Pleaseman filling agreement between owner and contractor join us tomorrow, 11/4, for Shawn Farrell‘s presentation “Construction Disputes: Lessons Learned” at the Carpenters’ Company of City and County of Philadelphia’s Master Builder Dialogues.

Shawn Farrell has over 20 years of experience litigating construction disputes, and will share the lessons he learned to demonstrate how an effective project management team can identify and manage the risks associated with construction contracts without the need for litigation. This seminar will instruct participants on the realistic application of contract terms, payment statutes, lien law, and bond rights to construction operations, with the objective of maximizing profit and minimizing the time to close out a project.

For more information and to register, please visit the Carpenters’ Company’s website.

It is no secret within the construction industry that public-private partnership (P3) project delivery has recently become all the rage.  The demand for infrastructure repairs and improvements is high, and the public dollars needed to fund them are scarce.  P3 projects incorporating public and private funding have, therefore, become a creative delivery alternative that states like Ohio have adopted.  And with new delivery methods comes the need for new legislation to regulate and administer these types of projects.

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The Bonding Requirements

Last month, Ohio Governor John Kasich approved new amendments to the state’s public-private partnership (P3) legislation that could have drastic impacts on subcontractors and suppliers performing work on Ohio P3 projects.  The new law, which goes into effect this September, requires prime contractors to provide both performance and payment bonds on P3 projects in Ohio—a change that subcontractors and suppliers will likely be touting as it will help to secure the payment obligations of prime contractors to their subs.

The Catch

The catch is that the director of the Ohio Department of Transportation (ODOT), Jerry Wray, will have discretion to determine the amount of the bonds.  In other words, the director could fix a bonding amount that is less than the prime contract price, leaving potential bond claimants somewhat exposed to the risk of nonpayment.

The legislation also requires that the performance bond be conditioned on the private entity performing the work according to the agreed upon terms, within the time prescribed, and in conformity with any other terms and conditions that the director requires.  Similarly, the payment bond must be conditioned on the payment for all labor, work performed, and materials furnished in connection with the P3 agreement and any such terms and conditions that director requires.

What Do the Amendments Mean for the Future?

This bonding requirement is a major change to Ohio’s P3 legislation, which is currently silent on bonding.  The new bonding requirement, which gives the director considerable discretion, is markedly different from some of Ohio’s other legislation relating to public construction.   The Ohio Transportation Code, for instance, requires a payment and performance bond for 100% of the contract amount for transportation projects.

Depending on the amount specified by the ODOT director for the payment and performance bonds, starting in September of 2014, contractors farther down the chain on Ohio P3 projects may have little or no payment protection other than directly bringing an action against the contracting party directly upstream.  We will continue to monitor the implementation of the new P3 bonding requirement and how ODOT’s director decides to use his discretion.

Lisa M. Wampler is a Partner in the Construction Group of Cohen Seglias Pallas Greenhall & Furman PC.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

New Proposed Legislation Would Require Bond: If House Bill 1488 becomes law in Maryland, bid protesters of state contracts appealing a decision to the Maryland Board of Contract Appeals would be required to simultaneously submit a “protest appeal bond or other form of acceptable security” along with their bid protest appeal. For mid-sized and large businesses, the bond would be required to be in an amount equal to 5 percent of the estimated value of the contract being protested – including base term and options. For small businesses, the proposed legislation would require a protest appeal bond in an amount equal to 1 percent of the estimated value of the contract being protested (including base term and options).

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If You Lose, The State Keeps The Cash: HB 1488 provides that if the Appeals Board affirms the unit’s procurement decision (or if the appeal is dismissed) the appeal bond (or other form of acceptable security) “shall be deposited into the General Fund of the State.” In other words, if you lose, your bond is forfeit to the State. If the protest appeal is successful, the appeal bond or other form of acceptable security would be returned to the protestor.

Chilling Effect: If House Bill 1488 becomes law, it will likely have a dramatic effect on the number of appeals filed. Indeed, the number of legitimate protests filed would most assuredly decline.

House Bill 1488 was first introduced and read for the first time on February 24, 2014. Cohen Seglias will continue to monitor the status of House Bill 1488.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

As members of the construction industry know, to describe the relationship between a surety and the party to whom it issues a surety bond (the principal) as confusing would be an understatement.  In fact, many believe that the surety-principal relationship is similar, if not identical, to the insurer-insured relationship. In a recent federal court opinion – Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America – a contractor learned the hard way that the principal in a surety-principal relationship is not nearly as protected as the insured in an insurer-insured relationship.

The Case

In Reginella, the United States District Court for the Western District of Pennsylvania granted a surety’s motion to dismiss the claims brought against it by the surety’s principal, Reginella, finding, among other things, that a surety does not owe the kind of heightened duty to its principal that an insurance carrier owes to its insured (this heightened obligation is called a fiduciary duty, and we tend to see it in the insurer-insured, attorney-client, trustee-beneficiary, and guardian-ward contexts).  In Reginella, the surety, Travelers, issued performance and payment bonds on behalf of its principal, Reginella, for a school district project in Pennsylvania and a turnpike project in Ohio.

