By Sara M. Bour, Esq., Manager and Counsel, AIA Contract Documents
A payment bond is a three-way agreement between a principal obligor (contractor or subcontractor), obligee (owner or upper tier contractor), and the surety. Generally, when a principal obligor fails to pay its subcontractors or suppliers, the payment bond binds the surety to fulfill its bonded principal’s payment obligations to these subcontractors or other persons supplying labor and materials on the project. What happens when that unpaid person is a design professional? Determining whether an architect, engineer, or other design professional is entitled to relief under a payment bond can be a convoluted and complicated analysis. The first step in determining entitlement is by asking, “is the work performed by the design professional covered by the terms of the bond?” A design professional’s recovery under the bond may also require determination of 1) whether the services performed were in the prosecution of the principal obligor’s work and not simply the project’s design, and 2) whether the design professional worked for or contracted with the contractor, such as in a design-build or delegated design context. A good place to start the evaluation is the very terms of the bond itself.
While it may appear like a simple question on its face, the question of coverage under a payment bond has led to ample litigation. This is because not all surety bonds are the same, and often both governing law and the terms of the bond control coverage. On public works projects, legislation on both the federal and state levels mandate both “who” and “what work” must be covered by the payment bond. These pieces of legislation are known as the Miller Act and Little Miller Acts. These Acts typically require bond coverage for those providing “labor and materials” in furtherance of the construction contract. Neither the Miller Act nor all state Little Miller Acts, however, expressly include design, engineering, or architecture services as “labor and materials.” Where does that leave design professionals after performing work on a public project? Since Little Miller Acts vary from state-to-state, an abyss of ambiguity exists concerning coverage of design professionals in each set of circumstances.
Thankfully, governing law usually establishes the minimum of coverage under a payment bond on public works projects. Courts have routinely interpreted both the Miller Act and the Little Miller Acts as a floor of protection for claimants, rather than an upper limit on the bond’s coverage. Several cases from around the country have held that where a bond provides more coverage than governing law, the terms of the bond control and coverage is therefore greater than the statutory minimum requirements. This expansion of coverage, however, cannot be said to have no bounds. Even where the terms of the bond may extend coverage beyond the statutory requirements, courts have limited design professionals’ coverage on public projects by excluding them from recovery absent on-site work, such as on-site supervision and manual labor. Further, courts have excluded design professionals from recovery under a public works payment bond where the design professional did not contract with the general contractor. In addition to statutory requirements, courts will look to the clear and unambiguous terms of the bond to determine coverage. The terms of the bond will shed light on 1) whether a design professional is a proper bond claimant, and 2) whether payment for the designer’s services is recoverable. This is not only true for public works projects, but for private projects too, where payment bonds are regularly required of contractors under the prime contract.
The American Institute of Architects (AIA) offers payment and performance bonds that expand coverage to include architectural and engineering services on both public works and privately held projects. These bond forms are the A312™-2010 Payment and Performance Bonds. Under the terms of the A312 Payment Bond, a “claimant” is specifically defined as “[a]n individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the Construction Contract.” The A312 clarifies that “labor, materials or equipment” is intended to include “architectural and engineering services required for performance of the work of the Contractor and the Contractor’s subcontractors, and all other items for which a mechanic’s lien may be asserted in the jurisdiction where the labor, materials or equipment were furnished.” (emphasis added). The A312 Performance Bond also covers design professional services. Under the A312 Performance Bond, where certain conditions are met, the surety is responsible for “additional legal, design professional and delay costs resulting from the Contractor’s Default, and resulting from the actions or failure to act of the Surety under Section 5 . . .” (emphasis added).
If you are an architect, engineer, or other design professional performing work, such as delegated design services, in the prosecution of the construction of a project where an A312 is used, then the initial question of “is the work performed by the design professional covered by the bond” is likely answered in the affirmative. Case law shows that courts will look to the express terms of the bond to determine entitlement under a payment bond on both public works and private projects. If the parties used an A312 on the project, a court is likely to find that an architect, engineer or other design professional who performed services for a contractor in prosecution of the work is a proper bond claimant seeking entitlement to payment for its design services.
In addition to offering payment and performance bond forms, AIA publishes a Bid Bond, A310™-2010 and a Warranty Bond, A313™-2020 that provide necessary coverage for contractors and project owners, which can be used in conjunction with the A312.
This article is provided for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel and other professionals.