Whereby the terms of its contract, a subcontract waived its rights to make a claim against the prime contractors payment bond, the Supreme Court of Massachusetts held the waiver to be contrary to public policy and, therefore, void and unenforceable. In Costa v. Brait Builders Corporation, 972 NE 449 (Mass. 2012), the subcontractor provided labor and materials on a public construction project. A state statute required the general contractor (GC) to provide payment and performance bonds. After the GC terminated the subcontract for default, the subcontractor filed suit and won a jury verdict for general damages in the amount of $199,000 for breach of contract, and consequential, incidental damages, pre-judgment interest, and other damages, including attorneys fees, far exceeding its general damages – for a total judgment of $1,124,039. The GC and its surety provider, however, were granted a directed verdict by the trial court – based on the subcontractor’s contractual waiver of “its right to claim against the Contractor’s performance and payment bonds as provided to the Awarding Authority.” This was reversed on appeal, with the court holding that the contractual waiver of claims against the bond violated public policy.
The surety company asserted that the bond requirement served primarily a private purpose: to place laborers and materialmen who work on public construction projects, for which mechanics liens are disallowed, on the same footing as those working on private construction projects where mechanics liens are allowed. As argued by the surety, “Any benefit the statute may provide to the public is only incidental [ ] and not sufficient to override freedom of contract and mutual risk-taking.” This argument was rejected completely by the court.
Comment: The surety company’s argument that the contract terms which were negotiated between the GC and subcontractor should be honored by the court is generally a good argument for enforcing most terms of a contract because courts respect the right of commercial entities to negotiate contract terms with allocation of risk acceptable to the contracting parties – even if that allocation might seem onerous or unreasonable to others. Where statutes and public policy are applicable to certain aspects of the contract such as surety bonds, however, the courts will take a harder look at the contract deal to determine whether the agreed upon terms violate a statute or public policy – in which case the court will determine the contract term to be void and unenforceable, as was done in this case.
When confronted by a contract that requires advance waiver of liens or waiver of claims against surety bonds, the holding by the court in this case may provide a good argument for refusing to agree to such contract terms.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 15, No. 2 (Feb 2013).
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