Suppliers of Subcontractors Have Bond Rights

Kegler Brown Construction Newsletter

In a recent case of great interest to suppliers, subcontractors, contractors and bonding companies, the Franklin County Court of Appeals has ruled that suppliers of subcontractors have the right to assert payment bond claims on public works projects in Ohio.

Prior to the effective date of the new mechanic's lien and bond law on January 1, 1992, Ohio law was that "subcontractors of subcontractors" had lien rights but not bond rights and "suppliers of suppliers" had bond rights but not lien rights, but at least one bonding company argued that "suppliers of subcontractors" had no right to make a payment bond claim. A trial court accepted this interpretation but the Court of Appeals in the case of EFCO v. Buckeye Union Insurance Company ruled in my client's favor and reversed the decision of the trial court. The Court of Appeals ruled that suppliers of subcontractors are not too remote and can recover against public payment bonds.

This decision means that subcontractors and suppliers with pending "old law" bond claims can recover, and is consistent with the post January 1, 1992 "new law" which allows remote tier subcontractors and suppliers to recover against the statutorily required payment bond on public works.

As there is generally an indemnity agreement between the contractor and his bonding company as to any losses under the bond, this means that contractors who paid their subcontractors may have to "pay twice" to any unpaid sub-subcontractors or second-tier suppliers.

It is not enough for a general contractor to pay his bills and trust that his subcontractors will do the same. Contractors who do not want to "pay twice" for remote tier subcontractor or supplier bond claims on public projects may want to consider making lien waivers also serve as a bond waiver, inquiring as to payment status of subs and suppliers, and issuing joint checks to shaky subcontractors. Contractors should remember that the Notice of Furnishing required of remote tier subcontractors and suppliers to perfect mechanic's liens is not required to perfect a bond claim.