I. INTRODUCTION

Because Mechanics' Liens are not available on public projects in Pennsylvania, the focus of secondary recourse for payment on public projects in Pennsylvania is squarely placed on the surety bond, which is generally required in order to protect those who supply labor and materials to the project from the risk of non-payment. Likewise, it is common to encounter performance bonds running in favor of the public owner to provide a secondary assurance of performance by the Contractor or other entity having a direct relationship with the public entity.

In fact, even before the contractual relationship has been formally entered by the public entity and the Contractor, there are certain statutes in Pennsylvania which provide for the requirement that a bid bond or other similar security be supplied in order to secure the Contractor's execution of the contract on which the Contractor/Bidder is submitting its bid. This bond, when required, runs almost universally in favor of the public entity which is issuing the Invitation for Bids ("IFB").

Regardless of the type of bond encountered on public projects, whether bid bond, performance bond or payment bond, the statutes relating to public contracting are the primary sources for the requirements pertaining to these bonds. Likewise, these same statutes, in some instances, contain requirements for enforcement of claims on these bonds and provide for specific limitation periods in which claims may be successfully pursued against certain types of bonds.

Generally speaking, the terms of the surety bond at issue will dictate the methods and amounts of recovery which can be had by a claimant. Indeed, in the absence of specific language contained in a bond, it is unlikely that courts will look to expand the liability or obligations of a Surety beyond the scope of the language which is contained in the bond at issue. See Miller v. Commercial Electric Construction, Inc., 297 A.2d 487 (Pa. Super. 1972); General State Authority v. Sutter Corp., 403 A.2d 1022 (Pa. Cmwlth. 1979).

The terms of the bond may also very well dictate the proof that is required in order to recover under the bond at issue. For example, in General Equipment Manufacturers v. Westfield Insurance Company, 635 A.2d 173 (Pa. Super. 1993), the subcontractor, who was claiming under the surety bond of a General Contractor who had been discharged from the project, was required to prove the amount of labor and materials actually supplied by the subcontractor to the project rather than the reasonable costs of completing the subcontract. There, the court held that under the terms of the bond, the subcontractor was entitled to payment only for the labor and materials actually supplied in the prosecution of the work. Moreover, and much like any other claims under a surety bond, a claim for attorneys' fees will most likely be driven by the terms of the bond itself. However, as will be seen below, certain statutory provisions as contained in the relatively young Procurement Code, 62 Pa. C.S.A. §§ 101-4509 (West 2000) (the "Procurement Code"), may, by operation of law, modify a Surety's obligations in this regard.

Because the Surety's liability will most likely be driven by that language contained in the bond, an examination of the typical bond language is appropriate. A performance bond form that is typically used is the American Institute of Architects' AIA Document A312-1984 Edition Performance Bond (the "A312 Performance Bond").

In Section 1 the following language appears:

The Contractor and the Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.

From this language, it is apparent that the terms of the Construction Contract would become a part of the A312 Performance Bond. As such, upon receipt of a bond of this type, it would be prudent to obtain a copy of the underlying contract documents, if possible, to determine the underlying performance obligations.

Section 2 of the A312 Performance Bond indicates that in the event that the Contractor is performing under the Construction Contract, the Surety and Contractor have no obligation under the bond except to participate in certain conferences specified by subparagraph 3.1. In turn, assuming there is no Owner default, Section 3 becomes operative only if 1) the Owner has notified the Contractor and Surety that the Owner is considering declaring a Contract default with the Contractor and the Surety; 2) the Owner has declared the Contract in default and formally terminated the Contractor's right to complete the Contract; and 3) the Owner has agreed to pay the balance of the Contract Price to the Surety or to a Contractor selected to perform the Construction Contract in accordance with the terms of the contract with the Owner.

