Statutory vs. Conventional Bonds: What’s the Difference?
Those in the construction industry are all too familiar with the requirement of furnishing bonds on a project. However, not everyone is acquainted with whether their bond is a statutory bond or a conventional bond. From a legal standpoint, the distinction between the two can be significant. For a statutory bond, one must look to the applicable statute itself to determine the conditions of the bond. Whatever is written in the bond, but not required by the applicable statute, must be read out of the bond. And whatever is not expressed in the bond, but is required by statute, must be read into the bond. In other words, a statutory bond can neither enlarge nor diminish the conditions required by the statute. On the other hand, a conventional bond is controlled by the language, intention and meaning of the bond documents. Unlike a statutory bond, a conventional bond may be qualified, conditioned, or limited in any lawful manner.
The effect of the distinction between a statutory bond versus a conventional bond was highlighted in the recent case of Law Enf't Dist. of Jefferson Par. v. MAPP Const., LLC, 16-220 (La. App. 5 Cir. 6/30/16), 196 So. 3d 896. That case involved the construction of a new forensic crime lab in Gretna, Louisiana. Subsequent to completion of the project, the owner filed suit against the general contractor alleging various damages arising out of the project. The general contractor then filed third-party demands against various subcontractors as well as against a surety which had furnished a bond on behalf of a subcontractor. Shortly thereafter, the surety sought dismissal from the suit, arguing that the claim against it was procedurally time-barred because the bond itself stated that any suit against the bond must be instituted within one year from substantial completion of the project. The general contractor, however, asserted that its suit against the surety should be maintained based upon a statutory provision in the Public Works Act which sets forth a five year period to assert claims against a surety.
With respect to public projects (such as the project at issue), La. R.S. 38:2241(A)(2) mandates that a public entity require the contractor to furnish a bond in a sum of not less than fifty percent of the contract price for any project in excess of twenty-five thousand dollars. The provision also provides that “[t]he bond furnished shall be a statutory bond.” La. R.S. 38:2189 states that “[a]ny action against the contractor on the contract or on the bond, or against the contractor or the surety or both on the bond furnished by the contractor…shall prescribe 5 years from the substantial completion.” The issue before the court was whether the subcontractor’s bond qualified as a statutory bond under La. R.S. 38:2241 of the Public Works Act. It was undisputed that the project was substantially complete on September 24, 2010, and that the general contractor’s third-party demand was not filed until June 9, 2015. Therefore, if the bond was deemed a statutory bond, the one year period set forth within the bond itself would have been read-out, and the general contractor’s claim against the surety would be maintained as being within the five year time period afforded by La. R.S. 38:2189. However, if the bond did not qualify as a statutory bond, but was rather a conventional bond, the one year limitations period would be valid, rendering the general contractor’s claim against the surety untimely.
The Louisiana Fifth Circuit Court of Appeals ultimately ruled that the subcontractor’s bond was a conventional bond, not a statutory bond. In so holding, the court explained that the mandatory statutory bond addressed in La. R.S. 38:2241 refers to the general contractor’s bond furnished to the owner, not a subcontractor’s bond furnished to the general contractor. Because the subcontractor’s bond was deemed a conventional bond, the surety permissibly provided a qualified or limited prescriptive period of one year as a condition to the bond. Consequently, the general contractor’s claim against the surety was dismissed.
The aforementioned case is consistent with the general rule on public projects: a general contractor’s bond will qualify as a statutory bond while a subcontractor’s bond will be deemed conventional. Thus, when determining the terms of the general contractor’s bond, one must refer to the statute governing the bond. In contrast, one should look to the terms of the bond itself in connection with a subcontractor’s bond. Recognizing and understanding the difference can be critical in evaluating a claim against a surety.