On the school district project, Reginella’s relationship with the owner broke down, and the project shutdown.  On the turnpike project, Reginella’s relationship with Travelers soured over a disagreement surrounding a lien filed by one of Reginella’s subcontractors.  Reginella alleges that Travelers failed to, among other things, (i) pay Reginella’s subcontractors in accordance with the payment bonds that Travelers issued, (ii) issue a bond to address a subcontractor lien, and (iii) generally act in the best interests of Reginella in a way that would facilitate payment from the project owners to Reginella.

Ultimately, Reginella sued Travelers for damages in excess of $15 million for lost business, goodwill, future earnings and residual value of its enterprise against Travelers for, among other claims, Travelers’ alleged breach of its fiduciary duty owed to Reginella in relation to the bonds issued on the two projects.  Travelers moved to dismiss the entirety of Reginella’s claims.  In applying Pennsylvania law, the Court granted Travelers’ motion and dismissed Reginella’s claims against Travelers, concluding that a Pennsylvania court would not impose fiduciary duties on a surety because a surety is a guarantor issuing a commercial guaranty, not an insurance carrier issuing an insurance policy.

What Does It All Mean?

The Court’s decision makes it clear that in Pennsylvania, a surety’s obligations to its principal are not the same as the heightened obligations that exist in fiduciary relationships.  In a fiduciary relationship, the fiduciary (e.g., an insurer) must act with the utmost fairness and refrain from using his position to the other’s detriment and his own advantage.  As the Court determined, however, surety relationships are ordinary arm’s-length commercial relationships where each party owes the other a less protected duty of good faith and fair dealing.  When entering into surety relationships, contractors need to be mindful of this distinction, especially when a surety begins communicating with project owners on its principal’s behalf.

Principals like Reginella should carefully monitor the surety’s activity and insist on being copied on all communications to and from the surety.

It is important to note that a couple of weeks ago, Reginella asked the Court to reconsider and alter its decision.  Therefore, the Court’s decision is not yet final, and we will continue to monitor the result.

John A. Greenhall is a Partner with the Firm and a member of the Construction Group. He can be reached at 215.564.1700 or jgreenhall@cohenseglias.com.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

By: Jason C. Tomasulo

An amendment to the Virginia Public Procurement Act (VPPA) has cut in half the amount of time a sub-subcontractor or supplier has to make a payment bond claim on public construction and transportation projects in Virginia. Payment bonds ensure payment to those who provide labor materials, equipment rentals and public utility services to a construction project. The VPPA requires payment bonds on public construction projects that exceed $500,000 and transportation projects that exceed $250,000.

Prior Law – 180 Days Notice

Until last year, the VPPA required a sub-subcontractor or supplier of a first-tier subcontractor to provide notice of its payment bond claim to the contractor who secured the payment bond within 180 days from the day it last furnished labor or material. Failure to timely provide notice is fatal to a payment bond claim. It was well established in Virginia that this 180-day period could not be shortened by the bonding company or the contractor, even when language in the payment bond required notice within a shorter period.

Current Law – 90 Days Notice

All of that changed last year when the Virginia Legislature amended the VPPA and reduced the notice period from 180 days to 90 days. This change makes the VPPA consistent with:

  • The notice period typically required by sureties in payment bonds;
  • The notice requirements for similarly situated claimants in Maryland, the District of Columbia and Pennsylvania under their state statutes; and
  • The Federal Miller Act, which applies to federal projects in Virginia and elsewhere.

Sub-subcontractors and suppliers to subcontractors in Virginia must be aware of this change in order to protect their payment bond rights on public construction projects. A sub-subcontractor or supplier who fails to timely provide notice within 90 days of last providing labor or materials will lose his right to assert a payment bond claim. For contractors, subcontractors and sureties defending against a payment bond claim, the reduced notice period may provide a defense to payment bond claims if the claimants are not aware of this statutory change.Jason Tomasulo is Senior Counsel at Cohen Seglias Pallas Greenhall & Furman PC. He focuses his practice on construction law and represents owners, general contractors, subcontractors, suppliers and sureties.

Jason C. Tomasulo is Senior Counsel at Cohen Seglias Pallas Greenhall & Furman PC. He focuses his practice on construction law and represents owners, general contractors, subcontractors, suppliers and sureties.

Scott T. Earle and Daniella Gordon contributed to this post.

A recent Delaware Supreme Court decision limited the field of bond claimants on a private project. In the case, Berlin Steel proper claimants under bond.pdf the SuprCrane.jpgeme Court overruled the trial court’s interpretation of an earlier decision that stood for the proposition that all subcontractors, regardless of their relationship to the principal under the bond, were third party beneficiaries of the payment bond.

Background of the Case and Key Parties

Berlin Steel Construction Company (Berlin) was a contractor for a private project in Delaware. Under the terms of the contract, Berlin obtained a payment and performance bond for the benefit of the construction manager and the project owner. Berlin subsequently entered into a subcontract with Structural Steel (Structural) to perform certain steel work at the project. Structural then subcontracted with J&J Rigging (J&J) to lease and operate a crane. J&J leased a crane for the project from Salah and Pecci Leasing Co. (S&P). Although Berlin paid Structural, and Structural paid J&J, J&J did not pay S&P. In order to obtain payment, S&P, a third tier subcontractor in relation to Berlin, made a claim against the payment bond held by Berlin.

Continue Reading Delaware Supreme Court Confirms That Sureties May Limit Bond Claimants