In poker, you have to play the cards you are dealt, but, if you have a bad hand, you can fold. In litigation, if you do not have a strong argument, you should negotiate a settlement, but that is not always possible because the opposing party’s demands may be so unreasonable that you might as well go to trial and see what happens. It is at those times where an attorney might attempt to get creative. Recently, our Appellate Court upheld a trial court decision that held a surety liable on both a payment bond and a mechanic’s lien substitution bond despite the nine special defenses that it raised. See O & G Indus. v. Am. Home Assur. Co., 204 Conn. App. 614 (2021). Some of these special defenses were novel, and, as a result, this decision gives us some greater insight into lien and bond claims.
In O & G Indus. v. Am. Home Assur. Co., the plaintiff brought an action against a surety that had issued both the subject project’s payment bond and a bond that was substituted for the plaintiff’s mechanic’s lien. Id. By way of brief background, The Morganti Group, Inc. (“Morganti”) was the general contractor for the construction of an apartment building; Morganti hired Concrete Superstructures, Inc. (“CSS”) as its concrete subcontractor; and CSS, in turn, sought to purchase materials from the plaintiff. Id. Prior to starting work on the project, CSS submitted a credit application to the plaintiff that the plaintiff rejected. Instead of offering CSS credit, the plaintiff offered to enter a joint check agreement with CSS and Morganti, but Morganti rejected that offer. The plaintiff then supplied CSS with concrete, but sent its invoices to Morganti, who paid plaintiff directly. Id. However, CSS then complained and insisted that the plaintiff submit its invoices to CSS, and the plaintiff complied with CSS’ direction. Id. Unfortunately, CSS did not pay the plaintiff for the concrete it supplied despite CSS having received payment from Morganti. Id. The plaintiff then filed a mechanic’s lien and a payment bond claim. Id. The subject payment bond had been provided by Morganti as principal and the defendant as surety. Id. The defendant also issued a bond that was substituted for the plaintiff’s mechanic’s lien. In the litigation that ensued, the defendant stipulated that CSS did not pay the plaintiff for the materials it delivered to the subject project and billed to CSS, and the defendant stipulated that there was no issue with the quality of the materials that the plaintiff supplied. Thus, one would expect the surety to be limited to claiming defects in the mechanic’s lien and/or the process of making claim on the bond, but that was not the entire story.
Some of the surety’s defenses were certainly expected. For example, the surety claimed that the plaintiff had procedural defects in its mechanic’s lien or bond claim, that the amount claimed was overstated, and that the owner and/or Morganti had made full payment to CSS. These claims failed.
The surety’s assertion that the plaintiff’s action was barred by the statute of frauds because the plaintiff was seeking to enforce “an oral contract for the sale of goods in excess of $500” was a little bit of a surprise. Id. The court disposed of this defense by deciding that the agreement “fell under the ‘specialty manufactured exception’” and alternatively decided that the plaintiff’s credit application and delivery tickets constituted a written contract. Id. at 623. However, while not noted in the decision, the court also could have noted that neither Connecticut’s mechanic’s lien nor payment bond statutes require a written contract for a claimant to file a mechanic’s lien or make a claim against a payment bond.
The most interesting part of this case, however, is that the surety asserted five special defenses based upon various equitable remedies. “[T]he court determined the defendant’s first five special defenses … could be summarized as alleging that the plaintiff’s conduct amounted to common-law recklessness, bad faith in the performance of contractual obligations amounting to a breach of the implied covenant of good faith and fair dealing, and a violation of the equitable concept of unclean hands.” Id. at 626. “The [trial] court determined that it would need to assess the plaintiff’s conduct through the ‘lens of common-law recklessness, unclean hands and bad faith.’” Id. at 627.
The trial court found that the plaintiff had acted properly and that decision was upheld on appeal. Id. at 646. The Appellate Court was dismissive of the defendant’s equitable claims insofar as it was the defendant’s principal that brought CSS into the subject project and “the plaintiff took more protective steps than the defendant” insofar as the surety did not require its principal to perform credit checks on subcontractors as the plaintiff had done with CSS. Id. at 630.
The question that remains is whether there are any circumstances under which the equitable defenses raised would actually be upheld. The short answer to that question is no. With regard to the assertion that the plaintiff acted in bad faith, the court analogized to a breach of the covenant of good will and fair dealing implied in every contract, and then found there was no bad faith because there was no contract between the plaintiff and defendant. Id. at 632. Thus, that argument will never work insofar as there will never be a contract between a surety and a payment bond claimant.
On its face, the court may have left the door open as to whether recklessness may be asserted as a defense to a payment bond claim, but I do not think so. The court said that “reckless conduct tends to take on the aspect of highly unreasonable conduct involving an extreme departure from ordinary care, in a situation where a high degree of danger is apparent.” Id. at 630. Personally, I cannot imagine a situation where the supplying of labor, materials, and/or services for which a supplier and/or subcontractor was not paid could result in a finding that said supplier and/or subcontractor was reckless. There is no requirement for a supplier to run a credit check before supplying materials, and a general contractor is in a far better position than a supplier to check the financial stability of any of its subcontractors.
In light of the foregoing, as long as the procedural formalities of mechanic’s liens and/or payment bond claims are properly followed, a lien or bond claimant will be able to recover the monies it is owed. As explained in other posts, however, the procedural formalities of lien and bond claims have pitfalls, which may trip up those without proper legal counsel.
If you should need any assistance with your mechanic’s lien and/or payment bond claim, please give me a call at (203) 640-8825.
Scott Orenstein