Payment bond claimants have long been aware of the need to preserve their claims by strictly complying with the filing deadlines imposed by the payment bond form. The parallel duty of sureties, under the laws of Maryland and Virginia, to respond to payment bond claims in the manner and within the time limits prescribed by the bond is the subject of two recent decisions.

Both decisions involved American Institute of Architects payment bond form A312. The obligations of the surety under the A312 are triggered by the subcontractor furnishing written notice of the claim to the surety and the owner, with the added qualifier that the notice of a second-tier subcontractor (a sub-subcontractor) must be filed within 90 days after the claimant last performed the labor or last furnished the materials or equipment included in the claim. Within 45 days of receiving the claim, the surety must 1) send an answer to the claimant; 2) state the amounts that are undisputed and the basis for challenging any amounts that are disputed; and 3) pay any undisputed amounts.

What happens when a surety fails to communicate to a claimant the amounts that are disputed, and the basis for the dispute, within 45 days? This issue was before the Maryland Court of Appeals in National Union Fire Insurance Company v. Bramble. The case involved sureties who acknowledged receipt of the claims, requested additional information, and acknowledged the receipt of supporting documentation, but took no further action. While not contesting that they breached the requirements of the bond, the sureties argued that their inaction rendered the entire claim in dispute.

In a 2005 decision, the Court in National Union held that the plain language of the bond necessarily required the sureties to communicate to the claimants within 45 days the amounts in dispute, and the basis for the dispute. Allowing the sureties, through inaction, to dispute the entire claim would not only “render the 45-day time requirement essentially nugatory,” but “would greatly undermine the bond’s purpose of safeguarding those entities that supply goods and labor to the general contractor.” The Court held that the effect of the sureties’ failure to strictly comply with the bond was to render the entire amount of the claim undisputed, and accordingly, the sureties were required to promptly pay the claims, which totaled $1.2 million. The Court stated that its interpretation of the bond was consistent with Maryland law, which construes contracts involving compensated sureties in favor of the party who benefits under the bond.

What happens when the surety timely communicates to a claimant the amounts disputed, and the bases for the dispute, but subsequently raises additional reasons for disputing the claim? This question was addressed in 2006 by the United States District Court for the Eastern District of Virginia in Casey Industrial, Inc. v. Seaboard Surety Company. In Casey, the surety—unlike the sureties in National Union – informed the claimant within the 45 day period which portions of the claim were disputed, and the bases for the dispute. However, during the lawsuit filed by the claimant to obtain payment under the bond, the surety raised additional defenses and bases for denying the claim, which had not been communicated during the 45-day period. The claimant argued that the surety should be precluded from raising these defenses.

The Casey decision is significant for several reasons. For one, it discusses, and expressly finds persuasive, the decision in National Union. The Court stated that National Union was consistent with the Virginia’s “plain meaning rule” of contract law, which requires unambiguous contract terms to be interpreted “within the four corners of the document itself, without the consideration of parole evidence.” Based upon this rule, and upon the reasoning in National Union, the Court concluded that the surety was indeed required, within the 45 day period provided for in the bond, to delineate which portions of the claim were disputed, and the bases for the dispute.

Second, the court in Casey stated that the “plain meaning rule” not only required the surety to state the bases for any dispute within 45 days, but also precluded the surety from developing or asserting new bases for disputing the claim outside the 45-day contractual period. Thus, in Casey, notwithstanding the surety’s inclusion of a “reservation of rights” clause in its reply to the claimant, any bases for dispute not expressly raised by the surety within the 45 day period were waived. The only exception to this rule recognized by the Court was “legal defenses,” which may be raised by the surety even if not asserted within 45 days.

The lessons of National Union and Casey are clear. In Maryland and Virginia, it is critical for sureties to strictly comply with the obligations imposed by the bond to timely provide a substantive response to payment bond claims. It is equally critical for payment bond claimants in those jurisdictions to be aware of the surety’s obligations, and to seek the appropriate legal relief when those obligations are not fulfilled.