As featured in Connstruction Summer 2017
A payment bond protects subcontractors and material suppliers against nonpayment. Since mechanic’s liens cannot be filed against public property, the payment bond may be the only protection for subs and suppliers if they are not paid for the goods and services they provide to a public construction project.
Given the importance of payment bonds on public projects, Connecticut has enacted the Little Miller Act, which requires any public owner that enters into a construction contract exceeding $100,000.00 to obtain delivery of a payment bond “with a surety or sureties satisfactory to the officer awarding the contract.” If the owner fails to obtain a bond from a “satisfactory” surety, then unpaid subcontractors and suppliers may assert claims directly against the owner pursuant to Connecticut General Statutes §49-41(d).
The use of the term “satisfactory” in the statute raises a number of important questions. For example: What are the limits of a public owners’ discretion when evaluating a payment bond submitted by a general contractor? Does the owner have a duty to investigate the financial solvency and creditworthiness of the proposed surety? Can the owner properly accept a payment bond from a surety that the owner knows has a history of refusing to pay legitimate claims? Can the owner accept a bond from an unlicensed surety? And as an extreme example: Is it possible that a bond written in crayon from a nonexistent surety could ever be deemed “satisfactory” under the statute?
The answers to these questions have enormous potential consequences for owners- who face significant liability if they fail to obtain a payment bond from a “satisfactory” surety– as well as for subcontractors and suppliers- who risk nonpayment if a surety is ultimately unable to pay valid claims.
A series of recent Connecticut Superior Court decisions address these questions and provide some guidance to both owners and subcontractors. In Enterprise Electrical Contractors, Inc. v. Dappreio Construction & Development, LLC, et al. (Docket No. FST-CV-14-6021764S), the Court noted that the use of the term “satisfactory” in Conn. Gen. Stat. §49-41 can only mean that there is some level of discretion and judgment required on the part of the officer awarding the contract. The Court declined to read “satisfactory” as authorizing a “rubber stamp” approach to any payment bond submitted to the awarding officer.
The Enterprise Electrical Court identified three aspects of suitability that are objective in nature and go to the issue of whether a bond could be categorized as having a “satisfactory” surety, or even properly be characterized as a surety bond:
- Does the owner have actual knowledge of facts that might or should preclude characterizing the surety as “satisfactory;”
- Does the surety satisfy mandatory registration or licensing requirements; and
- Does the surety actually exist?
The Court rejected the notion that an owner should be responsible for the financial solvency or responsibility of a bonding company after a payment bond is provided. However, an owner might be liable if the owner accepted a bond from a surety that the owner knows has a history of routinely refusing to honor legitimate claims. An owner would definitely be liable for accepting a payment bond from a surety that is not authorized to do business in Connecticut (as was the case in Enterprise Electrical), or does not even exist.
The lesson for subcontractors and suppliers: If possible, obtain a copy of the payment bond before agreeing to extend credit on a public project. If the bond is issued by a licensed insurer in Connecticut, the owner has likely satisfied its duty to obtain a “satisfactory” payment bond, and the subcontractor/supplier will bear the risk that the surety may become insolvent, or act in bad faith, at some point in the future.
The lesson for public owners: When evaluating bid submissions, it is not enough to merely note that a bidder has submitted a document which purports to be a “payment bond.” The owner must perform a substantive review of the bond instrument and the bonding company to ensure that the surety is sufficient. The review should include, at a minimum, checking with the Connecticut Insurance Commissioner to determine whether the company issuing the bond is actually licensed to conduct insurance business in the State.
By enacting Conn. Gen. Stat. §49-41(d), the Connecticut legislature placed the burden of determining the legitimacy of the statutory payment bond on the public owner. As the Court noted in Enterprise Electrical Contractors, Inc., the burden is minimal and involves little more than a common sense review. However, given the limited scope of a public’s owner’s statutory obligation, as well as the occurrence of payment bond fraud on public projects, subcontractors and suppliers are well-advised to perform their own due diligence before extending credit on a public project in order to assure themselves that the payment bond at issue is in fact “satisfactory.”
Michelson, Kane, P.C.
