So, You Think You’re Protected Because You Have a Performance Bond
Well, you might not be. While you might have prudently thought ahead and gotten a performance bond from an entity downstream, to protect you from its defective work, the protection afforded by a performance bond only lasts so long. After some point, if you have not filed a lawsuit against the performance bond surety, you lose your right to make a claim and it is as if the performance bond never existed. As explained below, it might be relatively easy to determine the deadline for an owner to file a lawsuit against its general contractor’s performance bond surety, but calculating the deadline for a general contractor to file a lawsuit against one of its subcontractors’ performance bond sureties might not be so easy.
A lawsuit against a performance bond must be filed within five years from the date the work at issue was completed and accepted, or the lawsuit will be forever time-barred. Generally, the time period for filing a lawsuit based on a construction defect that is not readily observable (a "latent" defect) does not start to run until it is discovered. That general rule does not apply to claims against a performance bond surety, however. Therefore, even if a defect in the work is not discovered until five years and one day after the work is completed and accepted, you will not have the ability to hold the performance bond surety accountable.
When calculating the deadline to file a lawsuit against a general contractor’s performance bond surety, the work at issue is typically the entire project and the acceptance starting the five-year period is the owner’s acceptance. For a claim by a general contractor against its subcontractor’s performance bond, the operative work and the contract with which it must comply are the subcontractor’s work and the subcontract. Therefore, when the claim at issue is against a subcontractor’s performance bond, the five-year period starts to run when the general contractor accepts the subcontractor’s work, in accordance with the subcontract, and pays for it in full.
Change orders that expand the scope of work to be performed by a subcontractor, disputes between the owner and general contractor over whether the subcontractor satisfactorily completed its work, and the use of replacement or completion subcontractors can make it ambiguous when the subcontractor’s work at issue was completed and accepted. The general contractor’s representations in its payment applications to the owner as to the status of a subcontractor’s work, the general contractor’s payments to the subcontractor and certifications by the architect of record and inspectors could support arguments that the five-year period started on different days. As a potential claimant against a performance bond, the resolution of that uncertainty could mean the difference between having a performance bond surety pay to address the defects and you having to pay to address them.
Performance bonds can provide valuable protection against construction defects. However, given the time sensitive nature of the requirements to pursue a claim against a performance bond, a potential claimant must be careful to preserve that protection. To make sure that protection is available when it is needed, a claimant must be sure to follow the notice and claims procedures stated in the bond, and, if necessary, ultimately file a lawsuit against the performance bond surety prior to five years after the work at issue was completed and accepted. To be safe, a claimant should use the earliest arguable completion and acceptance date in calculating the deadline to file its lawsuit, to avoid a dispute over whether the lawsuit was timely.