Every state in the country allows those that supply labor, materials, and/or services for the improvement of private property to claim an interest in the improved property as security for their payment. Although the procedure for perfecting those interests vary from state to state, each state does provide for such security devices, which are generally known as mechanic’s liens. However, the governments, which created these statutory rights that encumber privately held property, have exempted publicly owned land from any such claims.
Notwithstanding the foregoing, the statutory schemes that exempt public lands from the mechanic’s lien laws do not leave claimants without a remedy. The governments that have created a system where mechanic’s liens may be filed against privately owned land require general contractors on public projects to post surety bonds know as “payment bonds” or “labor and materials bonds,” that guarantee the payment for all those that supply labor, material, and/or services to the subject project.
The laws governing the payment bonds that are required on federal projects are known as the Miller Act and the laws governing such bonds for projects owned by the 50 states are known as the “Little Miller Acts.” As with mechanic’s liens, each stated has its own version of a Little Miller Act — each with different requirements — but all serve the same function insofar as they provide subcontractors and/or material suppliers with a way to obtain payment when those directly obligated to pay for such services fail to do so.
In Connecticut, the procedure by which a payment bond claimant asserts a claim arising out of a public project is set forth in Conn. Gen. Stat. § 49-42. As more fully explained in another post, Connecticut’s Little Miller Act requires a payment bond claimant to give notice of its claim within 180 days of the last day that it worked and/or supplied materials, and it must bring a lawsuit within one year of the last day that it worked and/or supplied materials. The failure to meet either requirement is fatal to a bond claimant’s legal cause of action but the same is not true when it comes to the surety’s obligations.
According to Conn. Gen. Stat. § 49-42, “[n]ot later than ninety days after service of the notice of claim, the surety shall make payment under the bond and satisfy the claim, or any portion of the claim which is not subject to a good faith dispute, and shall serve a notice on the claimant denying liability for any unpaid portion of the claim.” However, it often happens that the sureties do not respond within the 90-day period prescribed by statute. Thus, the question is whether a surety’s failure to respond results in a finding that the surety has waived the right to deny the claim. Such a ruling would appear to be consistent with the statutes because the surety is expected to address the claim in good faith and the failure to send a response within its 90 day time period may evidence bad faith but such an outcome is not the law in Connecticut.
In Electrical Contractors, Inc. v. Insurance Company of the Pennsylvania, the plaintiff brought an action in the Federal District Court that sounded in a claim under Connecticut’s Little Miller Act. Specifically, the “plaintiff alleged that because the defendant had failed to make payment, dispute the claim in good faith, or deny liability on the claim within the ninety day notice period provided by § 49-42 (a), the defendant had waived any substantive defenses and the plaintiff was therefore entitled to judgment in the full amount of the claim.” Elec. Contrs. v. Ins. Co. of the Pa., 314 Conn. 749, 753-754 (Conn. 2014). Because resolution of the claim involved the proper interpretation of a state statute, the District Court certified the question to the Connecticut Supreme Court. Id. at 754.
The Connecticut Supreme Court said “that a surety’s failure to make payment on or serve notice denying liability on a claim under § 49-42 (a), within that provision’s ninety day deadline, is tantamount to a denial of the claim and does not constitute a waiver of the surety’s right to defend the claim on the merits.” Id. at 755. Although the statute is written in mandatory language, the Supreme Court looked at factors that it considered in previous cases to determine “whether such requirements are mandatory or directory.” Id. at 758. Here, it was decided that a surety’s obligations were not mandatory.
If you need help understanding the timing requirements of a payment bond claim, please give me a call at (203) 640-8825.