Once the Owner has satisfied those conditions, Section 4 of the A312 Performance Bond provides the Surety with the following options: 1) arrange for the Contractor, with the consent of the Owner, to perform and complete the Construction Contract; 2) perform and complete the Construction Contract itself; 3) obtain bids or negotiated proposals for the replacement work for the approval of the Owner; or 4) waive the Surety's right to perform and complete and pay the amount which it determines is due to the Owner or deny liability.

If the Surety does not act as provided for in the A312 Performance Bond, the Surety can be deemed in default and subject to direct action by the Owner. Interestingly, if the Surety has acted to proceed in accordance with alternatives 1 through 3 identified above, then the responsibilities of the Surety to the Owner are not greater than those of the Contractor under the Construction Contract and vice versa. In the event that the Surety opts for the fourth alternative, either tendering payment for the amounts owed or denying liability, the Owner is entitled to pursue any remedies available to the Owner against the Surety.

Indeed, the A312 Performance Bond specifically allows for recovery against the Surety up to the penal sum of the bond, costs associated with correction of the defective work and completion of the Construction Contract. The A312 Performance Bond also allows for recovery against the Surety of additional legal, design professional and delay costs resulting from the Contractor's default, and liquidated or actual damages caused by delayed performance or non-performance of the Contractor. See A312 Performance Bond at §§ 6-6.3.

In Section 8, the Surety waives notice of any change, including changes of time, to the Construction Contract or other related contracts. Accordingly, to the extent the Surety has raised a defense that it is already expended all sums up to the original penal (or stated) sum of the bond, it may be worthwhile to explore whether any extras or change orders have been issued to the underlying Construction Contract which may expand the Surety's obligation to the revised contract amount.

Two other provisions of the A312 Performance Bond are worth specific note. First, Section 9 of the A312 Performance Bond provides for a two year limitation period running two years after the Contractor's default, within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under the bond, whichever occurs first. However, Section 9 provides that if this paragraph is deemed void or prohibited by law, the minimum period of limitation available to sureties as a defense shall be applicable.

Second, and of similar importance, is Section 11, which indicates that

When this Bond has been furnished to comply with a statutory or other legal requirement in the location where the construction was to be performed, any provision of this Bond conflicting with said statutory or legal requirement shall be deemed deleted here from and provisions conforming to such statutory or other legal requirements shall be deemed incorporated herein. The intent is that this Bond shall be construed as a statutory bond and not as a common law bond.

As such, the A312 Performance Bond expressly acknowledges the existence and controlling nature of statutory bond provisions.

A payment bond that is typically used is the American Institute of Architects' AIA Document A312-1984 Edition Payment Bond (the "A312 Payment Bond"). In Section 1, the following language appears:

The Contractor and the Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner to pay for labor, materials and equipment furnished for use in the performance of the Construction Contract, which is incorporated herein by reference.

Like the language of the A312 Performance Bond, it is apparent that the terms of the Construction Contract would be made a part of the A312 Payment Bond. As such, upon receipt of a payment bond of this type, it would be equally prudent to obtain a copy of the underlying agreement, if possible, to determine the pertinent payment obligations.

Thereafter, the A312 Payment Bond sets forth specific requirements for the claimant to be in a position to seek recovery under the bond. Included among these provisions are very specific notice requirements. Indeed, Section 4 of the A312 Payment Bond provides that the "Surety shall have no obligation to Claimants under this Bond until" these notice provisions have been complied with by the Claimants.

Another provision typical of Surety payment bonds can be found in Section 7 of the A312 Payment Bond. In that Section, it indicates that the Surety's total obligation shall not exceed the amount of the bond and that the amount of the bond shall be credited for any payments made in good faith by the Surety. However, it should be kept in mind that this amount may be adjusted due to change orders or other modifications to the underlying Construction Contract. Section 10 of the A312 Payment Bond provides "[t]he Surety hereby waives notice of any change, including changes of time, to the Construction Contract or related subcontracts, purchase orders and other obligations." As such, to the extent that a Surety has raised a defense that is has already expended all sums up to the original penal (or stated) sum of the bond, it may be worthwhile, as it is with the Performance Bond, to explore extras or change orders that have been issued to the underlying Construction Contract which could impact the Surety's payment obligations.

