Waiver of Bond Rights in Subcontract Found Unenforceable
Kegler Brown Construction Newsletter March 1, 2007
Many Central Ohio subcontractors were denied recovery of their payment bond claims against the bonding company after the general contractor became insolvent, because they signed subcontracts containing a provision purporting to waive payment bond rights. The relevant subcontract language provided "subcontractor waives and relinquishes any rights to pursue a claim on the surety bond issued by contractor and its surety in connection with this project." This problem raised the novel issue whether such a waiver of payment bond rights, at the time of contract and without payment, was enforceable under Ohio law.
As there was no legal authority on point in Ohio, the bonding company filed suit seeking a declaration that such a subcontract provision was enforceable and that the subcontractor's claims should be denied under "freedom of contract." The subcontractors argued that such a provision violated public policy, as well as Ohio's bond statutes, and should be declared unenforceable. The subcontractors argued that if such subcontract "fine print" were effective then the public owners of the State would suffer as well as the subcontractors, in that the owner (and indirectly the taxpayers) will have paid for a bond that did not serve its intended purpose of ensuring payment to subcontractors, which is not only inherently beneficial, but encourages subcontractors to bid and perform public construction work at the lowest possible price. It also could lead to the undesirable result of having unscrupulous contractors place this language in their subcontracts, lowering their risk, and achieving an unfair competitive advantage over contractors who use equitable contract language and expect to pay their bills to subcontractors.
In a landmark victory for local subcontractors, Judge Cain of the Franklin County Common Pleas Court in the Farrell Construction case agreed with the subcontractors and ruled that the subcontract waiver language conflicted with Ohio's bond statutes and was unenforceable for that reason. This decision should allow the subcontractors in the case to recover on their bond claims and discourage the use of such language in the future.
In addition, there is legislation pending in the Ohio General Assembly that would specifically find such "waiver of bond rights" language to be unenforceable and against public policy in Ohio.
Until such a bill becomes law in Ohio, prudent subcontractors will want to closely review their subcontracts and consider objecting to any provisions that purport to waive bond rights without full payment.