NC surety bonds- what they are; how they work (Guest Post)

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checking the bondToday, another guest post– this time from Danielle Rodabaugh, a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses throughout the nation. She aims to clarify bonding rules & regulations, and has recently been focusing on construction/contract bonds. Danielle will be discussing bonding issues within the North Carolina construction industry.

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Reliable professionals working in the construction industry want to guarantee the quality of their work to their clients, and that’s where surety bonds come in. In construction, contract (or construction) bonds are a type of surety bond utilized to ensure that professionals follow regulations and make appropriate decisions while working on a project. Construction bonds typically protect the client and work similarly to insurance—although they offer a different kind of protection.

What’s a surety bond?
In the construction industry a surety bond is essentially a legal agreement between three parties to help ensure the fulfillment of a contract:

  1. Obligee–typically the developer or worker who receives the protection of the bond, guaranteeing that the contractor fully completes the project
  2. Principal–the contractor who gets the bond, guaranteeing that they will fulfill various aspects of the project as outlined in the contract
  3. Surety–the agency who issues the bond to the principal, thus backing the contractor’s work and acting as an intermediary between the contractor and obligee

There are three main types of construction bonds that are utilized in North Carolina:

  • bid bonds
  • performance bonds
  • payment bonds

Each of these bonds plays a different role in guaranteeing the work of a contractor throughout a project’s duration. North Carolina surety bond agencies have the ability to issue construction bonds to qualifying professionals who want to take advantage of their benefits. Unfortunately, many working in the construction industry are still unaware of the legal financial protection offered by construction bonds.

 

Bid Bond Issues in North Carolina
Bid bonds guarantee a developer that—if selected—a contractor will agree to work on a project for the amount proposed in the original bid. This guards against contractors who might try to increase their bid on a project after being contracted by the developer. With a bid bond in place, the developer may collect appropriate reparation if the contractor breaks the bond’s terms. If such a situation arises, the resulting compensation is typically calculated by how much more the developer has to pay to contract the next-lowest bidder for the project. If the contractor does not have the ability to adequately compensate the developer the surety becomes responsible for paying reparation up to the bond’s full value.

Although North Carolina state law does not require the use of bid bonds on either private or public construction projects, a developer may still choose to require them as an added form of protection. According to N.C. Gen. Stat. s. 143-129, which outlines the procedure for letting of public contracts, North Carolina contractors must provide an upfront deposit in the amount of 5% of the total bid when submitting their bid. The language explains that a contractor may choose to provide a bid bond in lieu of making the required cash deposit. Bid bonds can be especially helpful for new contractors who may not have the necessary cash on hand for the collateral, as the surety would financially back the contractor’s bid.

 

Performance Bond Issues in North Carolina
Contractors secure performance bonds to guarantee that they will perform all aspects of a project as outlined in the contract. Should the contractor fail to complete the project satisfactorily, the performance bond allows the developer to regain appropriate compensation. If the contractor cannot pay the reparation then the performance bond instructs the surety to step in. Depending on the situation, the surety might be responsible for paying retribution up to the bond’s full face value for any extra fees incurred as a result of the contractor’s incomplete work.

Performance bonds are not required for private projects in North Carolina, however some regulations mandate their use for certain public ones. For example, the use of performance bonds is required when any government entity enters into a construction contract in an amount more than $100,000. Furthermore, they are also required for any other public construction project that exceeds $15,000, no matter the developer or specific contract. Additionally, any developer has the right to require a selected contractor to get a performance bond prior to a project, which especially benefits the developers of private projects or smaller projects that cost less than $15,000. All state-mandated performance bonds must be issued for 100% of the project’s contracted cost.

 

Payment Bond Issues in North Carolina
Payment bonds are put in place to make sure that contractors will pay all labor and material costs as outlined in the contract. Because mechanic’s liens—which ensure payment of outstanding debts upon sale of a property—can only be used on private property projects, payment bonds are essential to making sure that all bills are paid in full. Subcontractors (or other workers) can make a claim on the bond if a contractor does not make the appropriate payments, allowing them to recover deserved compensation.

Simply put, payment bonds are required on all projects that mandate the use of performance bonds. North Carolina General Statute 44A-27 explains that any professional working on a bonded project who is not paid for his labor within 90 days has the ability to make a claim on the bond. Private projects in North Carolina do not require the use of payment bonds, although these individuals may elect to use them at their own discretion. This goes to show that although bonds are not always be required in North Carolina, they are most certainly enforced. Oftentimes this means that individuals working within North Carolina’s construction industry must take the initiative to utilize construction bonds.

