Month: March 2016

Secrets of Bonding #122: Don’t Sign That Lien Release!

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WAIVER OF LIEN BY CONTRACTOR, SUBCONTRACTOR(S) AND SUPPLIER

We, the undersigned, acknowledge receipt of the amounts stated below as full payment for all labor, professional services, materials, or equipment furnished for use on or about the property of…”

In construction, lien releases are common. Project owners expect their general contractor to execute them. GCs demand them from their subcontractors and suppliers. They are part of the routine. If you want to get paid, you sign it. But when should you not sign it? Let’s look at what a lien release does, and when you should be cautious about executing.

The Purpose of Lien Releases
Typically, a lien release is required in connection with a monetary payment. It comes up in any of these situations:

  • Monthly payment made from project owner to the general contractor
  • Monthly payment from GC to a sub or suppliers
  • Final contract payments to any of these

The lien release enables the accounting to transition from one billing cycle to the next. It is a form of receipt that protects the Payor by acknowleging that the Payee has received funds – they relinquish the right to claim they were not paid.

danger-aheadNormally, when contractors and suppliers are unpaid, they can file a lien (a security interest) against the title of the physical property. With such a lien in place, the property cannot be sold.  The lien release / waiver gives up the right to file such a lien and possibly other legal remedies as well.

Lien releases come in two basic flavors, and it is very important to recognize the difference between them.

The Good One: Conditional

“THIS DOCUMENT WAIVES THE CLAIMANT’S LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS EFFECTIVE ON RECEIPT OF PAYMENT. A PERSON SHOULD NOT RELY ON THIS DOCUMENT UNLESS SATISFIED THAT THE CLAIMANT HAS RECEIVED PAYMENT.”

A release / waiver is Conditional if it waives rights once a condition (usually the receipt of payment) occurs. An example of conditional language is:

“Upon the receipt of $____, Subcontractor hereby waives and releases its lien and bond rights for labor and materials through _________ (date).”

Unless the waiver states otherwise, the conditional waiver is not effective until the condition, such as payment, occurs.

Also note, this wording includes a condition regarding time which protects the claimant’s lien rights arising in the next billing period.

The Bad One: Unconditionalcaution-proceed-carefully-md

“THIS DOCUMENT WAIVES AND RELEASES LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL WAIVER AND RELEASE FORM.”

Actually it is only bad if the claimant has not yet been paid. Then it would be inadvisable to provide an unconditional release. The claimant will have no recourse if they do not receive their payment, and they will also relinquish their ability to claim against the Payment Bond.

Conclusion
The Conditional Lien Release includes conditions and wording that protects the claimant’s interests.

The Unconditional Release can be detrimental if executed unintentionally or under inappropriate circumstances.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #121: Are Court Bonds Like Fruit?

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produce_manMostly we issue site, subdivision and contract surety bonds (Performance & Payment).  However, we are also an important provider of Court and Probate bonds.  We issued a number of interesting court bonds recently so here is some info on this subject.

What Are Court Bonds Are Why Are They Needed?

Generally, court bonds serve three purposes.

  1. They provide required protection for the other party in the litigation (opposite the bond applicant)
  2. They guarantee the payment of related court costs
  3. The court likes them

An Injunction Bond is a good example.  In these legal actions one party wants to limit or prevent the actions of another.  An insurance agency may request an injunction to prevent a former salesman from soliciting their clients.  The court requires the plaintiff (insurance agency) to provide a bond for the protection of the defendant (salesman) in the event it is found that (s)he has been wrongfully restrained.

A Replevin Bond is similar.  These are required when the plaintiff (a bank) wants to seize an asset (your private jet) for failure to pay your finance charges.  The bond will protect you if it is later found they wrongfully seized “Wings Over Yonkers.”  See how these work?  In different situations the bonds provide the same type of function.  The name of the bond identifies the underlying legal action.

Why Do Courts Like Them?

You may think “what’s not to like?!” That’s true. But the court may require a surety bond for a practical reason.  If the litigation involves a financial matter, they could require that an escrow deposit be placed with the court for the benefit of the other party. They would hold this money until the case is decided.

This works, but is not convenient.  Where will the funds be held?  Who is responsible for their safekeeping?  Will there be periodic accounting if the case runs for years?  Who pays the expenses associated with this?  What if the money is misplaced or stolen? 

Compare this to a surety bond: Get the bond, throw it in the folder. Done!

cherriesEven though the court may have the option to take cash in lieu of bond, they may demand the issuance of a surety bond simply for its convenience.

