public construction contract with the Village of Lynbrook to perform certain roadway improvements. Lincoln General Insurance Company, as surety, issued a payment bond for the work relating to the project, naming Techcon as its principal under the bond. Techcon later entered into a subcontract with Lizza & Sons Paving, Inc. to perform grading and paving work at the project.
After having performed work at the project without receiving payment from Techcon, Lizza was forced to suspend its work on July 31, 2002. Techcon later defaulted on its contract with the Village of Lynbrook and was terminated on September 23, 2002.
Pursuant to the terms of the payment bond issued by Lincoln General, all actions to recover on the bond were required to be commenced within one year of Techon’s last day of work at the project.
On May 25, 2004 Lizza Paving commenced an action on the payment bond, seeking to recover the money due it from Techcon. The surety moved for summary judgment dismissing the action of Lizza Paving, arguing that the action was time barred. According to the surety, the bond contained a one year limitation period running from the date upon which Techcon ceased work on the project. Techcon was terminated by Lynbrook on September 23, 2002. Under the time limitation provision of the bond, Lizza Paving would have had to commence its action by September 23, 2003. Since Lizza Paving did not commence its action until May 25, 2004, the surety argued that the action was time barred.
In contesting the surety’s motion for summary judgment, Lizza argued that statutory law applicable to public construction projects established the applicable time period within which to commence an action, not the language of the bond. State Finance Law section 137 provides for one year from the date on which final payment was due to commence an action on the payment bond. According to Lizza, since that date was disputed, the surety’s motion should be denied.
The trial court ruled in favor of the surety, granting summary judgment dismissing the claim of Lizza Paving. In doing so, the Court looked no further than to the language of the payment bond. It held that Lizza’s failure to commence an action within one year of the September 23, 2002 termination of Techcon was fatal to Lizza’s claim under the payment bond. The court held that the one year time limitation requirement was a precondition to recovery under the bond, and because Lizza failed to meet that condition precedent, its claim was lost.
This case is interesting because the court permitted the bond to shorten the time period otherwise established by New York’s State Finance Law on municipal public works projects. Only time will tell whether this case will withstand appellate review.
What is certain however, is that courts time and again strictly construe the terms of a payment bonds. This means that the courts will make certain that there has been strict compliance with the specific conditions of the bond. The bond claimant should be concerned with two time requirements under the payment bond. These requirements are first, the time within which notice, if any, must be given to preserve bond rights, and second, the time within which suit must be brought against the bonding company.
The unpaid claimant, or potential claimant, should make every effort to obtain a copy of the payment bond and become thoroughly familiar with its requirements. When dealing with an insolvent principal, the bond may provide the only opportunity to recover payment for work performed or materials furnished. If the terms of the bond are not complied with, the claim will be lost. The surety will only pay if the specific conditions of the bond are first satisfied.