September 18, 2018
Author: Brian J. Schoolman
Organization: Safran Law Offices
Like most states, North Carolina has passed statutes that proscribe requirements for payment and performance bonds for contractors working on public construction projects. The primary reason for payment bonds is to provide payment protection for subcontractors and suppliers, since the lien laws do not apply to public bodies or public buildings. See N.C. Gen. Stat. § 44A-34.
When the total amount of construction contracts awarded for any one North Carolina project exceeds $300,000 for a local governmental project, or exceeds $500,000 for a State department or agency (including the UNC system), payment and performance bonds are required by the contracting agency from any contractor or construction manager at risk with a contract of more than $50,000. N.C. Gen. Stat. § 44A-26(a). Both the performance bond and the payment bond must be in the amount of 100% of the construction contract amount. Id. The performance bond is posted solely for the protection of the contracting body that is constructing the project. N.C. Gen. Stat. § 44A- 26(a)(1). The payment bond is solely for the protection of the persons furnishing materials or performing labor for which a contractor, subcontractor, or construction manager at risk is liable. N.C. Gen. Stat. § 44A-26(a)(2). The bonds shall be executed by one or more surety companies legally authorized to do business in the State of North Carolina, and shall become effective upon the awarding of the construction contract. N.C. Gen. Stat. § 44A-26(b).
Any claimant who has performed labor or furnished materials in the prosecution of the work required by any contract for which a payment bond has been given pursuant to the provisions the bond statutes, and who has not been paid in full therefor before the expiration of 90 days after the day on which the claimant performed the last such labor or furnished the last such materials for which he claims payment, may bring an action on such payment bond in his own name, to recover any amount due him for such labor or materials and may prosecute such action to final judgment and have execution on the judgment. N.C. Gen. Stat. § 44A-27(a).
Any claimant who has a direct contractual relationship with any subcontractor but has no contractual relationship, express or implied, with the contractor may bring an action on the payment bond only if he has given written notice to the contractor within 120 days from the date on which the 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. N.C. Gen. Stat. § 44A-27(b).
House Bill 1052, which passed the General Assembly in 2012, and became effective for projects contracting on or after January 1, 2013, included a new notice requirement for lower-tier subcontractors, intended to protect general contractors from “double payment” liability on public projects. Under the old law, any second-tier or lower subcontractor or supplier who timely gave the Section 44A-27(b) notice could pursue a claim on a payment bond for a public project. Under the new law, however, a lower-tier (second or lower) subcontractor must serve a Notice of Public Subcontract upon the general contractor to preserve the full scope of its bond claim rights.
The Notice of Public Subcontract must include the name and address of the subcontractor; a general description of the property where the project is being built; a general description of the subcontract, including who the sub contracted with; and a general description of the labor and material being performed and furnished. N.C. Gen. Stat. § 44A-27(d). A sub or supplier who fails to deliver the notice in a timely manner will have its bond claim limited to those amounts earned during the 75 days prior to the delivery of the notice of the bond claim, and to a maximum of $20,000. See N.C. Gen. Stat. §§ 44A-27(b), (e).
The subcontractor notices – both the Notice of Public Subcontract and the notice of claim letter – must be served by registered or certified mail, addressed to the contractor at any place where his office is regularly maintained for the transaction of business or served in any manner provided by law for the service of summons (i.e., personal service or service by sheriff). N.C. Gen. Stat. § 44A-27(c).
Another portion of the revisions to the payment bond statute requires general contractors to prepare and deliver to all first-tier subcontractors a project statement to aid subs in making their bond claims. See N.C. Gen. Stat. § 44A-27(f). The project statement is required for all projects for which a payment bond is required, and must list the name of the project, the physical address of the project, the name of the contracting body, the name of the contractor, the contact information for an agent of the contractor authorized to accept service for requests for bonds, notices, and claims, and the name and address of the surety. N.C. Gen. Stat. § 44A-27(f)(1). Once the first-tier sub receives the project statement, it is required to flow the statement down to its subs and suppliers, and so on down the contractual chain. N.C. Gen. Stat. § 44A-27(f)(2). Any party failing to deliver the project statement will be unable to enforce its contract with the lower-tier party until that statement has been provided. N.C. Gen. Stat. § 44A-27(f)(3). However, the failure to obtain the project statement does not exempt a sub from having to satisfy the notice requirement.
A lawsuit brought against the payment bond shall be brought in the county where the construction contract or any part of it was performed. N.C. Gen. Stat. § 44A-28(a). No action on a public works payment bond may be commenced more than one year after the last date of furnishing of labor by the claimant, or the day on which final settlement was made with the contractor, whichever is later. N.C. Gen. Stat. § 44A-28(b). No surety shall be liable under a payment bond for a total amount greater than the face amount of the payment bond. N.C. Gen. Stat. § 44A-29. A judgment against any surety may be reduced or set aside upon motion by the surety and a showing that the total amount of claims paid and judgments previously rendered under such payment bond, together with the amount of the judgment to be reduced or set aside, exceeds the face amount of the bond. Id.
No act or agreement between the contracting body, the contractor, or the surety shall reduce the period of time for giving notice of a bond claim, or for commencing a lawsuit on the bond, or otherwise limit the liability of either the contractor or the surety. N.C. Gen. Stat. § 44A-30(a). Every bond given by a contractor pursuant to the North Carolina statutes is conclusively presumed to be in accordance with the statutes. N.C. Gen. Stat. § 44A-30(b).
Any person entitled to bring an action or any defendant in an action on a payment bond shall have a right to require the contracting body to certify and furnish a copy of the payment bond and of the construction contract covered by the bond. N.C. Gen. Stat. § 44A-31(a). It shall be the duty of such contracting body to give any such person a certified copy of the payment bond and the construction contract upon not less than 10 days' notice and request. Id. A copy of any payment bond and of the construction contract covered by the bond certified by the contracting body shall constitute prima facie evidence of the contents, execution and delivery of such bond and construction contract. N.C. Gen. Stat. § 44A-31(b).
Under the 2013 revisions, the contractor is also required to furnish a copy of the payment bond within seven days of receipt of a written request. N.C. Gen. Stat. § 44A- 27(b). If the contractor fails to furnish the bond as requested, the obligation of the subcontractor to furnish the Notice of Public Subcontract is suspended until the request is complied with. See id.
A payment or performance bond issued for a North Carolina public project shall follow the form established under Section 44A-33 of the General Statutes. See N.C. Gen. Stat. § 44A-33(a) (performance bond), 44A-33(b) (payment bond).
As with lien claims, the statutes provide for the recovery of attorney fees by the prevailing party in a claim under the North Carolina bond statutes. See N.C. Gen. Stat. § 44A-35. The “prevailing party” is the plaintiff who obtains a judgment of at least 50% of the monetary amount sought, or the defendant against whom a judgment of less than 50% of the amount sought is recovered. Id.