Other Court Bonds

When a money judgment is rendered, the defendant may want the matter heard by the Appellant Court. Let’s say Maynard sued Dobie for money and wins a $10,000 judgment.  Maynard figures “Ok here comes 10 big ones!”  However, Dobie wants to dispute the decision so now Maynard has to wait.

In order to bring the Appeal, Dobie must obtain an Appeal Bond which protects the interests of the court and guarantees prompt payment if Dobie loses again.  To get this bond, he’ll have to give his personal financial statement, his indemnity, and put up maybe $11,000 for the surety to hold.  Oh, and pay the bond premium!  Why is all this necessary?

Bond underwriters know that most defendants lose at the Appellate level.  They also know that the court will simply claim on the bond to pay off the judgement.  This means that underwriters expect full penalty claims on defendant’s appeal bonds – which is why they normally require full collateral for the judgment amount plus interest and expenses.nanners

Conclusion

Hopefully it is apparent that there is a thread of similarity between these different types of court bonds.  This can make it easier to understand them when tey are needed.

Oh, so why are court bonds like fruit?  Because they have appeal!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #120: About the “T-List”

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If:  

  1. You are interested or active in Surety Bonds (bid, performance & payment, etc.), and…
  2. You think the T-list is who you are following on Twitter, then… 
  3. You need to read this article!

What is the T-List?           (Click for mood music) 

For bond producers / agents, bonding companies and bonded contractors, Circular 570 (the official document title) is the list of sureties accepted on federal projects produced annually by the federal Treasury department. It is easily found online.

What does the list provide?

In addition to the name and address of the approved bonding companies, it states the maximum acceptable amount for any one bond (based on the surety’s financial position), and where the surety has indicated it is licensed.

Is a T-listed performance and payment bond required on all federal projects?T

Generally yes, although small and emergency contracts, and some service and commodity contracts are not bonded. The feds will also accept alternatives to a bond such a “cash” deposit held by the government, and tripartite agreements (which is a form of funds administration.)

Federal contracting officers also may have the latitude to accept a non T-listed surety on larger contracts if they deem it is in the best interests of the government.

Is a T-Listed bid bond required on federal projects?

Yes, when bid security is stipulated and a bond is the chosen method of compliance.  For example, a form of cash may be allowed at this stage, then a bond could be used for performance and payment.  Another twist, some federal projects call for a “bondability letter” instead of bid security.  This indicates the sureties interest in supporting the contract, but does not include a penal sum or any form of financial penalty.

Is the T-list required on state or municipal contracts?

Circular 570 is intended to be a federal requirement, although state and municipal owners may choose to stipulate it as a means of pre-qualifying the bonding companies.

t-400

When a surety is on the list, does the federal government “back” the bonding company for the benefit of other parties?

No, it is merely the government’s internal opinion regarding the condition of the surety.  The feds make no guarantee to 3rd parties regarding the viability of the surety, or the correctness of including them on the list

Can a surety fail while enjoying “approved” status on the list?

Yup.

Are there any strong bonding companies that are not on the list?

Yes, many!  Only sureties that decide they want to be on the list are reviewed by the federal analysts.  They must submit their info and go through the process.  Some bonding companies are not intending to bond federal contracts, or may be ineligible for some reason.  They could be among the strongest sureties in the country, but would not be on the list.

Must subcontractors on federal projects use T-listed sureties?

It is not automatically required because these are considered private contracts between the general / prime contractor and the subcontractor. However, see next question…

What about private owners?

THE A-TEAM -- Pictured: Mr. T as Sgt. Bosco "B.A." Baracus -- Photo by: Herb Ball/NBCU Photo Bank
THE A-TEAM — Pictured: Mr. T

On private contracts, such as ALL subcontracts and projects with an owner that is not a public entity, the bonding requirements are at the owner’s discretion – including whether or not they even want a bond. They may demand the use of their own special bond form (some general contractors develop a subcontract bond form extra beneficial to them) and may stipulate a T-list requirement.

In some cases, the GC’s surety makes the subcontract bonding requirements.

Conclusion

In essence, always assume a Circular 570 surety is required on federal contracts.  The bond amount cannot exceed the limit stated on the list, and the bond should state the surety’s address as indicated on 570.

When other public entities require the T-list, such as state or municipal owners, it is mandatory because there is normally no flexibility in their specifications. However private owners set their own rules so subcontractors and GCs working for private owners may have the opportunity to negotiate away the T-list requirement if their viable surety is not on the federal list.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.