Surety Bonds have been used in the United States to back construction projects for close to 120 years. While that is a relatively short period of time, the concept of Suretyship was addressed in the the Code of Hammurabi; a well-preserved Babylonian Legal Code, dating back to about 1770 BC. A Babylonian contract of a third party financial guarantee from 670 BC is the oldest surviving written surety contract. The Roman Empire developed laws regarding suretyship and the principles of suretyship developed by them is still in use today.
The Heard Act of 1894 – The Birth of Corporate Surety Bonds in the U.S.
Before the passage of the Heard Act, a subcontractor or supplier of a government contractor had little recourse against the government contractor, since the subcontractor or supplier could not assert a lien against property owned by the United States. Government contracts awarded during that period only rarely had clauses requiring the prime contractor to pay its debts to subcontractors and suppliers or permitting the government to withhold payments to the contractor if it did not. The Heard Act granted a right of action in the name of the United States against a prime contractor and its surety for unpaid labor and materials used in the prosecution of contract.
The problem with the Heard act was that it required the sub contractor or supplier to subcontractor or supplier had to show that the supplies or labor furnished were “necessary to and wholly consumed in the prosecution of the contract work” (Brogan v. National Surety Co., 246 U.S. 257 1918). It was difficult for the courts to determine whether particular labor or materials had a relation to the object of the contract so as to fall within the coverage of the Heard Act as the subcontractor or supplier had to show that the supplies or labor furnished were necessary to and wholly consumed in the prosecution of the contract work.
The Miller act of 1935
As a result of the short comings of the Heard act, it was repealed in 1935 and the Miller act was simultaneously passed. The Miller Act of 1935 is the current federal law mandating surety bonds on federal public works. It requires performance bonds for public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000. Almost all 50 states, the District of Columbia, Puerto Rico, and most local jurisdictions have enacted similar legislation requiring surety bonds on public works. These generally are referred to as “Little Miller Acts”.
Performance and Payment bonds have been protecting subcontractors, suppliers and the American tax payer for close to 120 years.