Surety bonds are an important cog in the construction industry machine, but a topic rife with complexities. Put plainly, a surety bond, whether a payment bond, performance bond, release of lien bond, or appeal bond, generally refers to a three-party relationship that includes a (1) principal (who is purchasing the surety bond to make sure of a performance of an obligation); (2) obligee (who is the party requiring or requesting the bond); and (3) the surety (who is issuing the bond, guaranteeing the principal’s obligations/performance, and if the principal fails to perform, step in to fulfill those obligations). For the purposes of this blog, we will focus on the most notable bonds in construction, payment and performance bonds.

There are many reasons why a principal might purchase a bond and an obligee might require it. For public projects governed by the Texas Government Code or federal projects, where bonds are required, an owner wants to make certain the lowest bidder is capable of fulfilling the requirements of the public contract, assure subcontractors and suppliers get paid if the general contractor-principal defaults and to protect the interest of the taxpayers by assuring the project is completed without massive cost-overruns. On private projects, an owner may insist on a bond if the project is a high dollar amount or complex. Also, a surety will assure that the contractor is qualified to handle the job and gives the private owner piece of mind that if the project goes south, the surety will step in and finish the project. Finally, many lenders may insist there be a bond to protect their interests as likely a senior lienholder.

At least as to payment bonds, if things do go decidedly wrong and a claim must be made on a bond, each of the public and private bonds has their own claim procedures, that if not followed correctly, mean disaster for the claimant. Chapter 2253 of the Texas Government Code details bond claims for public works projects while Chapter 53 of the Texas Property Code handles private project bond claims.

Texas Government Code 2253 requires that a prime contractor secure a bond in the amount of the contract for public work projects. Claims must be filed on or before the 15th day of the third month following the month wherein labor and/or materials were provided and not paid. Each claim must be mailed to the surety and the prime contractor via certified mail, and must include a sworn statement of account as to the details of the claim. Further, a claim filed by a second-tier claimant (who is not in privity with the prime contractor) must also provide proof to the surety that they sent a notice to the prime contractor on or before the 15th day of the second month.

For private projects, bonds under the Property Code are required to be in the amount of the underlying contract. When a Property Code bond is obtained by an owner from a prime contractor and its surety, and the bond is then recorded with the county, unpaid subcontractors and vendors are prohibited from filing lien claims and foreclosing liens on the property for such claims. This bond becomes the sole source recovery of such unpaid claims. A claimant under this type of bond can perfect a bond claim by (1) satisfying the requirements for a Property Code lien claim, and/or (2) filing a claim directly with the surety, with the notices that would be sent to the owner in perfecting a lien claim going to the surety instead. Provided that the bond was filed when the lien / claim was filed, the limitation to file suit on the bond is twelve months from the date of perfection of the lien / claim. The limitation is twenty-four months from perfection of the claim if the bond is recorded after the filing of the lien / claim.

Other than bonds governed by statute, there are also common law bonds, governed by the terms of the contract (or more likely subcontract) and the terms of the performance and/or payment bond itself and which lack much if any notice requirements (unlike statutory bonds). Here, the general contractor may demand a subcontractor obtains a payment or performance bond because of any number of reasons, not the least of which being an onerous prime contract or a new contractual relationship with the principal/subcontractor. In these cases, other than what might be contained in the bond language itself, the surety has numerous defenses it can assert to deny coverage or otherwise avoid liability (if it comes to that). Some of these defenses include:

• The construction contract was materially altered without the surety’s consent;
• Claimant failed to follow the surety bond’s conditions precedent before making a claim, such as providing timely notice of the principal’s default; and
• Claimant improperly terminated the bond’s principal.

Additionally, the surety cannot be liable for an amount greater than the penal sum of the bond, unless the bond expressly provides otherwise.

The attorneys in our Austin and Dallas offices have significant experience with handling bond claims. If you should have any questions or comments, please contact us at info@gstexlaw.com.

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