UPDATED WITH ATTACHMENTS: 2010 AIA Revisions to A312 Payment and Performance Bonds

We apologize but when this story was posted last week the attachments were not included. Below is the story with the links to the attachments. Again we apologize for the inconvenience.

In 1984, the American Institute of Architects published its A312 Payment and Performance Bond forms. Prompted by several court decisions, the AIA recently revised the 1984 bond forms and now has issued a 2010 edition of the A312 forms with several significant changes.

A. Payment Bond Changes (1984 and 2010 bond forms are attached below)

In the 1984 edition of the Payment Bond, §6.1 provided that the Surety had 45 days to respond to a Claim and to state the basis for challenging any amounts that were disputed. Beginning in 2004, several courts held that the Surety’s failure to state the basis for challenging disputed amounts constituted a waiver of any challenge.

The 2010 form contains three significant changes to address this issue.

  • First, the corresponding section of the 2010 form extends the Surety’s response time to 60 days.
  • Second, a new §7.3 provides that failure to dispute the Claim within the 60-day period shall not constitute a waiver of defenses but that the Surety shall become liable to the Claimant to reimburse it for attorney fees “the Claimant incurs thereafter to recover any sums found to be due and owing to the Claimant.” These fees shall be recoverable even if they cause the Surety’s liability to exceed the penal sum of the bond. These changes track the AIA’s suggested amendments.
  • Third, while the 1984 documents simply required Claimants to submit a notice of a Claim to the Surety, the 2010 forms add a requirement that the Claimant submit a “Claim” and provide that the Surety’s obligations do not arise until it has received that Claim. A new §16.1 defines a “Claim” to be a document containing eight different categories of information. This provision is designed to prevent a Claimant from providing a bare-bones notice of Claim in the hopes that the Surety will be unable to respond within the revised 60-day deadline and thereby become liable for attorney fees.

The Claim submission requirement also affects the time in which a Claimant may file suit. Under §12 of the 2010 bond, a Claimant must file suit within the earlier of one year after the date it submits the Claim or one year after it last performed work on the Project. Accordingly, a Claimant that submits a payment bond Claim but continues to work on the Project (for example, by performing punchlist work) must file suit within one year of its Claim submission or be time-barred on its bond Claim.

The 2010 form also extends the scope of possible Claimants. Under the 1984 form, Claimants were narrowly defined to include first and second tier subcontractors to the bond principal. The 2010 form expands this to anyone who may assert a mechanic’s lien.

Subcontractors pursuing mechanic’s lien claims should be aware of a potential trap created by the Claim requirement. The Bond in §4 requires the Surety to defend and indemnify the Owner against mechanic’s liens and other claims. Because the Surety becomes involved as a result of its defense and indemnity obligations to the owner, an unsuspecting subcontractor might forego filing a Claim on the payment Bond. Such a Claim, however, is a condition to making a Claim on the payment Bond.

Unless a Claim is filed, the Surety’s liability would be based solely on its indemnity obligations to the Owner on the mechanic’s lien and not on the payment Bond. Many states limit an Owner’s mechanic’s lien liability to the unpaid contract balance, which often is insufficient to satisfy all of the mechanic’s lien claims. Accordingly, a subcontractor that fails to submit a Claim based on the mistaken belief that the Surety is already defending could lose its payment Bond Claim.

2010 AIA Payment Bond

1984 AIA Payment Bond

B. Performance Bond Changes (1984 and 2010 bond forms are attached below)

The 2010 Performance Bond form contains a much more streamlined process for making a Claim on the basis of Contractor default. The 1984 form required the Owner to notify the Surety that it was considering declaring a Contractor Default and required the Owner to arrange a meeting with the Surety and Contractor to discuss methods of performing the contract within 15 days of the notice. The Owner could not declare a Contractor Default or terminate the Contractor until at least 20 days after the Contractor and Surety received notice of the default.

The 2010 form does not require a conference but does allow the Surety to request such a conference, with the conference to be held within 10 days of its receipt of the notice. Most importantly, however, §4 of the 2010 form provides that the Owner’s failure to comply with the notice requirements shall not release the Surety from its obligations except to the extent that the Surety can demonstrate “actual prejudice.” While “actual prejudice” typically is a fact issue to be resolved by a trial, this new section provides the Owner with some assurance that it can act in an emergency without waiving its bond rights.

The 2010 forms also provide for a more streamlined process for defaulting the Surety. If the Surety failed to perform, the 1984 Performance Bond form required the Owner to provide the Surety with 15 days notice of the default. The 2010 form reduces that to 7 days. No notice is required under either form if the Surety denies liability.

2010 AIA Performance Bond

1984 AIA Performance Bond

C. Technical Changes

Both bonds contain a number of organizational changes and minor edits, but there are two technical changes worth noting. First, the bond forms recognize that the underlying contract may not be based on an AIA form using the AIA definition of “Contract Documents.” Accordingly, both forms define “Contract Documents” to mean “All documents that comprise the agreement between the Owner and Contractor.”

Second, the bond forms describe the parties as the “Contractor” and “Owner” instead of using the traditional suretyship terms of “principal” and “obligee.” Because this terminology could create confusion when the forms are used to bond a subcontractor, they also provide that if the underlying agreement is a subcontract, then the term “Owner” in the bond shall mean the Contractor, and the term “Contractor” shall mean the Subcontractor.

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