The Problem with Weak Payment Bond Defenses

A payment bond surety whose principal may be insolvent is caught in a difficult spot. But a Connecticut court decision dealt a major blow to a surety who tried to rely on a series of special defenses, none of which stood up to the facts that materials were delivered, they weren’t paid for, the supplier’s paper trail was complete, and proper notice was given to the surety. The result? An award of all amounts sought by the supplier, plus five percent interest, plus another eight percent interest arising from the supplier’s offer in compromise that the surety had ignored, plus the prospect of legal fees yet to be awarded to the supplier. What could have been resolved for $460,000 will now cost the surety $628,403, and legal fees may get added to that number.

O&G Industries supplied concrete to Concrete Superstructures, Inc. (CSS), a subcontractor who the decision suggests has gone out of business. The prime contractor provided a payment bond with American Home Assurance Company (AHAC) as the surety. When O&G was not paid for all of the concrete supplied, it filed a lien and also made a claim against the payment bond. The lien was bonded, and the subsequent O&G lawsuit against AHAC included the same claim under both lien and payment bonds.

AHAC asserted nine special defenses, including that CSS had been fully paid, that O&G had failed to provide a written contract for its supplies, and that O&G had engaged in “reckless, unfair, and unreasonable conduct.” The court decision examines each of these and the other defenses in great detail, finding each of the defenses lacking. For instance, the prime contractor was apparently on notice that CSS was in poor financial condition, and yet would only pay by joint checks if O&G waived its lien rights – a condition contrary to Connecticut law. Also, the written contract consisted of a series of orders, each one documented with an invoice that included terms and conditions. The argument that O&G had acted in a “reckless” or “unfair” manner apparently was based on the fact that O&G had continued to supply concrete even when it was not getting paid. But the court noted that the project would have been in even greater disarray had O&G taken that step. In hindsight, the surety defenses alleging “unfair” or “unreasonable” conduct probably had no provable facts supporting them, and likely fueled the court’s decision against the surety.

The decision is not openly critical of the AHAC defenses, but it also dismantles them efficiently. In short, the court found the defenses to be without merit. Instead of accepting O&G’s compromise offer of $460,000, the surety is now liable for $628,403, and the judge has signaled a willingness to entertain a request for attorneys’ fees from O&G. The case is O&G Indus. v. Am. Home Assur. Co., 2019 Conn. Super. LEXIS 1811 (June 25, 2019).

About Stan Martin

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Stan Martin holds a law degree and an undergraduate degree in architecture. He has been involved with the construction industry for more than 45 years, working in construction prior to law school and beginning his construction law practice. Over the course of his career, he has served on boards and committees for organizations including the Associated General Contractors of Massachusetts, the Boston Society of Architects, and the Massachusetts Building Congress.

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