Recent Cases Have Reduced Defenses to Payment Bond Claims

Jacob E. Roussel | Breazeale Sachse & Wilson LLP | March 11, 2018

It goes without saying that contracts are essential in the construction industry. They govern the relationships between all parties involved on a project, including the owner, the general contractor, subcontractors, and suppliers. In resolving disputes, courts often state the principal that a contract defines the respective rights and obligations of the parties and is the law between them. As such, if the terms of a contract are clear, the contract should be enforced as written.

In the past several years, however, a general contractor’s ability to protect itself through the terms of its contracts have been diminished by courts permitting recovery against a surety furnishing a payment bond notwithstanding the general contractor’s contractual defenses which would otherwise prevent recovery. Of course, in those instances where a surety is held liable on a payment bond claim, the general contractor is ultimately responsible for the amount by way of its general indemnity agreement with the surety.

In 2011, the Louisiana First Circuit Court of Appeal decided the case of Glencoe Educ. Found., Inc. v. Clerk of Court & Recorder of Mortgages for Par. of St. Mary, 2010-1872 (La. App. 1 Cir. 5/6/11), 65 So. 3d 225, wherein the Court held that a surety on a public works project was not permitted to rely upon contractual “pay-if-paid” clauses in the defense of payment bond claims asserted by subcontractors. In essence, the Court reasoned that the “pay-if-paid” clauses in the subcontracts could not shield the surety from liability since the payment bond was a statutory bond intended for the benefit of the claimants. The practical effect of the decision is that the general contractor must ultimately be responsible for the subcontractors’ claims by way of its general indemnity agreement despite having a contractual “pay-if-paid” defense to the claims.

Recently, in January 2018, the holding of Glencoe was extended by the Louisiana First Circuit Court of Appeal. In Bear Indus., Inc. v. Hanover Ins. Co., 2017-0301 (La. App. 1 Cir. 1/4/18), — So. 3d. –, a supplier to a subcontractor filed a lawsuit alleging that it was owed additional amounts for materials furnished in connection with the construction of a Wal-Mart Supercenter. The lawsuit named as a defendant the surety which furnished a payment bond on behalf of the general contractor for the project. The trial resulted in a judgment rendered in favor of the supplier and against the surety. On appeal, the general contractor and surety argued that the trial court erred by ruling in favor of the supplier due to the supplier’s failure to comply with a notice requirement contained in a joint check agreement executed by the general contractor, subcontractor, and supplier. That agreement required that the supplier notify the general contractor in the event there was a failure on the part of the subcontractor to make payment within 60 days of the date of an invoice. Importantly, the agreement further stated that the failure of the supplier to provide such notice shall constitute a waiver of any lien rights or rights to collection against the general contractor.

The Court of Appeal affirmed the ruling of the trial court. Specifically, the Court held that the reasoning of Glencoe also applied to claims brought against a payment bond under the Private Works Act, not just to claims against a Public Works Act payment bond as was the case in Glencoe. The Court then extended the Glencoe reasoning beyond the application of a contractual “pay-if-paid” clause, holding that the surety was not entitled to rely upon the contractual 60 day notice provision as a defense to the payment bond claim. Thus, despite the general contractor having a contractual agreement stating that it would not be liable to the supplier in the absence of the required notice, the general contractor’s surety was still liable; meaning that the general contractor will ultimately be responsible to the surety for the amount.

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