Understanding Surety Concerns with the AIA A312 Payment Bond Form Presenter: [Insert Name]

AIA A312 Background Commonly-used bond forms for private and for local public work Commonly-used bond forms for private and for local public work First published in 1984 by the American Institute of Architects First published in 1984 by the American Institute of Architects Successor to AIA A311 (1970) Successor to AIA A311 (1970) Comprised of a performance bond and a payment bond Comprised of a performance bond and a payment bond Surety industry provided comments and input in the development of the forms but is not the publisher of the forms. Surety industry provided comments and input in the development of the forms but is not the publisher of the forms.

A312 Payment Bond Bond form covering contractor’s obligations to pay subcontractors and others for labor and materials Bond form covering contractor’s obligations to pay subcontractors and others for labor and materials More procedurally detailed, with more elaborate notice provisions, than A311 More procedurally detailed, with more elaborate notice provisions, than A311

A312 Payment Bond: Claimant Notice Important Provisions to Understand: Important Provisions to Understand: Paragraph 4 – “The Surety shall have no obligation to Claimants under this Bond until: Paragraph 4 – “The Surety shall have no obligation to Claimants under this Bond until: 4.1 Claimants who are employed by or have a direct contract with the Contractor have given notice to the Surety…and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and, with substantial accuracy, the amount of the claim.” 4.2 Claimants who do not have a direct contract with the Contractor:.1 Have furnished written notice to the Contractor and sent a copy, or notice thereof, to the Owner, within 90 days after having last performed labor or last furnished materials or equipment included in the claim stating, with substantial accuracy, the amount of the claim and the name of the party to whom the materials were furnished or supplied or for whom the labor was done or performed; and.2 Have either received a rejection in whole or in part from the Contractor, or not received within 30 days of furnishing the above notice any communication from the Contractor by which the Contractor has indicated the claim will be paid directly or indirectly; and.3 Not having been paid within the above 30 days, have sent a written notice to the Surety…and sent a copy, or notice thereof, to the Owner, stating that a claim is being made under this Bond and enclosing a copy of the previous written notice furnished to the Contractor.”

A312 Payment Bond: Surety Response Important Provisions to Understand: Important Provisions to Understand: Paragraph 6 – “When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions: Paragraph 6 – “When the Claimant has satisfied the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following actions: 6.1 Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed. 6.2 Pay or arrange for payment of any undisputed amounts.”

The Crux of the Concern: 3 Recent Legal Decisions National Union Fire Insurance Co. of Pittsburg v. David A. Bramble, Inc., 879 A. 2d 101 (Md. 2005) National Union Fire Insurance Co. of Pittsburg v. David A. Bramble, Inc., 879 A. 2d 101 (Md. 2005) Casey Industrial, Inc. v. Seaboard Surety Co., 2006 WL (E.D. Va. Oct. 2, 2006) Casey Industrial, Inc. v. Seaboard Surety Co., 2006 WL (E.D. Va. Oct. 2, 2006) J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance Co., 2007 WL (M.D. Fla. Oct. 8, 2007) J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance Co., 2007 WL (M.D. Fla. Oct. 8, 2007)

Bramble Decision Maryland decision in which highest Maryland state court found that a surety’s non-response to a Claimant’s notice under the terms of Paragraph 6 of the A312 payment bond constituted a complete waiver of all procedural and substantive defenses by the surety. Maryland decision in which highest Maryland state court found that a surety’s non-response to a Claimant’s notice under the terms of Paragraph 6 of the A312 payment bond constituted a complete waiver of all procedural and substantive defenses by the surety. The Court rejected surety’s arguments that: (1) if the non-response constituted a breach, the claimant should receive any damages caused by that breach, not payment of the entire claim, valid or invalid, and (2) the surety’s non-response should be treated as a denial of the claim, rather than an admission of liability. The Court rejected surety’s arguments that: (1) if the non-response constituted a breach, the claimant should receive any damages caused by that breach, not payment of the entire claim, valid or invalid, and (2) the surety’s non-response should be treated as a denial of the claim, rather than an admission of liability.

Casey Industrial, Inc. Decision Virginia decision in which federal district court, looking to Bramble Decision for guidance, ruled that a surety’s failure to identify all fact-based defenses within the 45-day response period of A312 acted as a waiver of any new fact-based defense raised outside of the 45-day period. Virginia decision in which federal district court, looking to Bramble Decision for guidance, ruled that a surety’s failure to identify all fact-based defenses within the 45-day response period of A312 acted as a waiver of any new fact-based defense raised outside of the 45-day period.

