Friday, June 4, 2010

The Newly Released AIA A312-2010 Performance and Payment Bond Forms

Green Building contractors and subcontractors should be aware that The American Institute of Architects recently released updated versions of its widely used A312 Performance and Payment Bonds and A310 Bid Bond. Click here for the AIA’s Commentary on the change, featuring the text of the new bond forms and for each, a comparison of the new version with the previous version (the AIA A312-1984 for the Performance and Payment Bonds, the AIA A310-1970 for the Bid Bond).

Probably the most notable feature of the new A312 is the addition of language that would avoid the effect of National Union Fire Insurance Co. v. David A. Bramble, Inc.  Under the A312-1984 form, the surety has 45 days from receiving a payment bond claimant’s notice of bond claim to provide the claimant with a response “stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.” In the Bramble case, decided in 2005, the Maryland Court of Appeals held that where the surety fails to provide this response under the A312-1984 payment bond form, it waives its defenses to the claimant’s payment bond claim, regardless of whether the claim is valid or the amounts sought are legitimately owed to the claimant by the bond principal. Few courts that have addressed the issue in the years since have agreed with the Bramble court’s holding, but the issue has not been definitively addressed in most jurisdictions.

In opposition to the adoption of the Bramble holding by courts in other jurisdictions, sureties have argued, among other things, that the penalty of a waiver of all defenses is too steep, that construing a surety’s silence as a waiver contravenes longstanding principles of contract interpretation, and that the 45-day period is too short to conduct an investigation on a complex construction project, especially given that the claimant is required to give little information in order to provide notice of its claim.

The surety industry’s concerns have resulted in changes in the new form. Under the A312-2010 form, the surety has 60 days to respond to the claimant, and for those subcontractors without a direct contract with the bond principal, this period starts to run only when the claimant provides the surety with a written statement similar to that required under public works bonds.

The most significant change is an explicit rejection, in Section 7.3, of any waiver of surety’s defenses for failure to respond. The new form provides that the claimant is not entitled to such a waiver if the surety fails to respond, but can recover attorney’s fees incurred in seeking amounts found to be due and owing to the claimant. The American Subcontractors’ Association has criticized this new provision, calling it “unfathomable” and arguing that it is unfair to bond claimants, who in some jurisdictions can lose entirely their rights to payment under a bond if they fail to comply strictly with its notice provisions, including claim submission deadlines.

It remains to be seen how widely used the A312-2010 form will be in both the short and long term. For years, the A312-1984 form has been relatively common in the industry. Owners and contractors, who generally mandate specific bond forms in their construction contracts with contractors and downstream subcontractors, will not be required to use the new form in place of the previous version, so the A312-1984 may well continue to see significant use in the coming years. Even today, some project owners still use the old AIA A311 bond forms, which were long ago replaced by the AIA A312-1984.

It’s worth noting that sureties, obligees, and bond principals can amend the bond language, so even where an A312-1984 form is used, it may include additional language similar to that in the new form, expressly disclaiming any intent to waive defenses from the surety’s failure to respond to a notice of claim. Such language has been added to the A312-1984 form for many projects since the Bramble decision came down; in 2008, the AIA even came out with its own such amendment to the A312-1984 to deal with the waiver issue.  But not all users of the AIA A312-1984 necessarily included this new amendment in the A312 payment bonds mandated for their projects.  So all parties have to pay close attention to the specific payment bond issued for their specific project in submitting and responding to bond claims.  As they say in the industry: RTFB.

-- Will Pearce, LEED AP BD+C

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