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A primer on Minnesota Public Payment Bonds

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In a previous article, we discussed Performance Bonds, which ensure that public construction projects are completed according to contractual terms. This article will offer a general overview of the related concept of payment bonds which, just as they sound, are bonds to ensure payment for work performed.

The Minnesota Public Payment Bond statutes ("Bond Laws") share the same general purpose as the Minnesota Mechanic's Lien statutes ("Lien Laws"), i.e., to ensure that general contractors, subcontractors, and material suppliers who provide labor, materials, services, or equipment for a construction project are assured payment.

However, since a mechanic's lien may only be filed against a privately owned project (or a publicly owned project used for a private purpose) Bond Laws apply to public projects. Bond Laws also require prime or general contractors to provide performance bonds to ensure that the work is completed pursuant to the terms and conditions of their contracts with the property owner.

General Requirements

The Bond Laws require that a contract for a public project calling for payments in excess of $75,000.00 will not be valid unless the prime contractor supplies:

(A) a performance bond ensuring that the contractor will complete the project according to the terms and conditions of the contract with the governmental agency or unit; and

(B) a payment bond covering all subcontractors, sub-subcontractors, material suppliers, or laborers furnishing labor, materials, services or equipment to the public project.

Definitions

Public Body: The Bond Laws define a "public body" as any public board or body, including stock agencies, local municipalities, and city agencies ( e.g. Minneapolis Community Development Agency) (referred to herein as "Public Unit").

Contract: A contract has been defined as any contract with any Public Unit associated with work to be performed on any public project;

Labor and Materials: Labor and materials under the Bond Laws refers to work, skill, tools, machinery, materials, insurance premiums, equipment, supplies, and certain other taxes (referred to herein simply as "Work").

Public Project: The term "public work" is not defined in the Minnesota Act, and it is not always clear with constitutes a "public work." For example, a private development is not transformed into a "public work" simply because it receives public financial assistance. On the other hand, courts have construed a kiosk installed in the Twin Cities International Airport to be a "public work" under the Bond Laws. A four-part test generally determines whether a contract is for a "public work" project for which a payment bond is required:

1. ownership of the project;

2. funding of the project;

3. the scope of the municipalities participation in the project; and

4. the extent the project is put to a public use.

Private Projects: Owners of private projects are increasingly requiring contractors to provide payment bonds in order to protect the owners from mechanic's lien claims asserted by subcontractors, sub-subcontractors and suppliers. In turn, contractors will often require their subcontractors to provide payment bonds in order to protect the contractor from the claims of sub-subcontractors and suppliers. Bonds issued for such private projects are entirely creatures of contract. Consequently, the language of a payment bond issued for a private project must be carefully reviewed to ensure that it provides the required protection, and to ensure that any claims on such bond comply with the conditions of the bond.

Prior to starting Work for the public project, the general contractor must file the payment and performance bonds with the Public Units treasurer or financial officer named in the bonds. The Bonds must list the name and address of the covered general contractor and the surety providing the bonds. The Public Unit overseeing the project must make the payment and the performance bonds available for inspection and copying upon request.

If the Public Unit fails to obtain and approve a valid payment bond, the Public Unit will be liable to all contractors furnishing Work under the contract for any losses due to the absence of a payment bond. However, before a claimant may seek recovery against the Public Unit for absence of a valid payment bond, the claimant must first pursue collateral collection efforts against the General Contractor that was primarily responsible for providing the bond.

Note that the Public Unit overseeing the project may not be liable simply because the bond does not properly or adequately list the proper address of the contractor or the surety.

Entities Entitled to Assert Claims

The Bond Laws define those entities that may make a claim against a payment bond as "all persons furnishing labor and materials engaged under, or to perform the contract."

Those having a direct contract with the Public Unit and those who are subsequently brought in to provide Work for the general contractor may assert claims against a payment bond. There is case law to suggest that second, third, etc. tier contractors are also covered by a payment bond.

Claims Covered by Payment Bonds

In general, the Bond Laws cover all contractors providing Work for the public project and the following types of claims:

· Hourly wages for labor performed on the public works project

· Goods, materials, and supplies used for the project

· Certain freight and transportation costs

· Machinery and tools;

· Wages for workers producing or manufacturing materials off site

· State income withholding, unemployment, sales and use taxes

· Insurance premiums required by the contract or by law

· Some "capital" or "plant" expenses, if entirely consumed on the single project

· Equipment repairs, if solely needed to perform the bonded work

· Changed or extra work will be covered by the payment bond so long as the additional work is reasonably within the scope of the original contract

· Delay damages or lost profits: there is no reported Minnesota appellate decision ruling on whether the Bond Laws allow for these claims. A split of authority exists in other jurisdictions but the recent trend appears to be to allow delay damages, but not lost profits.

Initiation of Bond Action

Time Limitations

To preserve its rights against a bond the claimant must serve a written Notice of Claim upon the surety and the general contractor for whom the bond was issued by either personal service or certified mail. The Notice of Claim must be served within 120 days from the last date that the claimant supplied Work to or for the project.

Contents of Notice of Claim

The Notice of Claim must state the nature, extent, and the amount of the proposed claim and the date upon which the claimant last contributed Work to or for the Project. (Contact us for a copy of the statutory Notice of Claim form.)

Commencement of Action Against the Bond

After serving the Notice of Claim, the claimant must initiate legal action against the bond within one year from the date upon which the claimant last contributed Work as set forth in the Notice of Claim.

Note that if the payment bond filed with the Public Unit fails to adequately state or set forth the information required by law, the contractor/claimant need not file a notice of claim within 120 days of its last date of Work. However, the claimant must still commence legal action against the bond within one year from its actual last date of work contributed to or for the project.

If a public project extends for a lengthy period of time, a contractor might complete its work during the relatively early stages, and be owed withheld retainage amounts more than one year from its last date of work. The Bond Laws allow the claimant to extend the one-year deadline to initiate a payment bond action through either (1) a written stipulation with the surety or (2) by providing written notice to the surety to which the surety does not object.

If the surety does not object to a written notice to extend of the one-year deadline, the claimants deadline will then be continued until any payment such as retention becomes contractually due to the claimant. As a practical matter, claimants should always seek a written stipulation with the surety.

However, the claimant should be cautious to preserve its rights by serving written notice to extend the deadline in hopes of obtaining a continuance as a result of the survey failure to object. The written notice must be given to the surety at least 90 days before the one-year deadline expires.

Inclusion of Additional Parties

The claimant may commence an individual action against the bond, or instead may join by motion any other party providing Work to the project. In such case, the Court will determine the respective rights and obligations of the parties sought to be joined.

Insufficient Bond

If the payment bond is insufficient to pay all of the asserted claims, the Court will pro rate the bond distribution between the contractors with valid bond claims.

Attorneys Fees and Interest

The Bond Laws provide for the recovery of reasonable attorney's fees, costs, and disbursements for a successful claimant. However, any such award will be in the judges or other arbiters discretion, and is not guaranteed. Interest may be obtained at the applicable legal rate unless a different rate is set forth in the contract. If the claimants contract specifies a rate, the Court will permit the claimant to recover interest at that rate up to and including the date of judgment.

Summary

Specific questions or issues regarding Minnesota Public Payment Bond statutes - as with any complicated construction matter - should be directed to an attorney experienced in this area.