ASA hails Maryland high court decision safeguarding subcontractors’ payment bond rights

News American Subcontractors Association, Inc. August 12, 2005
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On July 21, the Maryland Court of Appeals, Maryland’s highest court, handed victory to subcontractors and other construction firms that rely on payment surety bonds for assurance that they will be paid for their work. The court ruled that a payment surety’s failure to respond to a subcontractor’s claim in the manner prescribed in a bond form prevented the surety from disputing the claim and required the claim be paid in full. The American Subcontractors Association (ASA), which in May 2005 filed an amici curiae (“friends of the court”) brief in the case joined by ASA’s regional chapters, ASA of Baltimore and the D.C. Metropolitan Subcontractors Association, applauded the ruling. The brief supported the subcontractor’s position that the lower courts’ decision should be affirmed.

“ASA believes the Maryland court sent the right signal, namely that every party must play by the rules set forth in the bond form,” said ASA Executive Vice President E. Colette Nelson. “Many subcontractors lose their claims because they do not follow claims procedures. Payment sureties must follow claims procedures as well.”

In the case, National Union Fire Insurance Company of Pittsburgh, Pa. v. Wadsworth Golf Construction Company of the Midwest, a subcontractor committee properly submitted a claim within the time limit prescribed by the American Institute of Architects’ (AIA) A312-1984 bond form. This form requires the surety to “Send an answer to the Claimant…within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.” The sureties’ correspondence with the subcontractor within the 45-day period did not, however, dispute any portion of the work and did not offer grounds to challenge the subcontractor’s claim.

A trial court ruled in favor of the subcontractor, and a Maryland appeals court agreed, upholding the ruling that the sureties had waived all of their defenses to the subcontractor’s payment bond claim. The sureties, joined by the Surety Association of America and the American Insurance Association, asked the Court of Appeals of Maryland to review the decision and review was granted.

ASA’s brief argued that if subcontractors have to meet the time deadlines for claims as they are stated in a bond form, then the sureties should have to meet their time deadlines as well. In its brief, ASA also pointed out that “subcontractors expect, and have a right to expect, that bonds mean what they say and that the bonding company will comply with the unambiguous terms and conditions of the bond.”

In its ruling, Maryland’s high court agreed: “We determine that the language of the payment bond requires the sureties to delineate those portions of the claim that they intend to dispute within the 45-day period and that, under the language of the bond, a failure to do so results in the entirety of the claim being undisputed.”

One of the sureties’ arguments was that letters to the subcontractor within the 45-day window that “reserved their rights” was equivalent to disputing the subcontractor’s whole claim, and allowed the sureties to provide details and grounds for the dispute later. However, ASA’s brief pointed out: “The Sureties could only reserve those rights to which they were entitled under the Bond. The letters could not serve to expand those rights to which they were entitled under the Bond. The letters could not serve to expand those rights, as no party can unilaterally change the terms of the contract.”

Likewise, the high court’s ruling said: “To decide that the sureties, by inaction through time and effort, could dispute the entirety of a claim ad infinitum, would greatly undermine the bond’s purpose of safeguarding those entities that supply goods and labor to the general contractor. The requirements of Paragraph 6 function to insure that subcontractors and sub-subcontractors are not forced to absorb the risk of nonpayment over a protracted period by the contractor and the owner, through no fault of their own.”

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