A general contractor was awarded the contract to build an elementary school in Massachusetts. In accordance with Massachusetts law, the general contractor obtained a payment and performance bond for the full amount of the public works contract.[1]
Shortly after award, incident to its prime contract, the general contractor entered into a subcontract agreement to perform site work and utilities.
During the course of performance, issues arose between the site work subcontractor and general contractor. The subcontractor contended that its performance was obstructed by the general contractor-the general contractor failed to pay the subcontractor and barred the subcontractor from the project site. The subcontractor filed a lawsuit in which it sought recovery against the general contractor’s bond. The Subcontract contained the following provision:
In the event that the subcontractor does not provide performance and payment bonds on a form acceptable to the contractor, then subcontractor waives its right to claim against the contractor’s performance and payment bonds as provided to the [School District].
At the trial (by jury) the court awarded a directed verdict in favor of the general contractor and surety based on the above referenced clause. The court determined, as a matter of law, that the subcontractor had no right to proceed against the bond based on the above subcontract waiver clause. On the other hand, although the subcontractor was not permitted to pursue the bonding company, it still had a right against the general contractor. Against the general contractor, the jury rendered a verdict in favor of the subcontractor in excess of a million dollars.
On appeal, the subcontractor argued that the bond waiver provision violated public policy of the state of Massachusetts and could not be enforced. The subcontractor asserted that in public works construction projects, the bond claim statute reflects a strong public policy of encouraging competitive bidding for and swift completion of public projects, rendering a waiver by private agreement unenforceable.
The bonding company, in response, contended that the bond requirement serves primarily a private purpose: to place laborers and material suppliers who work on public construction projects (for which mechanics’ liens are disallowed) on the same footing as those who work on private construction projects (for which mechanics’ liens are allowed). The bonding company argued that the statute provides security against nonpayment, which directly benefits laborers and materials suppliers. According to the bonding company, this only serves a private purpose-not a public purpose.
The court after reviewing the bond claim statute and its legislative history determined that the statute serves both a public and a private purpose. The court then addressed whether the public purpose was important enough to preclude a waiver by private agreement. The court concluded that the strong public policy behind Massachusetts’ bond claim statute rendered the bond waiver provision unenforceable. The court believed that the subcontractor’s argument was the better one-the bond claim statute embraced a substantial public policy precluding waiver. Accordingly, the Massachusetts court held that the subcontractor’s waiver was unenforceable and the Supreme Court reversed the trial court’s order granting the motion for directed verdict.
Comment: The issue of prospective waiver of subcontractor claims has not been decided by appellate courts in the states of Washington, Alaska, or Oregon. While waiver provisions, after performance, are enforceable, an open question remains regarding whether the freedom of contract (which the general contractor and subcontractor enjoy) would allow for the waiver to precede performance or whether such an attempt would be trumped by the strong public policy underlying the bond claim statute. It is very likely that Washington, Oregon, and Alaska courts would reach the same conclusion as the Massachusetts court because of the similarities of the bond claim statute and legislative history in these states.
In addition, the general contractor’s position in this case is understandable. In consideration for the subcontractor’s inability to bond its work, the subcontractor exchanged its right to claim against the general contractor’s bond. From the general contractor’s point of view, if the subcontractor had been unable to post a bond for its performance, the risk to the general contractor would have been substantially less. Thus, there was arguably “consideration” for the bargain/waiver that occurred.
This case is an example of public policy (statutes) trumping parties’ agreements. Similar to the “no damage for delay” cases in which exculpatory contract clauses were deemed inapplicable when they conflict with public policy (statutes). No Damages for Delay Part I; No Damages for Delay Part II
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[1] Costa v. Brait Builders Corp., 463 Mass. 65, 972 N.E. 2d 449 (2012).