NewsBreak! Articles > March 5, 2008

AIA 312 PAYMENT BOND CAUSING CONCERN IN THE CONSTRUCTION INDUSTRY

Carolinas AGC has been given a heads up by the surety industry – including Ray Garruto and Martin Pallazza of Rutherfoord – about potential problems being caused by the use of the AIA 312 Payment Bond.

Recently, courts in three states have ruled adversely against Paragraph 6 of the AIA 312 Payment Bond. The rulings are not favorable to the surety industry nor do they appear favorable to contractors and the construction industry in general. As a result, the surety industry as a whole has rejected the further use of the AIA 312 Payment Bond in its current form. It is widely believed by the surety industry that its refusal to issue this form in its current state protects contractors as well as the surety industry.

"We want to make sure that everybody understands this issue and that the surety industry is making these recommendations to protect both the construction industry and the surety industry," said Pallazza, a former member of Carolinas AGC's Board of Directors.

Specifically, the courts' interpretation of Paragraph 6 in the AIA 312 Payment Bond requires the surety to notify the claimant within 45 days of any amounts which are undisputed and the basis for which other amounts are disputed.  The courts held that the surety forfeited its rights to dispute a claim if a satisfactory and timely response was not provided within the 45 days. Additionally, it appears the courts disputed what was considered a "satisfactory and timely response."  This literal interpretation could affect the surety's ability to support their clients' (contractors') positions in denying an illegitimate claim.

Pallazza said the surety companies generally will accept the current form if certain language is modified, principally in Paragraph 6. Contractors will need to contact their surety company for their acceptable modification language to the AIA 312 Payment Bond.  Some sureties have suggested that, as an alternative to modifying the AIA 312 Payment Bond, another option could be to use the AIA 311 Payment Bond along with the AIA 312 Performance Bond.

The surety industry continues to have dialog with the AIA to work towards a solution to this issue, but as of this time, there has been no resolution, thought negotiations continue and this is a positive development. The construction industry will need to stay in touch with their surety company for any updates to this issue, but in the meantime, the unrevised version of the AIA 312 Payment Bond is unacceptable to the surety industry.
 
Meantime, Brian M. Perlberg, senior counsel, construction law, contract documents program for AGC of America, said that AIA is aware of the issue. “This is somewhat of a growing crisis that AIA is quite aware of, but for some reason beyond me refuses to fix,’ he said, adding that the problem also exists in Engineers Joint Contract Documents Committee (EJCDC) bond forms.

“My advice is to use the ConsensusDOCS bond forms, specifically the 260, which can be purchased for use through the AGC bookstore. ConsensusDOCS are committed to using best practices and do not such problems you aptly highlighted. That is why our forms are endorsed by the two major surety associations – SFAA (Surety & Fidelity Association of America) and NASBP (National Association of Surety Bond Professionals)." To order the ConsensusDOCs, go to:

http://www.consensusdocs.org/support_step-by-step.html

To sign up for an April 10 seminar in Raleigh on the ConsensusDOCs, go to:

http://www.cagc.org/edu_training/files/consensus_DOCS_raleigh_041008.pdf.