Payment bonds are always associated with contractual terms, but sometimes they also are simultaneously regulated by statute.This results in a legal battle among the freedom of contract, public policy and statutory authority—and often leads to a big legal black hole.
Determine Whether Payment Bond Laws Apply
Every payment bond has associated contractual terms; the legal provisions are printed on the reverse side or on pages accompanying the bonding paperwork. However, payment bonds also may be regulated by state or federal statutes if:
- a state, county or federal project requires a payment bond; or
- the state has laws that regulate voluntary payment bonds.
State and federal improvement projects present the most common circumstances when a payment bond is legally required. Keep in mind, however, state and federal laws only require the general contractor to post a payment bond. If other parties (e.g., subcontractors) obtain a payment bond on state or federal projects, those bonds are technically the product of contractual agreements (not law).
Nevertheless, even payment bonds that exist because of contractual agreement may be regulated by statute. Florida’s law is one example in which private payment bonds are subject to some statutory control (F.S. § 713.23 et seq.).
If statutory requirements do not apply, the claimant’s job is relatively easy: review the bond’s terms and comply. When statutory requirements do apply, determining which regulations control the bond becomes important. Does the state law override the payment bond’s terms or vice versa? If the bond’s terms and the state law do not actually conflict, but instead present unique complementary requirements, must a payment claimant meet both the statutory and contractual requirements?
Resolve Conflicts Between State Regulations and Bond Terms
When a payment bond is required or regulated by statute, the general U.S. legal rule is the statutory provisions apply and completely override the bond’s contractual terms. In other words, act as if the bond’s terms never existed and simply comply with the state or federal law.
This is the case with the U.S. Miller Act, which regulates general contractor payment bonds on federal improvement projects. Regarding these bonds, it’s a pretty safe practice to ignore the bond’s actual terms and follow the Miller Act’s regulations.
Of course, a few exceptions to this general rule can apply.
- States that allow bond terms to override state law if they expand the claimant’s rights. In Rhode Island, the law sets forth a standard two-year bond claim foreclosure period, but authorizes a payment bond to include terms that alter the period in favor of the claimant. Rhode Island Statute §37-12-5 states that “[n]o suit instituted … shall be commenced after the expiration of two years, or under the maximum time limit as contained within any … payment bond … whichever period is longer.”
- States that allow bond terms to completely override state law. Unlike most states, Kentucky does not establish a statutory payment bond foreclosure period. Therefore, the state’s general contract statute of limitations period of 15 years applies to bond claims unless the terms of a payment bond restrict the time period for suit. In that case, the terms of the bond will be honored. As such, Kentucky payment bond claimants must keep careful track of the foreclosure periods set forth in any applicable bond’s terms, as these periods will control their claim’s lifespan.
- States that are silent on the question. Surprisingly, quite a few jurisdictions are completely silent as to what happens in the event of a conflict. While a true gray area exists, it is likely the state, without explicit instructions otherwise, would apply the general rule that the legal requirements override the bond’s terms.