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?