Another provision of critical importance to the A312 Payment Bond is Section 11. This Section provides that no suit or action shall be commenced on the Payment Bond after expiration of one year from the date 1) on which the Claimant gave the notice required of it, or 2) on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the Construction Contract, whichever of 1) or 2) first occurs. Consequently, this recourse must be pursued promptly or it will be forever lost. Section 11 is also in accord with Pennsylvania law. In 42 Pa. C.S.A. § 5523 (West 2000), a one year limitation for claims on all bonds, including payment bonds, is set forth. Further, much the same as the A312 Performance Bond, the A312 Payment Bond contains language requiring that its provisions shall be deemed to be modified to be consistent with statutory or other legal requirements affecting the bonds. Accordingly, a review of the applicable statutes which discuss and impact bonds in Pennsylvania becomes essential.

A. Public Works Contractors' Bond Law of 1967

Since January 20, 1968, Public Owners, Sureties and Contractors' rights and responsibilities under public works surety bonds were governed by Pennsylvania's Public Works Contractors' Bond Law of 1967, 8 P.S. §§ 191-202 (West 2000) (the "Bond Law"). Because of the Bond Law's similarity to the Federal Miller Act, 40 U.S.C.A. §§ 270a-270f (West 2000) (the "Miller Act"), discussed further in Section V, infra, the Bond Law is sometimes referred to as Pennsylvania's "Little Miller Act". Indeed, except for instances where the public owner is the Commonwealth of Pennsylvania or one of the Commonwealth's agencies, as defined in the Procurement Code, which will be discussed in more detail in Section IV, B, infra, the Bond Law remains the law of the Commonwealth as it relates to public contract surety bonds.

For all contracts undertaken by public agencies, excepting those now covered by the Procurement Code, where the contract exceeds $5,000, the terms of the Bond Law are applicable. Section 193 of the Bond Law requires on these projects a performance bond for 100% of the contract sum "conditioned upon the faithful performance of the contract in accordance with the plans, specifications and conditions of the contract." See Bond Law at §193(a)(1). This bond is executed "solely" for the protection of the public contracting entity which awards the contract. Id.

The Bond Law also requires the submission of a payment bond by the Contractor. As with the performance bond, the amount of the payment bond is to be equal to 100% of the contract sum and is issued

solely for the protection of claimant supplying labor or materials to the prime contractor to whom the contract was awarded, or to any of his subcontractors, in the prosecution of the work provided for in such contract, and shall be conditioned for the prompt payment of all such material furnished or labor supplied or performed in the prosecution of the work.

See Bond Law at § 193(a)(2). "Labor or materials" is defined in the Bond Law as including public utility services and "reasonable rentals of equipment, but only for periods when the equipment rented is actually used at the site." Id.

From a review of this statutory language, it is apparent that the Bond Law provides protection co-equal to the protection afforded by the Miller Act on Federal projects. In particular, first tier contractors and second tier contractors are covered under the Bond Law. However, it is important to note that suppliers to first tier contractors are not within the scope and coverage of the Bond Law's protection. In this regard, Pennsylvania follows the definition of "subcontractor" set forth by the United States Supreme Court in Clifford F. MacEvoy Co. v. United States, 322 U.S. 102, 109 (1944) (a subcontractor is "one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract.").

