Posts Tagged ‘performance bond’
Bidding on Public Projects in Pennsylvania: Carefully Heed Mandatory Requirements
by HDlawblog Posted: Friday, 3/30/2012Early this year, the Commonwealth of Pennsylvania issued an opinion holding that even if public bid specifications state that the owner reserves the right to waive any formality in bids received, the owner may not waive a defect in the bid if the bid specifications expressly state that a bid will be rejected if certain information is not provided at the time of bid submission. Where a governmental entity expressly states that a bid will be rejected if certain requirements are not met at the time of bid submission, such requirements become mandatory, even if not statutory. Thus, the failure to comply with such requirements will be considered a material defect that precludes the bid from being considered.
In Dragani v. Borough of Ambler, the Borough of Ambler issued a public advertisement requesting sealed bids for its refuse, recyclables and yard waste hauling contract. In relevant part, the bid specifications stated that each bidder must accompany its bid with a consent of surety from an approved surety company with its underwritten limitation therein stated to be at least equal to $20 million and that the failure to provide the required consent of surety at the time of bid submittal shall preclude a bid from being considered. However, another section of the bid specification stated that the Borough reserved the right to waive any informality in bids received.
Three bids were submitted in response to the request for bids. The consent of surety attached to BFI’s bid came from a surety with an underwriting authority of only $16 million. BFI was the lowest bidder. The next lowest bidder notified the Borough that BFI’s bid did not conform to the bidding instructions, in part because BFI’s surety did not have underwriting authority of $20 million, and therefore the bid should not be awarded to BFI. BFI responded that the defects with its bid were nonmaterial and could be cured or waived by the Borough.
The Borough awarded the contract to BFI. Thereafter, a resident taxpayer of the Borough took legal action to block the contract from being awarded to and carried out by BFI. The trial court sided with the Borough on the grounds that: (1) the defects in BFI’s bid were not statutory; (2) the Borough reserved the right to waive bid deficiencies in the bid specifications and in the advertisement for bids; and (3) the waiver of defects by the Borough did not confer a competitive advantage on BFI.
The taxpayer resident appealed the trial court’s decision to the Commonwealth of Pennsylvania on the basis that BFI did not conform to the bid specifications. Specifically, the taxpayer resident pointed to the fact that BFI’s surety only had underwriting for $16 million and that this defect was material and could not be waived by the Borough.
In examining this case the Commonwealth noted that it has repeatedly held that requirements set forth in bidding documents are mandatory and must be strictly adhered to in order for a bid to be valid, but that where the requirements in a bidding document are not required by statute and the bidding document reserves the right to waive defects, a non-compliant bid for public work may be accepted or cured if: (1) the effect of the waiver will not deprive a municipality of its assurance that the contract will be entered into, performed and guaranteed according to its specified requirements; and (2) a waiver will not adversely affect competitive bidding by placing a bidder in a position of advantage over other bidders. This standard is referred to hereinafter as the “Gaeta Standard.”
The tax payer argued that the Gaeta Standard should not be applied because the Borough could not waive a bid defect relating to a particular requirement in the bid specifications when the specifications expressly provided that the bid would not be considered if that particular requirement was not met. In other words, while a governmental entity may waive a bid defect, it may not do so if the defect involves the waiver of a mandatory requirement that the bid specifications treat as non-waivable.
The Commonwealth Court agreed with the taxpayer and held that the Gaeta Standard did not apply because the Borough removed its discretion to waive a defect pertaining to the surety having $20 million in underwriting when it provided that the bid would be rejected if this requirement was not met at the time of bid submission. Although the bid instructions reserved the right to waive any informality and the bid specifications reserved the Borough’s right to accept any contract, the Borough removed any discretion it had to waive a defect pertaining to the consent of surety when it provided that the bid would not be considered if the consent of surety required by the specifications was not provided at the time of bid submission. BFI did not provide the consent of surety required by the bid specifications at the time it submitted its bid. Because this requirement was mandatory, the failure to submit a consent of surety from a company with at least $20 million in underwriting was a legally disqualifying error.
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.
Performance Bonds and Pennsylvania’s Doctrine of Fraudulent Concealment Based on a Theory of Estoppel
by HDlawblog Posted: Friday, 3/16/2012
- 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.
- 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.]
- 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.
- 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.
