The Often-Overlooked Protection Provided By a Statutory Payment Bond Under Chapter 53 of the Texas Property Code

Owners of construction projects are often surprised to learn that they are required to withhold 10% retainage on private construction projects in Texas. Failure to withhold 10% can result in liability up to that amount.[1] Similarly, owners often continue to pay the general contractor after receiving a lien notice with fund-trapping language which can create "fund-trapping" liability. If fund-trapping liability is established, the owner could end up paying for the same work twice—once to the general contractor and again to the subcontractor.[2]

But an owner can avoid these pitfalls by requiring that the prime contractor[3] on a private construction project provide a statutory payment bond. A statutory payment bond under Texas Property Code § 53.202 is not just any bond. To provide the protection contemplated by the statute, the bond must:[4] in the original contract amount; in favor of the owner—as obligee;

3.have the written approval of the owner endorsed on it; executed by:

a.the original contractor as principal; and

b.a corporate surety authorized, admitted and licensed to do business in Texas; conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials and normal and usual extras not exceeding 15% of the contract price; and

6.clearly and prominently display the contact information for the surety.

If the owner obtains a bond that is consistent with these requirements and records it in the applicable real property records,[5] the owner is relieved of the requirement to withhold retainage and cannot be held liable for failing to trap funds.[6] Subcontractor liens no longer attach to the owner's property and as a result, the subcontractor has no lien foreclosure action against the owner. In other words, the subcontractor's remedy is provided by the bond and is not against the owner. This is a win-win for owners and subcontractors because the subcontractor's remedy is not limited to its proportionate share of retainage plus any trapped funds and the owner is not subjected to a multiplicity of often conflicting subcontractor claims if bankruptcy, termination, or abandonment occurs at the prime contractor level.

Tips for making sure you actually receive a statutory payment bond when one is requested:

  • 1.The original contractor must provide the bond. In connection with an engineering, procurement and construction (EPC) contract, the EPC contractor often attempts to argue that the lead subcontractor performing the construction work should provide the bond. If the owner acquiesces, the owner does not have a statutory payment bond.
  • 2.The owner should require a bond compliant with § 53.202 in the contract.
  • 3.The bond should be in the amount of the contract, not an amount less than the contract.
  • 4.Once the contractor obtains the bond, the owner should review it for compliance with § 53.202.
  • 5.The owner should not be persuaded by the surety or the general contractor that the surety can only use its noncompliant form.
  • 6.The owner should make sure that it is named as the "obligee"—and not a contractor or some other party.

Reprinted with permission.

Amy Wolfshohl is a partner in the construction practice group of Porter Hedges. She represents companies in negotiating and analyzing risk in connection with highly complex construction transactions with an emphasis on industrial construction and EPC contracts.

[1] Tex. Prop. Code § 53.105.

[2] Id. § 53.084.

[3] General contractor here means the party contracting directly with the owner to perform the work.

[4] To make the intent of the parties clear, the owner should also consider including language in the bond that it is in attempted compliance with Texas Property Code § 53.202. The requirements in this blog post are paraphrased from the statute.

[5] Tex. Prop. Code § 53.203.

[6] Id. § 53.201.

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Monday, 30 March 2020

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