Surety Bonds & Baseball (Guest Post)

ballpark construction surety issuesIn lieu of a Tuesday Tip, today we have another Guest Post, this time by JW Surety Bonds, an A+ BBB-rated surety agency outside Philadelphia that sells surety bonds nationwide.

Take Me Out to the Surety Bond Game

Nothing says summer like heading to the ballpark for nine innings of cheering, athleticism and hotdogs. While the excitement of professional sporting events may not immediately bring to mind the less-thrilling (yet highly important) world of surety bonds, the two are intricately tied together.

Most obviously, multi-million contract bonds start the process of any new stadium building project. As stadiums get more and more complex, each trying to outdo the previous contender, the financial strain put on contractors becomes more acute. Thorough research is needed by surety companies to weed out wanna-be firms from those with the actual resources and know-how to erect a high definition, 4-D, interactive scoreboard the size of theChryslerBuilding. Team owners need to know their pampered players will have a locker room to call home by the time opening day rolls around, or risk the ire of sports-deprived fans.

Beyond the general infrastructure, bonds are also required to secure everyone’s favorite part of a sporting event: the beer vendors. Corporate catering services or individual vendors hired to work in a stadium may be required to obtain liquor tax bonds as a promise to the government that they will truthfully report and pay all applicable taxes on alcohol sales.

Stadium owners can also require that food vendors of all kinds secure a performance bond to cover the length of the season. While the details of such a performance bond vary widely, they essentially serve to guarantee that the vendor will provide enough soft pretzels, hot dog buns and roasted peanuts to last through playoffs. Should a vendor default on their bond, the stadium owners could file a claim to receive funds to hire someone else to feed the masses for the remainder of the season.

About the only thing in a stadium that can’t be bonded is the players, but not for lack of trying. In 1983, the coach of aUSOlympic volleyball team admitted to requiring his star player to post a performance bond. The player had previously quit, and the coach demanded a cash deposit to guarantee the player would stick around through the 1984 Olympics if he was allowed back on the team. While creating a contractual and financial obligation for a pitcher to complete a no-hitter or a pinch hitter to steal a given number of bases would be appealing to team managers, it’s neither practical nor beneficial.

With the average cost of a new stadium at just below half a billion dollars, and annual sports revenue well into the millions, it makes good business sense for owners to carefully vet and bond all parties involved, ensuring a homerun success.

Questions or comments about surety bonds, and your experiences dealing with bonding companies?  Share in the comment section below. 

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 Photo by  vivoandando via Flickr/Creative Commons license.

Update/Correction to Lien Law post

opps sign After my last post, I received a call from Doug Jeremiah, who is the Chair of the Design Professionals Liason Committee (of which I am a member).  According to Doug, the concerns I expressed for designers have been, if not eliminated, then significantly reduced by the current version of the draft lien law bill.

Designers, like any other party on the construction contract, can now file their own, separate Notice of Commencement, which would then (in all likelihood) pre-date other Notices of Commencement on the Project.  To file a Notice of Commencement under the proposed bill, the Designer first must ask the Owner to file a Notice of Commencement.  If the Owner does not do so, the Designer is free to file his own Notice of Commencement (See section 44A-9.1 (3)(c)).  This is the same procedure used by Contractors to file a Notice of Commencement.

Practice Tip (should the bill pass):

How the Owner will view the request for an early Notice of Commencement may still be an issue.  If the bill passes, a good, proactive discussion with the Owner should help prevent creating animosity.  Better yet, you might consider a Company Policy of always having a Notice of Commencement filed on every project.  That way, you can simply blame the “company policy” rather than implying, or having the Owner infer, that you don’t trust their financial viability.

Thanks, Doug, for setting me straight.  Opinions or thoughts about the proposed lien law revisions?  Drop me a line in the comments, below.

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Photo credit: Streetfly JZ via Creative Commons License.

Lien Law Changes: Bad for Designers?

UPDATE:  Designers may file Notices of Commencement when they start their work, which should eliminate or significantly reduce the priority date concerns expressed below.  See this post for more details.  — mdb  3/4/11

gavel, law books, & hard hat

The work of the NC Bar Association’s Construction Section Lien Law committee continues, and it may drastically change the lien law landscape for architects and engineers.

On February 18, the Construction Law Section Council, the governing body of the Section, voted 11-4 to accept the latest draft version which must still be approved by the NC Bar Board of Governors.  After approval by the Board, it will then need sponsorship at the General Assembly.   The lien law changes have divided the construction industry – some believe the changes are beneficial, while others worry about new requirements contained within the bill.

Of particular note for architects and engineers, the new lien law envisions a new Notice of Commencement which would then act as the first date of service for everybody who works on the project.  The new law would give almost everyone on a project the same priority date.  Almost all liens would then relate to and take effect as of the Notice of Commencement date.