The distinction of being a second tier subcontractor versus material supplier is, therefore, critical in evaluating whether protection is afforded under the Bond Law. In Lezzer Cash & Carry, Inc. v. Aetna Insurance Co., 371 Pa. Super. 137, 537 A.2d 857 (1987), the court concluded that a materialman who had supplied materials to a second tier subcontractor could not recover on the labor and material payment bond required under the Bond Law. Further, in Eastern Industrial Marketing, Inc. v. Desco Electrical Supply, 651 F. Supp. 140 (W.D. Pa. 1986), the court rejected a claim by an entity who had contracted with a supplier to the project, despite the bond claimant's assertion that because the party with whom it contracted manufactured custom goods for the project, that entity was a subcontractor and not a supplier. Indeed, the policy which appears to underlie this limitation on claimants is that where the claimants become too remote from the prime contractor, it would not be fair to permit recovery against the payment bond. See e.g., Nicholson Construction Co. v. Standard Fire Insurance Co., 760 F.2d 74 (3d Cir. 1985).

As specifically noted in the Bond Law, a "Claimant" can be an "individual, firm, partnership, association or corporation," provided that the claimant satisfies the status as a subcontractor or second tier subcontractor as discussed above. See Bond Law at § 192(1). Also, the statute expressly provides for recovery of "reasonable rentals of equipment, but only for periods when the equipment rented is actually used at the site." See Bond Law at §193(a)(2). From the language of the Bond Law itself, therefore, it appears that claims for rentals during periods where the equipment is laying idle are not covered within the scope and coverage of the Bond Law. Likewise, it can be drawn from the language of the statute itself that the equipment must actually be used at the site, contrasted with materials, which can be a subject of a Bond Law claim regardless of whether they become incorporated into the public improvement. See Bond Law at § 195. Of course, the most prudent course in any action under any payment bond is to consult the terms of the bond itself in order to determine the actual rights of recovery. Because the Bond Law imposes, more or less, a minimum standard, the bond provided pursuant to a Bond Law covered project may provide benefits in excess of the statutory requisites.

From the Surety's perspective, the Bond Law identifies three items of significance. These items are 1) that the bonds must be executed by Sureties legally authorized to conduct business in the Commonwealth of Pennsylvania, 2) that each of such bonds shall be filed in the office of the contracting body which awarded the contract for which such bonds were given, and 3) that it is unlawful for any representative of any contracting body to require that any bonds specified be furnished by a particular surety company through a particular agent or broker. See Bond Law at §§ 193(b) - (c) and 198(a). In fact, in the event that "any person" violates the provisions of Section 198, said action constitutes a "misdemeanor and upon conviction thereof shall be sentenced to pay a fine not exceeding five thousand dollars ($5,000), or undergo imprisonment for a term not exceeding five years, or both." See Bond Law at § 198.

Provided that the claimant is afforded rights under the Bond Law, there are also requirements imposed by the Bond Law for filing of claims. Further, in instances where a claimant has a direct contractual relationship with any subcontractor of the prime contractor who gave such payment bond but has no contractual relationship, express or implied, with such prime contractor may bring an action on the payment bond only if he has given written notice to such contractor within ninety days from the date on which claimant performed the last of the labor or furnished the last of the materials for which he claims payment, stating with substantial accuracy the amount claimed and the name of the person for whom the work was performed or to whom the material was furnished.

See Bond Law at § 194(b). This notice is to be served upon the Contractor "by registered or certified mail, postage prepaid, in an envelope addressed to such contractor at any place where his office is regularly maintained or served in any manner in which legal process may be served," except that such service "need not be made by a public officer." Id.

As noted above, pursuant to 42 Pa. C.S.A. § 5523, all actions against surety bonds must be commenced within one year after the claim accrues under the particular bond, unless the bond provides for a larger period of limitation on actions. However, the Bond Law provides an additional requirement distinct from claims against non-public bonds. In particular, the Bond Law provides that an action may not be brought on a payment bond before the expiration of ninety (90) days after the day on which the claimant performed the last of the labor or furnished the last of the materials for which its claims payment. See Bond Law at § 194(a). This requirement is strictly enforced. In Centre Concrete Co. v. AGI, Inc., 522 Pa. 27, 559 A.2d 516 (1989), the Supreme Court of Pennsylvania concluded that a cause of action under the Bond Law would not accrue until the 90 day period specified by the Bond Law had expired. In that action, a surety company claimed that the one year statute of limitation for claims on payment bonds had run on a claim brought by a supplier one year and six weeks after the supplier had furnished its last materials for the project. The court reversed the decision of the lower court and concluded "a statutorily imposed time ban against filing suit acts as a toll on the applicable statute of limitations which does not begin to run until the expiration of the banned period." Id. at 32, 559 A.2d at 519. As such, it is important to read the provisions of the Bond Law and 42 Pa. C.S.A. § 5523 together when proceeding with claims against public surety bonds.