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Danielle and I welcome your thoughts, comments, and questions about surety bonds in the comments section, below.

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Photo “Checking the bond” by Stephen via Picasa/Creative Commons License.

5 Ways to Ruin Your Business (Tues Tip)

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Failing Street streetsignWhile my goal on this blog is to help your construction, architecture, or engineering practice thrive, sometimes it’s best to demonstrate by example of what *not* to do.  This list is good for any business, not just those in the construction field.

1.

Don’t bother running a credit report, Google check, or otherwise investigating who you will be doing business with. If you do check references, only call the cousin they listed, because a credit reporting service might cost money.  (Can you say penny wise and pound foolish?).

2.

Don’t talk about costs, estimates v. fixed fees, and extras up front.  Wait until they get the bill and complain to have that conversation. (It’s much less awkward then!).

3.

Don’t bother to train your staff or even tell them who the important clients are– let them treat your most important customer like an annoying telemarketer.

4.

Don’t bother to keep organized documentation on projects.  Only lawyers worry about those details.  (And you, when you get sued or audited).

5.

Don’t answer written communications  in writing– a phone call or handshake is all that is necessary.  (Who needs “proof” when you go to court? The jury will believe you over the written documents, right?).

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Any other big mistakes that should be added to the list?  Let me know your thoughts in the comments!  (And as always, if you enjoy these tips, please sign up for email delivery of my blog posts so you can be sure to see them all).

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Photo “Failing Street” by Chris Daniel via Flickr via Creative Commons License. 

 

Joint & Several Liability in NC (law note)

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British pennies & poundsIf a client has been sued, he wants to know how much is at risk if he loses at trial.  This is especially true where more than one person or company have been sued.  How is any damage award apportioned?

 The answer is not one clients generally like to hear:  your company can be on the hook for 100% of any damages.  This is true even if your company is really only liable for a tiny fraction of what caused the damages in the first place.  You can thank “joint and several liability” for that.

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For example, in a fairly typical construction dispute, an owner sues a contractor and the architect for construction defects. The contractor uses unsuitable substitutions, and the architect approves the unsuitable substitutes.   Both contractor and architect may be held liable for the resulting damages.  If a jury awards the owner $500,000, then both contractor and architect are liable for the entire $500,000 to owner.  That’s the “severability” part of the law.  As between the two, of course, they both share in the damages, and if the owner executes on the entire judgment against the architect (perhaps due to the architect’s insurance coverage), the architect can then go after the contractor for an equal share and get paid back $250,000 in “contribution.”  (That’s the “joint” nature of such an award).  This is, however, assuming the contractor has those funds.  Essentially, whoever has the funds when a judgment hits might end up paying for the entire award.  If the contractor doesn’t have $250,000 for the architect to be paid back, the architect is out of luck.

Does the result change if the jury finds the architect was only 5% liable for the damages and 95% were attributed to the contractor? Nope.  In North Carolina, where the parties’ actions together contribute to one indivisible injury, there is no apportionment.  “In for a penny, in for a pound” as the old saying goes.

Exceptions to the Rule?

Are there exceptions? But of course!  If the owner is also negligent, he can get no recovery at all since North Carolina is a pure contributory negligence state.  If one party is actively negligent and one passive, than the passively negligent party can seek indemnity from the active party.  If one party settles before trial, things become more complicated.  More on these subjects in future posts.  I’m also told that in other states apportionment is more the rule, so you may have better luck with your out of state projects in a similar situation.

As a general rule of thumb, however, for your North Carolina project, just assume that the entire amount of claimed damages may be presented to you for payment.  Unfair? Many times, yes.   That’s the nature of the beast.  It is also one of many, many good reasons to make sure you are doing business with people you trust and, more importantly, that other professionals are appropriately insured or bonded on any project you are working on.

If you have any questions about joint and several liability, drop me a line or a comment below.

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Photo “Shiny pennies” by David Pillbro (Flickr Creative Commons license)

 

Tolling the Statutes of Limitation & Repose? (Law note)

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Lowe's Motor Speedway

A blog reader recently raised the question of to how to handle construction defect claims while repair attempts are being made on a defective building.  In part, the answer to this question will depend on how close you are to the statute of limitations or the statue of repose from running.  The closer you are, the more you need to be concerned about this issue.  Just because all parties are working together to solve construction issues does not mean that the statutes are not running.  They can.  [There are, as usual, exceptions for equitable reasons.]  And once statues run, there’s no getting them back.

