Court Voids Payment Bonds\' 30 Day Notice Requirement

Labor and material payment bonds are normally required of contractors on public improvement projects under Section 137 of the State Finance Law. The purpose of a payment bond is to protect subcontractors, materialmen and laborers against a default of the contractor. When the contractor fails to pay, the surety company, as guarantor, can be forced to pay if the bond claimant has complied with the terms and conditions of the bond.

In the case of Navillus Tile, Inc. v Bovis Lend Lease LMB, Inc., the prime contract imposed a 30-day notice of claim requirement as a condition precedent to payment. The question before the court is whether such a short 30 day notice requirement is enforceable under Section 137 of the State Finance Law.

In 2002, the City of New York entered into a Prime Contract with Bovis Lend Lease LMB, Inc. for Bovis to act as the construction manager for the construction of the City\'s new Office of Emergency Management headquarters. Rather than require a traditional labor and material payment bond under Section 137 of the State Finance Law, the Prime Contract contained a \"payment guarantee\" by the City for the claims of subcontractors and material suppliers. The Prime Contract further provided that the guarantee would be construed \"in a manner consistent with Section 137 of the State Finance Law\".

State Finance Law Section 137 requires bond claimants, such as subcontractors or material suppliers, to give written notice of their claims within 120 days after the last performance of work or furnishing of materials to the project. The Prime Contract, however, contained a requirement that claimants had to provide the City with notice of any claim under its payment guarantee within 30 days after last performance of the work or furnishing of materials.

Navillus sued Bovis for unpaid work under the contract and also sued the City on the payment guarantee. The City moved to dismiss Navillus\' payment guarantee claim on the grounds that Navillus did not comply with the 30 day notice of claim requirement. The trial court granted the City\'s motion and dismissed Navillus\' claim based on its failure to comply with the 30 day notice requirement.

The appellate court reversed the trial court\'s dismissal of the claim. The court noted that the City\'s payment guarantee specifically replaced the traditional payment bond. Accordingly, although not a payment bond per se, the court held that the City was obligated to afford all claimants with the rights set forth in Section 137 of the State Finance Law, including its granting bond claimants 120 day notice of claim requirement, rather than the onerous 30 day notice requirement set forth under the payment guarantee.

The court quoted from an appellate court case that held that a payment bond cannot impose more stringent requirements than that required by State Finance Law Section 137: \"Any such more burdensome notice provision having the effect of weakening the financial protection afforded statutory beneficiaries would be void as violative of public policy embodied in State Finance Law Section 137\".

While the appellate court held that a payment guarantee issued in lieu of a payment bond cannot have terms which are more restrictive than the terms of a statutory bond, it is in a claimant\'s best interest to act with best possible speed so as to comply with the 120 day requirement contained in the statute. A surety will only pay a claim if all procedural requirements are satisfied, including the notice requirement.

About the author: Mr. Miuccio is a partner of the law firm of Welby, Brady & Greenblatt, LLP and General Counsel to the Construction Industry Council of Westchester & Hudson Valley, Inc. Gregory J. Spaun, an associate with the firm, assisted with the preparation of this article.

If you would like more information regarding this topic please contact Alexander A. Miuccio at amiuccio@wbgllp.com or call (914) 607-6480