Surety Today: The Blog

Avoiding Successful Estoppel Defenses in Untimely Payment Bond Litigation

By Cynthia E. Rodgers-Waire

March 29, 2022

It is well known that the Miller Act, 40 U.S.C. § 3131 et seq., provides that any payment bond lawsuit must be filed within one year from the date on which the claimant last provided labor or materials to the bonded project.  40 U.S.C. § 3131(b)(4).  Almost all states have their own statutory counterparts, commonly referred to as “Little Miller Acts.” Some Little Miller Acts track the limitations language found in the Miller Act while others contain a variety of different limitations provisions.  Some states may even have statutory provisions governing bonds issued for private construction projects.

In the absence of statutory guidance, some bond forms, including the frequently-used AIA A312-2010 payment bond form, contain contractual limitations periods, which may or may not be enforceable depending on the nature of the project and/or applicable state law governing the project.  No matter what the applicable limitations period, it is important that pre-litigation communications between a payment bond claimant and a surety’s representative do not allow the claimant’s attorney to make a credible argument that the surety is estopped from arguing that a payment bond lawsuit is untimely.  Specifically, a surety representative cannot make any communications or take actions that would potentially mislead a claimant, particularly a claimant unrepresented by counsel, into believing that the surety intends to pay the claim.

The case law provides some useful guidance.  In Humble Oil & Ref. Co. v. Fid. & Cas. Co. of N.Y., 402 F.2d 893, 898 (4th Cir. 1968), the Fourth Circuit found the doctrine of equitable estoppel to be applicable in a Miller Act payment bond lawsuit when the surety made representations that it was going to pay the claim, but then reneged on its promise to pay after negotiations over the proper amount of the claim ran past the one-year limitations period.

Similarly, in Nelson v. Reliance Ins. Co., 436 F.2d 1366, 1370-72 (10th Cir. 1971), when the Miller Act payment bond claimant threatened to sue, the surety made representations that conveyed an impression that if the subcontractor deferred in filing a lawsuit while settlement negotiations were ongoing between the principal and the government owner, that the surety would pay the claim if the principal failed to do so.  When the surety later denied the claim resulting in the subcontractor filing suit, the 10th Circuit reversed the lower court decision and accepted the subcontractor’s estoppel argument.

In Atlas Erection Co., Inc. v. Continental Cas. Co., 357 F. Supp. 795, 800 (E.D. La. 1973), even though the surety never directly requested that the claimant forbear from filing suit over the contested balance, the court found that the surety was estopped from asserting limitations when the surety had assured the claimant that all valid invoices would be paid upon completion of its investigation into the disputed portion of the claim, but broke off all further negotiations and refused to make any further payments once the limitations period had expired.  In Bagnal Builders Supply Co. v. USF&G, 411 F. Supp. 1333, 1338 (D.S.C. 1976), the court denied the surety’s motion to dismiss and granted the claimant’s motion for summary judgment where the facts demonstrated that the surety never disputed the validity of the claim and made a partial payment and continued to communicate with the claimant regarding the principal’s efforts in securing additional funds to pay the remaining balance due.

Although the courts’ willingness to apply the equitable estoppel doctrine to surety limitations defenses is now well established in the case law, fulfilling the surety’s duty to investigate without creating an estoppel argument remains a difficult balancing act, as demonstrated by the recent case of Oscar Orduno v. Liberty Mutual Ins. Co., 2021 W.L. 5908989 (N.D. Tex. Dec. 14, 2021).  In Orduno, at the time the surety received the claimant’s notice of claim, there was already pending a lawsuit brought by the principal against the claimant for leaving the project over a payment dispute.  The surety’s representative referenced the pending lawsuit and stated “for now, I will leave the claim open to allow the parties reasonable time to resolve the disputed issues.”  By the time that the principal dismissed its lawsuit against the claimant, the limitations period for a Little Miller Act lawsuit had already run.  The court denied the surety’s cross-motion for summary judgment on the issue of limitations on a Texas Little Miller Act claim, finding that the surety’s alleged misrepresentations created a question of fact to be decided by a jury.

Although no strategy is full-proof, the following are some practice pointers to avoid a successful equitable estoppel argument:

  1. Determine the applicable limitations period and whether a statute or contractual provision governs in the case of a potential conflict.
  2. If applicable to the limitations analysis, gather the necessary project paperwork to establish the last date for performance of work and the specific nature of that work.
  3. Complete the investigation of the claim in a reasonable time frame and provide timely responses to the claimant’s communications to avoid the appearance of intentionally dragging out the surety’s investigation beyond the applicable limitations period.
  4. Avoid making requests that the claimant forgo filing a payment lawsuit while negotiations involving other parties, such as the principal or obligee, are ongoing.
  5. Resist the urge to make representations that valid claims will be paid or the claim will be resolved following completion of the surety’s investigation, particularly in conjunction with a request for lawsuit forbearance.
  6. Include specific written reservation of rights language in all communications with the claimant that includes reference to limitations defenses.

If you have questions regarding the issues discussed in this post, please contact myself at crodgerswaire@wcslaw.com or any member of the Surety and Fidelity Practice Group.