Harmon & Davies, P.C.

1. What is a performance bond?

Generally, a performance bond assures an obligee (usually an Owner/General Contractor) that if the principal fails to perform, the surety will discharge the principal’s obligations either through performance or by paying the obligee the excess cost of performance.  Performance bonds differ from payment bonds (sometimes called labor and materials bonds), which are put in place to ensure that laborers, subcontractors, and suppliers are paid.

By way of example, where a performance bond is in place, a general contractor may file a performance bond claim with a surety when a subcontractor defaults.  It isn’t enough for a party to simply assert a claim under a performance bond.  Rather, a claiming party must heed the requirements of the performance bond.  Particularly, a claiming party needs to pay attention to the deadline for initiating litigation to enforce a bond claim or else the claim may be lost.

2. The Timeliness of a performance bond claim. 

As a general rule in Pennsylvania, the statute of limitations for asserting an action on a performance bond or payment bond is one year.  See 42 Pa.Cons.Stat. §5523(3).  However, under Pennsylvania law, parties to a contract may contractually agree to shorten a statute of limitations period.  In Kedar Corp. v. American Contractors Indemnity Company, a case decided just last month by the Eastern District of Pennsylvania, the time period for filing a performance bond had been contractually shortened to six months.  [Of note: six months is considered a permissibly reasonable contractual limitations period under Pennsylvania law, but if one is dealing with a performance bond issued on a federal project, a six month duration within which to file a bond claim most likely would not be upheld under federal law.]

3. The doctrine of fraudulent concealment based on a theory of estoppel may save an otherwise untimely bond claim.  

In the Kedar Corp. case, the surety defended the contractor’s performance bond action by arguing that it was untimely because the action had not been filed within six months after the subcontractor defaulted.  The surety moved for summary judgment (an early dismissal of the case) on this basis.  In response, the contractor successfully argued that its claim was not untimely by asserting a doctrine developed in Pennsylvania known as the doctrine of fraudulent concealment based on a theory of estoppel (the “Doctrine”).

The Doctrine tolls (a/k/a suspends) the statute of limitations where, through fraud or concealment, the defendant causes the plaintiff to relax his vigilance or deviate from the right inquiry; some sort of affirmative act of concealment that would divert or mislead the plaintiff from discovering the injury is required.   In other words, if the defendant was merely silent, the Doctrine won’t apply.  The Pennsylvania Supreme Court has recognized that any act which tends to mislead the plaintiff, while parties are dealing on friendly terms, to avoid litigation, will be held to be evidence of a waiver of the contractual limitations period.

In Kedar Corp., the contactor successfully defeated summary judgment by arguing that a course of dealings existed between the contractor and the surety whereby the contractor was led to believe that the performance bond’s six month limitations period would not be enforced by the surety.  There, the contractor notified the surety of the subcontractor’s default in September 2009 and made an unequivocal demand for the surety to honor its obligations under the performance bond.  After November 2009, little, if any, communication took place between the contractor and surety.  In May 2010 the contractor completed the work on the project.  By October 2010, the surety and contractor resumed their discussions regarding the contractor’s demand for payment on the performance bond with no indication by the surety that it intended to assert that the contractor’s claim was untimely.  In July 2011, the surety averred that the contractor’s claim was submitted more than six month’s after the sub’s default and, therefore, untimely.

The court found that although the record did not show that the surety expressly waived enforcement of the limitations period or definitely acknowledged liability in this case, its conduct was such as to reasonably convey that the limitation period would not be strictly enforced as the parties pursued settlement opportunities.  The court acknowledged the lack of documented communications between the parties for a period of time, but recognized that: (1) a demand for payment had already been made; (2) the parties had begun a course of discussions regarding that demand; (3) surety was aware of the plaintiff’s ongoing work on the project; (4) the surety never indicated that contractor should cease work on the project; and (5) no definitive payment on the performance bond could be made until the plaintiff completed the project in May 2010. Moreover, the Court noted that the surety promptly resumed negotiations with contractor in October 2010, which was directly contrary to any intent to enforce a time bar.

4. Conclusion

 If you are an owner or contractor and a surety tries telling you that your bond claim is untimely, don’t tuck your tail and run if the surety led you to believe that your claim could be worked out to the point where you felt like pursuing litigation to recover on the bond claim was unnecessary.  However, under such circumstances, it is strongly recommended that you consult with an attorney before your filing deadline expires.  The attorneys at Harmon & Davies are available to assist with bond claims.

This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice.  Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.

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