Of course, in order to make a claim against a bond, and in order to comply with the bond provisions, obtaining a copy of the bond is crucial. Specific protection to a potential claimant is afforded by the Bond Law insofar as it allows a claimant to obtain a certified copy of the payment bond and the contract for which such bond was given to any person who makes an application for that documentation. See Bond Law at § 196. The requesting party must furnish an affidavit indicating that it has furnished material or performed labor for the completion of the work, but has not been fully paid for such labor and material, or it is a defendant in an action on a payment bond or it is a surety on a payment bond in which an action has been commenced. Provided that the costs of copying are paid, the requested documentation must be provided by the contracting body. See Bond Law at § 196.

B. The Procurement Code

Since the Procurement Code became effective on November 11, 1998, many of the provisions contained in the Bond Law have now become incorporated into the coverage of the Procurement Code. The Bond Law remains intact for those persons or entities dealing with public agencies which are not the Commonwealth or a Commonwealth agency. As defined in the Procurement Code, Commonwealth agencies include "executive agencies, independent agencies and state-affiliated agencies." "Executive agencies" include the Governor, the Departments, boards, commissions, authorities and other officers of the Commonwealth. "Independent agencies" include boards, commissions and other agencies and officers of the Commonwealth that are not subject to the policy supervision and control of the Governor. "State-affiliated entities" refer to a Commonwealth authority or a Commonwealth entity. Although this latter definition is somewhat loose, these entities would include the Pennsylvania Turnpike Commission, the Pennsylvania Turnpike Housing and Financing Agency, the Pennsylvania Municipal Retirement System, the Pennsylvania Infrastructure Investment Authority, the State Public School Building Authority, the Pennsylvania Higher Educational Facilities Authority and the State System of Higher Education. Not included within the above-definitions are courts or officers or agencies of the judicial system or the General Assembly and its officers and agencies. Likewise, the Procurement Code provisions dealing with bid bonds, performance bonds and payment bonds do not apply to state-related institutions, political subdivisions or local, regional and metropolitan transportation authorities. These entities are, therefore, still within the coverage of the Bond Law. See Procurement Code at §§ 102-103; Bond Law at § 192.

For projects covered by the Procurement Code, the provisions relating to bonds are almost exclusively set forth in Chapter 9. An exception to this general statement is contained in Section 2311 of the Procurement Code. This Section incorporates but modifies the Bond Law's prohibition of specifying surety companies, agents or brokers. However, it limits the proscription to "employees." See Procurement Code at § 2311. Nevertheless, influencing an employee to breach this provision may give rise to a breach of ethical standards for non-employees. See Procurement Code at § 2302. Such an ethical breach may give rise to debarment, but it does not expose the offending non-employee party to stated monetary fines or imprisonment.

In Section 902, provisions are included for the supply of bid bonds for public construction projects. Bonds provided pursuant to this Section must be by surety companies authorized to do business in the Commonwealth. Where the bonds are required, the bid security is to be in at least the minimum amount or a percentage of the amount of the bid as specified in the advertisement, the IFB or the request for proposals. Significantly, if a bidder is permitted to withdraw its bid before an award, no action is permitted against the bidder or the bid security, including the bid bond. See generally, Procurement Code at § 902.

