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AIA Issues Stopgap Amendment to Its A312 Payment Bond After Complaints by Sureties
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June 16, 2008
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By William DeVan
Thelen Reid Brown Raysman & Steiner LLP
In response to court decisions interpreting its A312-1984 payment bond and the reaction of sureties to those court decisions, the American Institute of Architects has issued an amendment to the bond form as "a stopgap measure to address the immediate concerns of the sureties" until AIA can consider a comprehensive revision of the bond form.
Paragraph 6.1 of A312 had required sureties, within 45 days of receiving a claim, to send a response to bond claimants stating the amount that was undisputed and the basis for challenging any disputed amounts.
Courts in Maryland, Virginia and Florida have held that a surety's failure to respond to a claim within the 45-day period resulted in waiver of the surety's defenses to the claim. 1/ Those cases and sureties' reactions to them were summarized in a report published here on February 4, 2008. Click here to view the report.
In response to the court decisions, Travelers, CNA and Chubb had instructed their agents not to issue payment bonds on the A312 form without modifying ¶6. The modifications varied by surety, and the AIA now has reacted by authorizing its own form amendment to ¶6.
The AIA's amendment contains two significant modifications. First, it lengthens the surety's time to respond to a bond claim from 45 days to 60 days. Second, it adds a new ¶6.3 providing that:
The Surety's failure to discharge its obligations under this Section 6 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a claim. However, if the Surety fails to discharge its obligations under this Section 6, the Surety shall indemnify the Claimant for the reasonable attorney's fees the Claimant incurs to recover any sums found to be due and owing to the Claimant. 2/
According to the AIA, this language is intended to balance "the sureties' concern over waiver of defenses" with the claimants' "interests."
"It was important to us to address the sureties' concerns as promptly as possible, but not to substantially revise the bond without the input of owners and claimants," Suzanne Harness, managing director and counsel, AIA Contract Documents, said. "The revision provides an interim solution as we work toward revising the bond forms with input from sureties, owners and claimants."
AIA jointly announced the amendment with the Surety and Fidelity Association of America and National Association of Surety Bond Producers, which contend A312 was incorrectly interpreted by the courts. Over the coming months, the AIA said, SFAA, NASBP, and organizations representing owners, contractors, subcontractors and other potential bond claimants will review and overhaul as necessary both the A312-1984 Performance Bond and Payment Bond and the A310-1970 Bid Bond.
Edward Gallagher, general counsel of SFAA, expressed appreciation to AIA for issuing the modification and said, "The revision is a substantial improvement that addresses the surety's primary concern, the potential loss of defenses. As the process moves forward, we will work with the AIA to address other issues raised in the court decisions."
The new language in ¶6 raises a number of issues.
First, the amendment does not expressly limit the recoverable attorney fees to those incurred after the 60-day claims response period has expired. Thus, some claimants may assert that the surety is liable for the claimant's attorney fees incurred both in submitting the claim and in responding to any information requests that the surety makes before expiration of the 60-day period.
Such an interpretation could give claimants an incentive to submit vague, incomplete, and inadequately documented claims in hopes of triggering an attorney fee obligation by he surety.
Second, disputes may arise as to whether the claimant may recover fees incurred to pursue claims that are subsequently found not to be due and owing. The amendment provides that the surety shall indemnify the claimant for fees incurred "to recover any sums found to be due and owing to the Claimant." [emphasis added] If a claimant pursued multiple claims and recovered on only one of those claims, it may argue that it is entitled to be indemnified for its reasonable fees incurred to pursue all of the claims. If so interpreted, the clause could give claimants an incentive to include weak claims.
Third, disputes may arise when sums are found to be "due and owing" to the claimant but not necessarily due from the surety. The A312 payment bond does not mention delay damages, and the law of some jurisdictions does not allow a subcontractor to recover delay damages from a surety unless the bond expressly identifies such damages as recoverable. If the surety denies the claim because such damages fall outside the scope of its liability, would it still be liable for the claimant's attorney fees because such damages were due and owing from the bond principal?
Other issues may arise from the general indemnity agreement between the bond principal and the surety. If the surety fails to respond to the claim within the 60 days and thereby becomes liable to the claimant for the claimant's attorney fees, does the bond principal become liable to its surety under the indemnity agreement? If the surety failed to respond as a result of its own fault or negligence, it would seem unjust to hold the bond principal liable for these fees, but the result may hinge on the language of the indemnity agreement.
If the bond principal does become liable to the surety, the effect may be either to add a fee-shifting provision to the bond principal's contract with the claimant or to modify an existing fee-shifting provision. For example, a contract that provides the "substantially prevailing party" with a right to fees could be converted to a contract entitling the claimant to fees even if it prevails on only a small part of its claim.
In addition, sureties in some jurisdictions owe duties of good faith to bond claimants and/or principals. The interplay between the duties set forth in the AIA's authorized amendment and the relevant state law may also provide ground for litigation.
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For more information about the issues covered in this report, please contact William DeVan in our Washington, D.C. office at 202-508-4054 or at wdevan@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
ENDNOTES
| 1/ | National Union Fire Insurance Co. of Pittsburgh v. Wadsworth Golf Construction Co. of the Midwest, 863 A.2d 347 (Md. Ct. of Spec. App. 2004), aff'd sub nom., National Union Fire Insurance Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005); Casey Industrial, Inc. v. Seaboard Surety Co., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006); and J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance Co., 2007 WL 2916399 (M.D. Fla. Oct. 8, 2007).
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| 2/ | The full text of the revised ¶6 now reads:
| 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:
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| 6.1 | Send an answer to the Claimant, with a copy to the Owner, within 60 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.
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| 6.2 | Pay or arrange for payment of any undisputed amounts.
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| 6.3 | The Surety's failure to discharge its obligations under this Section 6 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a claim. However, if the Surety fails to discharge its obligations under this Section 6, the Surety shall indemnify the Claimant for the reasonable attorney's fees the Claimant incurs to recover any sums found to be due and owing to the Claimant.
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©2008 Thelen Reid Brown Raysman & Steiner LLP
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