Public Works Projects in Tennessee: The Distinction Between Statutory and Common Law Bonds - January 2008
Recognizing that the lien laws protecting suppliers of labor, services and material do not apply to public works projects, the Tennessee General Assembly has enacted statutes providing that no public works contract in excess of $100,000 may be let until the contractor executes a bond that effects a promise that he or she will pay for all labor and material used in the project. Under Tenn. Code Ann. §§ 12-4-201 through -208, any provider of labor or material on a public works project may bring an action on the contractor's bond if certain conditions, which include notice, are met.
It is worth noting that, on highway projects administered by the State of Tennessee Department of Transportation, the bond requirements generally are distinct from those for public works. These requirements are set forth in Tenn. Code Ann. §§ 54-5-119, and the notice requirements for public works under Tenn. Code Ann. § 12-4-205 do not apply to lawsuits on a highway contractor's bond.
What are Statutory and Common Law Bonds?
A bond that provides the minimum protection mandated by these Tennessee statutes is referred to as a "statutory bond." If the terms of the bond extend privileges and protection to a potential claimant that are greater than what is required by statute, then the bond is referred to as a "common law" bond. For example, the common law bond could require less of the claimant than the statute requires when making a claim. Factors to consider in determining whether a bond is statutory or common law are:
whether the obligations of the surety and contractor go beyond the statutory obligations
whether the bond references the relevant Tennessee Code provisions, and
whether the bond contains notice or time limitations.
Ultimately, the more generous or more lenient terms of a common law bond will govern the claimant's rights.
Why Does the Distinction Matter?
The distinction between a statutory and common law bond is critical when determining whether a claimant has properly made a claim on the bond. For example, in the case of Wal-Board Supply Co. v. Daniels, a claimant on a bond did not meet all of the technical requirements for notice according to the Tennessee statute in making a claim. In light of the language of the bond, however, which identified its intent to afford protection to laborers and furnishers by the terms of, and independently of, the statutes, the court held that the bond was a common law bond and that the claimant's notice amounted to proper notice for recovery under the bond.
More recently, in White's Elec., Heating, Air and Plumbing v. Lewis Constr. Co., a claimant filed a lawsuit for recovery under a bond. The general contractor argued that, prior to filing the lawsuit, the claimant did not give 90-days notice of its claim pursuant to Tennessee law. The court held, however, that the bond was a common law bond that did not contain any notice requirements. As a result, the contractor's defense that it did not receive proper notice under the statute failed. The court pointed out that the bond required the principal and surety to pay for "all insurance premiums on said work," the bond did not reference Tennessee Code Annotated §§ 12-4-201 to -206, and the bond did not set forth notice requirements or time limits for bringing an action on the bond.
In light of these court decisions, whether a bond is a "common law" bond or a "statutory" bond can determine payment rights for subcontractors and suppliers working on public projects in Tennessee. Upon executing a bond for a public works project, a general contractor should be aware that broadening its own obligations or relaxing a claimant's notice requirements may effectively reduce the general contractor's defenses under Tenn. Code Ann. §§ 12-4-201 through -206 if a Court determines that its bond is a common law versus statutory bond. To protect themselves, contractors should make certain that their sureties carefully observe the technical requirements for bonds under the Tennessee statutes. This will help to avoid unnecessarily broad exposure to payment-related bond claims from project subcontractors and suppliers. If contractors go beyond what is required under the statutes, then courts are more likely to consider the bond a common law bond having broader protections for potential claimants.
For more information about the distinction between statutory and common law bonds, please contact Christopher S. Dunn
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance. at 800-487-6380.