The majority of the provisions contained in the Bond Law are incorporated into Section 903 of the Procurement Code. However, the contract value which triggers applicability of the Procurement Code provisions has been increased from the provisions contained in the Bond Law:

(a) When required and amounts. - For construction contracts awarded for amounts between $25,000 and $100,000, the purchasing agency shall require contract performance security, in an amount equal to at least 50% of the contract price, as the purchasing agency in its discretion, determines necessary to protect the interests of the Commonwealth. When a construction contract is awarded in excess of $100,000 [performance bonds and payment bonds equal to 100% of the price identified in the contract] shall be delivered to the purchasing agency and shall be binding on the parties upon execution of the contract . . . .

See Procurement Code at § 903(a). It should be noted, however, that the Procurement Code specifically allows the Commonwealth agency to "require a performance bond, payment bond or other security in addition to those bonds or in circumstances other than specified" above. See Procurement Code at § 903(c). In all other respects, the claim provisions as contained in the Procurement Code are, for practical purposes, identical to those contained in the Bond Law.

Under Section 904 of the Procurement Code, obtaining copies of the bonds and the contract for which the bonds were given is simplified considerably. As long as the applicant pays for a copy of the payment bond, a fee fixed by the purchasing agency to cover the actual costs of preparation, a copy of the bond can be obtained. See Procurement Code at § 904. The requirement of supplying an affidavit accompanying such a request has been eliminated. Id.

Another significant change pertaining to public bonds exists in Section 2105 of the Procurement Code dealing with small and disadvantaged businesses. This Section permits a purchasing agency to "reduce the level or change the types of bonding normally required or accept alternative forms of security to the extent reasonably necessary to encourage procurement from small and disadvantaged businesses." As such, the purchasing agency is given more discretion and flexibility in requiring bid bonds, performance bonds and payment bonds when dealing with small and disadvantaged businesses as defined in the Procurement Code. See Procurement Code at §§ 2102-2105.

Other provisions contained in the Procurement Code which may effect Sureties are contained in Chapter 39. This Chapter incorporates the prompt payment laws previously contained in the Amendments to the Award and Execution of Public Contracts Act, 73 P.S. §§ 1621-1626.9 (Purdon 1999). The first provisions of significance are provisions for penalties and attorneys' fees contained in Section 3935 of the Procurement Code. The significance of this provision to sureties and/or potential claimants has been made more acute by the decision in John W. Kay Electrical Contractor, Inc. v. Miniscalco Corp., No. 96-008389-05-1 (Bucks Co., March 4, 1998). In Kay, the court concluded that the presence of interest, penalty and attorneys' fee provisions in the nearly identical Pennsylvania's Contractor and Subcontractor Payment Act, 73 P.S. §§ 501-516 (Purdon 1999) (the "Payment Act"), entitled plaintiff to recovery of these items of damages from not only the defaulting contractor, but also that contractor's payment bond surety. Because of the pertinent similarity of the interest, penalty and attorneys' fee provisions in the Payment Act and the Procurement Code, Sureties must be highly cognizant of these provisions which exist under the Procurement Code.

Equally significant to Sureties is Section 3939(b) of the Procurement Code. That Section provides that "[o]nce a contractor has made payment to the subcontractor according to the provisions of [the Procurement Code], future claims for payment against the contractor or the contractor's surety by parties owed payment from the subcontractor which has been paid shall be barred." See Procurement Code at § 3939(b) (emphasis added).

V. SURETY BONDS ON FEDERAL CONSTRUCTION PROJECTS IN PENNSYLVANIA

When performing on Federal projects in the Commonwealth of Pennsylvania, contractors, subcontractors and sureties will find themselves confronted with and governed by the terms of the Miller Act. The Miller Act, passed in 1935, generally requires contractors on Federally funded public works projects to provide performance and payment surety bonds. As set forth in Section 270a of the Miller Act, performance bonds and payment bonds are required.

The Miller Act has been the subject of some very recent amendments which were intended to enhance the protection of the Miller Act for subcontractors and direct material suppliers. In particular, while the pre-amendment version of the Miller Act did not require payment bonds beyond the penal sum o