What’s New in the New AIA A312 Payment and Performance Bonds?
Posted by: Hilger Hammond On: 19th May 2011 | no responses.
By Aileen Leipprandt
While historically construction professionals may have paid little attention to the fine print on AIA payment bonds, lean times in construction have triggered more payment bond claims than ever. New in 2010, the American Institute of Architects (AIA) has issued revised bond forms, including revised Payment and Performance Bond, A312™-2010 and revised Bid Bond A310™-2010 (Bond Forms). The AIA process of revising the A312™-1984 Performance and Payment Bonds and the A310™-1970 Bid Bond began in 2009 and included solicitation of input from various industry groups and consideration of court opinions interpreting the language of the bonds. While the Bond Forms retain much of their original terms, there are several changes that clarify language and attempt to address the concerns of various stakeholders. Of particular interest are the following noteworthy changes to the A312™-2010 Payment Bond.
Claimant. The definition of “Claimant” has been expanded to include anyone who can file a construction lien. Under A312™-1984, claimants were more narrowly defined to include only first and second tier subcontractors to the bond principal.
Surety Response. A312™-1984 provided that the surety had 45 days to respond to a claim and state the basis for challenging any amounts that were in dispute. The A312™-2010 now gives the surety 60 days to respond to a bond claim.
Surety Waiver of Defenses. Some courts found that the surety’s failure to strictly comply with its reply obligations resulted in a waiver of the surety’s defenses under the bond. A312™-2010 now provides that if the surety fails to respond within the 60-day time frame, such failure does not waive any defenses the surety may have. If, however, the claimant has to bring a claim under the bond, and the claimant is successful on that claim, the surety must pay the claimant’s attorney fees, even if those attorney fees exceed the penal sum of the bond.
Detailed Claim. Under A-312™-1984, a claimant initiated a claim against the bond by sending notice to the surety. That notice only had to state the amount of the claim, and in some circumstances, the name of the party to whom the claimant furnished labor and materials. A-312™-2010, how defines “claim” and requires that the claim contain certain specific information such as a copy of the contract or purchase order, the total amount claimant earned, and the total amount of previous payments the claimant received. A letter to the surety generally describing claims and demands will not be sufficient to state a claim and to start the clock running on the surety’s 60-day time to respond.
The AIA also revised language in the performance bond to provide a more stream-lined process for making a claim under the bond and for defaulting the surety. Likewise, the AIA modified the standard bid bond, A310™-2010, to include language that allows for up to a 60-day extension of time for acceptance of the bid specified in the bid documents. The surety, however, must be notified and consent to any extension of the date for acceptance of the bid by more than 60 days in the aggregate.
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Construction Lien Has Priority Over Mortgage Regardless of Change in General Contractor and Project Ownership
Posted by: Hilger Hammond On: 13th May 2011 | no responses.
By Aileen Leipprandt
In a recent Court of Appeals case, First Community Bank v Mountainaire, LLC (October 2010) involving the interpretation of several provisions of the Michigan Construction Lien Act, the appellate court affirmed the remedial nature of the Lien Act and rejected a lender’s arguments that a contractor’s construction liens were untimely.
In Mountainaire, the parties contested the priority of a construction lienvis-a-vis a mortgage. The case arose from a failed multi-parcel mixed use development project called Pier 33. Though the complete facts are not set forth in the legal opinion, it appears that the general contractor, Pioneer General Contractors, Inc., (Pioneer) entered into contracts for various portions of the same project. Actual physical improvement to the property first occurred in the early spring of 2004. The notice of commencement and mortgage were recorded in June 2004. The developer, Mountainaire LLC, later transferred the property in August 2005, for one dollar, to a separate legal entity, Cheboygan Yacht Club at Pier 33 LLC (Yacht Club), of which the developer was the majority owner. Thereafter, Pioneer was hired as general contractor and recorded a notice of commencement in September 2005.
The lender, First Community Bank (FC Bank) argued that a new project (with new priorities) began when the developer transferred ownership to the Yacht Club and Pioneer filed a new notice of commencement. Therefore, Pioneer’s “well house” and “site work” liens were untimely because Pioneer recorded the liens more than 90 days after Pioneer completed those portions of the work. Essentially, FC Bank argued that a contractor performing work on a single project, but under various contracts, had to record a lien within 90 days after the contractor completed each contract.
The trial court rejected FC Bank’s argument and granted summary disposition in favor of Pioneer. The Court of Appeals affirmed the ruling in favor of Pioneer. Citing a provision in the Lien Act that defines “project” as the “aggregate of improvements contracted for by the contracting owner” the appellate court ruled that a change in ownership did not necessarily signal the commencement of a new construction project, particularly in this case where FC Bank understood all along the Yacht Club was developed for the purpose of managing the development, the project was conceived and presented to FC Bank as a whole, and FC Bank continued funding the project after the transfer of ownership. The appellate court concluded that the Yacht Club assumed the developer’s role as the “contracting” owner. Consequently, it was entirely appropriate for Pioneer’s construction lien to relate back to the first physical improvement in early 2004 which predated FC Bank’s recording of its mortgage.
While the result in this case favored the contractor, the outcome could have been different had the facts not so strongly shown a continuum in the project development and ownership. A contractor can never be too careful in assessing project ownership and the proper time for recording a claim of lien.
