ConstructionPro Week, Volume: 4 - Issue: 8 - 02/27/2015

Do Payment Bonds Cover More Than Contract Payments?

By Bruce Jervis

 

Payment bonds guarantee the payment obligations of a construction contract. An unpaid subcontractor must prove entitlement to payment under the subcontract as a prerequisite to recovery against a payment bond, or so it is usually stated. A recent Oregon case, however, calls this maxim into question.


A subcontractor on a public works project sued for additional compensation due to an extended performance period. The prime contractor raised the notice-of-claim and pay-when-paid clauses of the subcontract as a defense. The subcontractor was denied compensation under the subcontract, but was awarded the fair value of its work under the equitable principle of “quantum meruit.”


Despite denial of entitlement to payment under the subcontract, the sub was still allowed to recover its quantum meruit award from the prime contractor’s payment bond. The public works payment bond statute was enacted to protect subcontractors and should therefore be liberally construed for their benefit.

 

What is your opinion? It is unlikely a payment bond on a private construction project would be interpreted to guarantee anything other than payment under the bonded contract. Is it a slippery slope to treat public works payment bonds as all-purpose guarantees, regardless of defenses the prime contractor might have under the contract?

 

COMMENTS

I am an un-bonded GC who has done many small public works jobs in NY (generally under $50K). Sometimes I work as a sub on a large public or private commercial job. If I am a sub, I will never sign a contract with a GC that has a "pay when paid" clause. I would never ask one of my subs to agree to a "pay when paid" condition. There have been times when I had to/agreed to pay a sub in part or in whole before I was paid.

I am a GC, but I think all subs should stand up to GCs and refuse to sign "pay when paid" sub-contracts. If a sub satisfactorily completes his work why should he take the chance of not getting paid for some reason that is beyond his control.
Posted by: A Wisoff - Friday, February 27, 2015 2:09 PM


i have done gc work but primarily a subcontractor,i feel exactly the same way,as a sub i cannot be responsible for the whole project.i have been told by gc,s that texas is a paid if paid state(my reponse is yes but we are not a paid if paid company).so far i have lost 1 job due to this.we all want work but we have to stand up to our beliefs or we could be one of the companies that end up auctioning equipment off for nothing(i have been to many of them)
Posted by: tom - Saturday, February 28, 2015 2:10 PM


 









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