J.C. Gibson Plastering Co. Decision Florida decision in which federal district court, following the Bramble and Casey decisions, held that an untimely surety response (one given in 48 days) constituted a complete waiver of the surety’s defenses. Florida decision in which federal district court, following the Bramble and Casey decisions, held that an untimely surety response (one given in 48 days) constituted a complete waiver of the surety’s defenses. The Court reasoned that the 45-day response period begins to run from receipt of Claimant’s notice that (1) a claim is being made on the bond and (2) which states the amount of the claim with substantial accuracy. The Court reasoned that the 45-day response period begins to run from receipt of Claimant’s notice that (1) a claim is being made on the bond and (2) which states the amount of the claim with substantial accuracy. The Court rejected the surety’s contention that the 45-day response period should commence to run from when the surety receives proof of loss/substantiating documentation of the claim, since this was not stated explicitly in the bond form. The Court rejected the surety’s contention that the 45-day response period should commence to run from when the surety receives proof of loss/substantiating documentation of the claim, since this was not stated explicitly in the bond form. The Court noted, that under Florida law, bond language must be strictly construed against the surety. The Court noted, that under Florida law, bond language must be strictly construed against the surety.

Implications 45 days is not a long evaluative period given the complexities of today’s construction projects. 45 days is not a long evaluative period given the complexities of today’s construction projects. According to the Gibson decision, the 45-day period runs from receipt of a notice simply identifying that it is a claim on the payment bond and stating an amount due with “substantial accuracy”; the absence of supporting documentation does not delay the running of the surety’s response period! According to the Gibson decision, the 45-day period runs from receipt of a notice simply identifying that it is a claim on the payment bond and stating an amount due with “substantial accuracy”; the absence of supporting documentation does not delay the running of the surety’s response period! How can the surety make a proper determination as to the merits of the claim and the range of appropriate defenses in the absence of relevant facts and documentation? Principal must provide the surety with all claim information promptly and expeditiously! How can the surety make a proper determination as to the merits of the claim and the range of appropriate defenses in the absence of relevant facts and documentation? Principal must provide the surety with all claim information promptly and expeditiously! An untimely or non-response has harsh consequences for principal and surety alike! An untimely or non-response has harsh consequences for principal and surety alike! Remember the principal indemnifies the surety for amounts paid out, so the Principal ultimately bears the risk of paying unsubstantiated claims! Remember the principal indemnifies the surety for amounts paid out, so the Principal ultimately bears the risk of paying unsubstantiated claims! Please note that EJCDC C-615, Payment Bond, is predicated on AIA A312 bond form language and likewise is problematic! Please note that EJCDC C-615, Payment Bond, is predicated on AIA A312 bond form language and likewise is problematic!

Surety Company Responses Each surety company will make its own decision on whether and how to write the A312 payment bond form. Each surety company will make its own decision on whether and how to write the A312 payment bond form. Given the import of recent legal developments and increased risks to contractors and sureties, sureties are reticent to write an unmodified A312 payment bond form. Given the import of recent legal developments and increased risks to contractors and sureties, sureties are reticent to write an unmodified A312 payment bond form. Many sureties have created their own custom modifications to the A312 payment bond form; the language and approach of such modifications vary among surety companies. Many sureties have created their own custom modifications to the A312 payment bond form; the language and approach of such modifications vary among surety companies. Some sureties seek use of alternative payment bond forms such as A311. Some sureties seek use of alternative payment bond forms such as A311. Some sureties may write an unmodified A312 bond form, but only for particular accounts. Some sureties may write an unmodified A312 bond form, but only for particular accounts.

Surety Industry Response The National Association of Surety Bond Producers (NASBP) and The Surety & Fidelity Association of America (SFAA) have taken immediate actions to address concerns: The National Association of Surety Bond Producers (NASBP) and The Surety & Fidelity Association of America (SFAA) have taken immediate actions to address concerns: Initiated dialogue and meetings with AIA Initiated dialogue and meetings with AIA Working toward a consensus modification to A312 payment bond form that can be considered by owners, design professionals, contractors, and sureties Working toward a consensus modification to A312 payment bond form that can be considered by owners, design professionals, contractors, and sureties Seeking development and issuance by AIA of a “stopgap” amendment to Paragraph 6 of the A312 payment bond form Seeking development and issuance by AIA of a “stopgap” amendment to Paragraph 6 of the A312 payment bond form Seeking to expedite the revision cycle for AIA A312 and to discuss with AIA the development of alternate bond forms Seeking to expedite the revision cycle for AIA A312 and to discuss with AIA the development of alternate bond forms

What Can You Do As A Contractor? Educate owners and design professionals about the implications of specifying an unmodified A312 payment bond form! Make sure they understand that unmodified A312 payment bond forms will be harder to obtain. Educate owners and design professionals about the implications of specifying an unmodified A312 payment bond form! Make sure they understand that unmodified A312 payment bond forms will be harder to obtain. Work with your local contractor associations to bring awareness to and understanding of these issues! Work with your local contractor associations to bring awareness to and understanding of these issues! Cooperate with your bond producer and surety on any payment bond claims under A312 and provide all relevant information to the surety as promptly as possible. Cooperate with your bond producer and surety on any payment bond claims under A312 and provide all relevant information to the surety as promptly as possible.

For More Information National Association of Surety Bond Producers (NASBP) The Surety & Fidelity Association of America (SFAA) Surety Information Office (SIO)