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.

The Trial Court Decision

Berlin’s payment bond allowed for a defined class of claimants to make claims for payment against the bond.  The term “claimant” was defined in the payment bond as those subcontractors “having a direct contract with the Principal [Berlin] or with a subcontractor of the Principal for labor, material or both . . . used in the performance of the contract.” In spite of the language of the bond, however, the trial court found that S&P, which did not have a direct contract with Berlin or Berlin’s subcontractor, Structural, was a proper claimant under the bond. The trial Court relied in large part upon Royal Indemnity Co. v Alexander Industries, Inc., a 1965 Delaware Supreme Court case in which the Court held that all subcontractors on a project, regardless of tier, were third party beneficiaries of the payment bond for a project. Unlike the bond in Berlin Steel, the bond in Royal Indemnity guaranteed that the principal would “do and perform the matters and things in its contract with the owner,” which included paying for all labor and materials used at the project.

The Appeal

The Delaware Supreme Court held that the plain language of the bond prohibited claims by third-tier subcontractors such as S&P, reversing the trial court’s decision. The Court distinguished the facts of Berlin Steel from those in Royal Indemnity, ruling that the bond in Berlin Steel contained limiting language that was absent from the bond in Royal Indemnity. Unlike Royal Indemnity, in Berlin Steel, the language of the bond expressly limited the field of claimants to those that contracted directly with Berlin, or those that contracted directly with direct subcontractors of Berlin. Because S&P did not contract directly with Berlin or any of its direct subcontractors, its claim was deemed invalid.

Lessons of the Berlin Steel Decision

In light of the Court’s decision in Berlin Steel, parties furnishing labor and materials to bonded projects should be aware that the language of the payment bond, and the provisions incorporated therein, will establish who can qualify as a claimant under the bond.  Subcontractors and suppliers who provide services or materials to private projects should not assume that they will be permitted to make claims under the payment bond unless they fall within the defined field of claimants set forth in the bond.

This lesson also holds true for public projects. In Delaware, subcontractors and suppliers in state-funded projects should be aware of whether the bond contains the limiting language “furnishing material or performing labor under the contract for which the successful bidder is liable” as set forth in 29 Del.C. § 6962(d)(9)(d). Delaware courts have held that the statutory language “under the contract for which the successful bidder is liable” limits potential claimants to those who are in privity of contract with the principal or its surety. Thus, second-tier and third-tier subcontractors are precluded from making claims against these bonds.

Cohen Seglias Pallas Greenhall & Furman successfully represented the principal and the surety on appeal in Berlin Steel.