In other words, designers and others who perform work very early in the project would have no stronger lien rights than those who perform work at the very end of the project.  If there are insufficient funds to satisfy all of the liens, the net result is that architects and engineers will have to share pro rata will all contractors and subcontractors from the owner’s assets.   (And, to answer a question posed to me the other day, yes, architects and engineers have lien rights on projects in North Carolina!)

Is there a way around this for designers and other early performers? Yes and no.  One way a designer can protect his priority is by filing a Claim of Lien before the Owner files the Notice of Commencement.  (See section 44A-10 of the new draft bill).  However, as you can imagine, filing a Claim of Lien before construction has even started is likely to be frowned upon by the Owner.  Furthermore, the lien would have to be timely perfected, which involves actually suing the Owner.  Obviously, use of the Claim of Lien to beat the proposed Notice of Commencement date will have limited, if any, practical use for construction professionals who are working on a project and want to maintain a good relationship with the Owner.

There are many good things in the new bill: a way to streamline payment issues to ensure subcontractors are timely paid when the general contractor is paid, for example, as well as an attempt to provide lien rights to parties even after a bankruptcy filing, which had been made impossible by recent cases.   However, the priority issue is definitely bad for designers, as well as others who do their work very early in the project.

Comments, questions, or thoughts about the proposed changes?  Let me know in the comment section, below.  And sign up for regular email updates from this Blog, so you never miss a post.

Root canals & Lawsuits: two things to avoid (Law Note)

man flossing

 No one (with the exception of sadistic dentists)  likes root canals, and no one (except lawyers) likes lawsuits.  In the same way you can prevent (or limit) the need for root canals through proper flossing habits, you can limit the number of lawsuits you need to be involved in if you include everyone you should the first time around.  For those involved in filing construction liens, this means that when you perfect a lien by filing the lawsuit, be sure you include everyone you need to include.  A recent North Carolina Court of Appeals case demonstrates this principle in full living color.

In Lawyers Title Insurance Corp. v. Zogreo, LLC, __ N.C. App. __ (November 16, 2010), two contractors filed and perfected valid liens on a piece of property.  They did not include, in the lawsuits to perfect the liens, the banks which had given funds to the property owner after they first began work on the property.  The Court held that it was entirely proper not to include the banks (who held deeds of trust on the property to secure their loans); however, by the contractors’ failure to include them, they were forced to later litigate priority issues with the banks.  This is because “if a subsequent encumbrancer is not joined [in the underlying lien perfection lawsuit], he is not bound by the judgment in the action between the contractor and the owner.” 

In other words, even though they filed proper liens, filed the lawsuits timely, and even won final judgment in those lawsuits, because they did not include the banks, the banks were free to start a new action, which they did in this case.  The banks also obtained an injunction to stop any judicial sale of the property until priorities could be established.

Moral of the story? It is better to include all subsequent encumbrancers (i.e., the banks) when perfecting a lien.  It’s not required, but it is better practice.  (And flossing your teeth isn’t required, either).   After all, who wants a root canal, or, in this case, to re-litigate your right to be paid money in yet another expensive lawsuit?  When it comes to root canals and lawsuits, fewer is better.

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Photo: Day One Hundred Fifty-One by Eric Mesa via Flickr/Creative Commons License

Tues Tip: Check out the new AIA Bond forms

Have you seen the 2010 AIA 312 Payment Bond Form?  If you regularly deal with AIA bonds, be Payment Officer looking at demolitionsure to check out this blog post, entitled “What changes you need to know about in the new AIA A 312 Payment Bond” from the New York Construction Law Update Blog.

  Of particular note:

There is a new section (7.3) that expressly states the surety’s failure to respond within sixty (60) days does not constitute a waiver of any potential defenses.  However, the new AIA A312 also states that if the surety fails to respond and if the claimant has to bring an action to recover under the bond, and is successful, then the surety will be responsible for attorneys’ fees incurred by the claimant. 

The new Section 16.1 provides certain minimum requirements that must be in the notice of claim to constitute a valid claim under the bond.  Previous versions of the AIA A312 did not contain such minimum requirements and a claimant in a rush could potentially submit a simple letter identifying the project and setting forth the amount of its claim to try and squeeze in before the deadline to submit a claim. 

While it is tempting and easy to skip reading standard form contract documents, that is not a good practice.  The new requirements involved in making a bond claim, for example, are something that would be easy to overlook if you have previous experience making bond claims– and it could be a very expensive lesson.  Moral of the story, as always, is to read your contracts, preferably with your attorney and insurance carrier at hand.

Do you use the AIA 312 Payment Bond form?  Thoughts about the new Form versus the old Form? Bonding questions in general?  Drop me a line or comment below.

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Photo copyright of U.S. Air Force and made available via Creative Commons license. 

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