One prudent approach to dealing with the statutes is to have all parties involved enter into a “Tolling Agreement.”  What a properly drafted tolling agreement can do is to stop the running of the statue of limitations and/or repose while the parties attempt to fix the defects or otherwise settle their issues with one another.  Note that the tolling agreement does not give a party any greater rights than they would have at the time it is signed– that is, if the statute has *already* run, then it would be of no use.  But the tolling agreement can act as a “time out” on the running of the clock.

A good example of a tolling agreements is found in the Court of Appeals opinion in Charlotte Motor Speedway, Inc. v. Tindall Corporation, 195 N.C. App. 296, 672 S.E.2d 691 (2009).  The Speedway case involved the infamous collapse of a pedestrian walkway during the NASCAR Winston Cup.  The walkway which collapsed had been substantially completed by October 1995, and the collapse occurred in May 2000.  Speedway (the project owner) and Tindall (which constructed the walkway) entered into a tolling agreement:

“to toll and suspend any applicable statute of limitations, repose or time, whether created by statute, contract, laches or otherwise, within which any cause, claim action, cause of action, or suit must be made, or commenced by the parties against any one of them concerning the [pedestrian] claims, including any and all claims for indemnification and contribution.”  Id. at 298, 672 S.E.2d at 693.

Tindall attempted to argue that the statute of limitations barred Speedway’s claim for indemnification of monies paid prior to three years before it filed its complaint, but the Court found that the Tolling Agreement, which remained effective “through and including January 1, 2006” tolled the action, and Speedway brought suit on July 17, 2007, less than two years after the Tolling Agreement expired.  Likewise, the Court held that the statute of repose did not bar the action, because the Tolling Agreement was entered into less than six years after substantial completion, and the lawsuit was brought during the pendency of a second funding [tolling] agreement between the parties.

If you are considering a tolling agreement (or think you don’t need one because you “have time”), it is always smart to get a professional opinion on the matter.

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Comments? Let me know.  I welcome the opportunity to discuss how the statute of limitations and repose may be tolled in your specific situation.

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Photo “Trucks” by JMLeedy (Justin Leedy) via Flickr via Creative Commons License.

 

Tues Tip: 8 Best Collection Practices

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crayon tips

COLLECTION “TIPS”

 

 Readers of this blog may not know this, but in addition to construction law I also head our firm’s Collections practice.  What that means is that, once your client is no longer paying your bills or taking your calls, you can hire our Firm to either (1) get the client’s attention or, failing that,  (2) sue the (former) client for unpaid fees or merchandise.         However, if you establish good collection practices up front, before you extend credit to any client, you may be able to avoid having to hire a collection attorney to do the dirty work for you.  Here are my top 8 collection practice management tips:

  1. Be careful on the front side in who you extend credit to. Get personal guarantee if possible.  Make a copy of the person’s driver’s license. (This helps if you have to sue to collect). Check their credit.
  2. Have a written contract.  Failing that, a signed purchase order agreement, with contract terms on the back, would be good. Just don’t rely on a handshake.  You can include language for interest (up to 18% per annum in North Carolina) and reasonable attorney fees and collection costs.  If you don’t have this in writing, you may not be able to get these items later.
  3. With the first payment by the customer, make a photocopy of the check.  (This is helpful to know where they bank in case they later stop making payments).
  4. Bill regularly- at least monthly.
  5. Charge an interest rate on past due accounts so your money isn’t being used for your client’s “float”.
  6. If you are in the position to file a mechanic’s lien (contractor, subcontractor, etc)– be aware of time deadlines for both (1) filing a lien and (2) perfecting that lien.  These are state-dependent so consult an attorney in your state.
  7. Create a system for large A/R accounts.  For example, when account is X days late, send a polite but firm demand letter.  When account is Y days late, initiate lawsuit/have your attorney send demand letter.
  8. Consider alternative payment arrangements.  If your customer acknowledges the debt, and is willing to sign a note or confession of judgment, you can offer payment terms.  If the payment terms are not met, then you can file the note and judgment.

Bonus tips– Steps for after a judgment, to help your collection efforts:

  • Send a copy of the debtor’s drivers license to the sheriff for execution on your judgment.
  • See if your jurisdiction allows for the seizure of bank funds.  If so, provide the banking information to the sheriff to aid in his seizing assets.
  • If a judgment comes back with “no assets,” consider having your attorney serve supplemental discovery questions if allowed in your jurisdiction.
  • Some states (but NOT North Carolina) allow you garnish wages.  Ask your local attorney if this is an option.

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Comments? Questions? Other good collection practices?  Let me know in the comments section or drop me a line.   And sign up for email updates by putting your address in the box on the top right so you will not miss any posts.

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Photo “Crayon Tips” by laffy4k via Flickr via Creative Commons License.