Surety Waives Defense to AIA A312 Payment Bond Claim by Failure to Object Within Bond’s 45- Day Limit

Nat’l Union Fire Ins. Co. v. David A. Bramble, Inc.
388 Md. 195, 879 A.2d 101 (Md. July 21, 2005)

In connection with construction of a resort hotel project, general contractor Clark Construction provided a payment bond securing its obligation to pay its subcontractors for all labor, material, and equipment required. The bond was a standard American Institute of Architects document A312 form, used without alteration to the form language, issued jointly by three sureties. In the event claim was made against the bond, it provided that the surety would “Send an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.”

Clark entered into subcontracts for the construction of a golf course and sewer piping systems to the resort. During the course of the project, Clark made periodic progress payments to the subcontractors as it was paid by the owner. After the completion of their work, however, both subcontractors attempted unsuccessfully to collect the final amount still owed by Clark, and submitted claims to the sureties against the payment bond.

The sureties responded, requesting supporting documentation, and after its submittal, stated that they would take the claim up with Clark. Despite requests from the subcontractors for an answer to their claims, they received no further communication from the sureties. Each of the subcontractors filed a complaint against the sureties alleging breach of contract and filed a motion for summary judgment based on the sureties’ failure to comply with the bond’s term requiring dispute of claims within 45 days. The motions were granted and the sureties appealed.

The Court of Special Appeals affirmed, holding that the language of the bond precluded the sureties from disputing the subcontractors’ claims because they had failed to comply with the provision of the payment bond requiring the sureties to dispute a subcontractor’s claim for payment within 45 days. The sureties filed a petition for a writ of certiorari in both cases, which were consolidated. The Surety Association of America and the American Insurance Association filed an Amici Curiae Brief in support of the sureties urging reversal.

The Court of Appeals affirmed the decisions in favor of the subcontractors. The court noted that surety agreements are construed according to ordinary canons of contract construction. Specifically, it recognized adherence to the rule that a contract containing no ambiguity will be enforced, and the principle of giving effect to all of a contract’s provisions when possible. Applying these rules, the court rejected the sureties’ argument that their failure to respond within 45 days indicated that the entirety of the claims was being disputed. The court found it would be inconsistent with the plain meaning of the bond’s language to allow sureties to dispute a claim in its entirely simply through inaction. Further, such an interpretation would render the 45-day requirement nugatory and be counter to the very purpose of a surety bond, which is to protect the parties supplying labor and materials to a project. The court concluded that under the plain language of the payment bond’s provision, the sureties were required to answer the claimant’s claim, define which portions were undisputed, and list the bases for any amounts that were disputed. Therefore, the sureties’ failure to do so within the 45-day period rendered the claims undisputed in their entirety, requiring prompt payment of the claims submitted by the subcontractors.

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