Posted on March 19, 2015
Last week, this blog discussed one of the most important, and effective, tools that contractors, subcontractors, and materialmen have at their disposal to protect their right to payment – the mechanic’s lien. Right behind the mechanic’s lien in importance, however, is the bond claim, particularly in the case of public projects which, under Ohio law, cannot be liened.
There are two types of construction bonds – payment and performance – and although both are important, this post will only address the significance of payment bonds. A payment bond is essentially a contract between the owner, the contractor and the surety, which guarantees that all subcontractors and materialmen will be paid by the surety in the event the owner or contractor does not pay.
In Ohio, a general contractor working on a public project must furnish a payment bond to the public authority, agreeing “to pay all lawful claims of subcontractors, materialmen, and laborers for labor performed or material furnished in carrying forward, performing, or completing the contract…” R.C. 153.54(B)(2). Like a mechanic’s lien, certain statutory requirements must be followed in order to assert a claim on a payment bond on a public improvement.
Specifically, the claimant must: (1) serve a notice of furnishing on the general contractor, unless the claimant’s contract is for an amount equal to or less than $30,000, and the claimant has a contract directly with the general contractor; and (2) provide the surety on the bond a statement of the amount due within ninety days after the acceptance of the public improvement by the public authority. Sixty days after the claim has been asserted with the surety, the claimant may bring a legal action for the amount owed, as long as said action is brought within one year of the date that the project was accepted.
General contractors working on private projects are not required by law to furnish a payment bond, however, many owners will require them to do so. The restrictions contained in the payment bond may limit the claimant’s rights to those that the claimant has under R.C. 153. Generally, a claimant must provide the surety on the bond and the general contractor a statement of the amount due within ninety days after the claimant provided materials or services. Further, a claimant may bring a legal action for the amount owed any time, as long as said action is brought within one year after the general contractor completed its work on the project.
Just like mechanic’s liens the statutory and contractual provisions that govern the proper assertion of bond claims are frequently ignored or not followed. Following these requirements is particularly important in the context of bond claims, as Ohio courts strictly enforce bond claim requirements. For example, The Monreal Funeral Home, Inc. v. Ohio Farmers Insurance Company, 2010-Ohio-385, a limitation in a bond stating that a lawsuit arising under the bond was required to be brought within two years from the date which the contract ceased work, was strictly enforced to deny recovery against the bond when suit was brought outside the two year time period.
The provisions of Ohio’s construction bond law, as well as the provisions contained in the bond itself, can be incredibly complicated and difficult to follow. Ensuring compliance with bond claim requirements is an undertaking that can, and should, be discussed with experienced legal counsel. For questions regarding construction bond claims, or any other aspect of Ohio construction law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or email@example.com or firstname.lastname@example.org.
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