Entering into a big project creates a chain of responsibility and reliance- as a contractor, you are legally responsible for the work of your subcontractors, and you have to rely on them to do a good job. You have to trust that they are honest and competent, and will complete the work as ordered, on time. You have to assume and try to enforce that they are going to fulfill every aspect of their contract, because if not, you can be held accountable. It’s like a reverse pyramid: the problems at the bottom come rushing up to the top.
Projects that are left unfinished or are poorly constructed are eyesores, and cities rightly want to reclaim losses. New rulings on surety bond limitation statutes might make it easier for them to collect. Image from Flickr CC user David
The reason for this is that the contract you have, especially with a municipality, carries with it the responsibility that everything is going to be taken care of as stipulated. This is why nearly every job requires a bond. Of course, that bond doesn’t hold for perpetuity. There is a time limit on it, partly so that 10 years of normal wear and tear can’t suddenly be shown as shoddy craftsmanship. What you may not know is that the law allows for the clock to be stopped and paused for a variety of reasons. A recent court ruling in Minnesota not only expands the reasons for the clock stoppage, but expands the responsibility your company might face if subcontractors fail to perform.
If you have a payment bond, you might think that after a year, or whenever the state or federal lien laws dictate as the length of the bond, you are in the free and clear. It isn’t that simple, for a couple of reasons. There are two questions- when the clock is supposed to start, and what causes it to stop.
Though there are exceptions, it is generally accepted that the clock begins when the last day of labor is completed. Needless to say, this can bring its own ambiguities, but it is relatively cut-and-dried. Patch-up or minor repair work- known as “punch-list” generally isn’t considered. For example, if you finish a new public pool on March 1st, but are called on April 1st to repair a brick that was loose, the obligee won’t be allowed to file a claim on March 15th of the next year, because the work you did in April wasn’t enough to restart the clock. The trick comes in deciding what work constitutes “punch-list work” vs what work indicates a failure to have completed the contract.
When the clock is stopped on a statute of limitation for any reason, it is called “tolling”. Tolling is exceptions the law allows on the period where your company is exposed and liable. It’s how one year can turn into two or three. This is very important for you, because it turns out that if a subcontractor committed fraud, regardless of your lack of knowledge or complicity, you can be liable for far longer than you thought.
Minnesota Court Ruling Lets Fraud Toll the Statute
A court in Minnesota looked at a case where the obligee felt defrauded by a subcontractor, and sued the general contractor, who was the principal of the bond. The principal was doing bridge deconstruction, and guaranteed payment of a subs labor and material cost. The sub agreed to contribute a certain amount of money to a general workers’ fund run by the state (employees of the sub were members of the fund). This is tricky business, but par for the course.
Unfortunately, the sub played fast and loose with their books, and didn’t actually make the payments to the fund. Due to the nature of the fraud, this wasn’t discovered until over a year later when the statute of limitations had passed. They sued the principal, because they had guaranteed costs. The principal pointed out of course that the limitations period was over, and the issue went to court.
The court ruled that this type of fraud, which took time to detect, effectively tolled the statute of limitations, ruling then in favor of the defendant. While the actual case is still up for debate, the fact that it can even proceed from here could represent a sea change in surety law.
Make Sure You’re Protected in Case of Fraud
As a contractor, you may be required to obtain bonds to get a contract, whether for public or private work. This means you guarantee the work of subcontractors, not all of whom may be as scrupulous as you. This ruling extends the period where you are liable in the case of fraudulent behavior happening on your watch, even if you had nothing to do with it, and were in fact completely innocent of any fraud. The principal is still obligated to defend themselves.