A recently proposed bill to reduce the retainage amount for certain public work contracts to five percent and to allow a claimant to recover reasonable attorney’s fees and costs from a payment bond surety that fails to timely respond to a claim was unanimously approved by the General Assembly’s General Law Committee on March 11, 2016, and is now awaiting action by the full General Assembly.  The bill, entitled “An Act Concerning Public Work Contract Retainage and Enforcement of the Right to Payment on a Bond,” amends two existing statutes, Connecticut General Statutes § 49-41b, “Release of Payments on Construction Projects,” and § 49-42, “Enforcement of Right to Payment on Bond.”

The portion of the bill amending § 49-41b provides that under any contract awarded by the Connecticut Department of Administrative Services or any other state agency, except for the Department of Transportation, the agency may not withhold more than five percent retainage, which is a reduction from the ten percent cap on retainage under existing law.  Similar to the present version of the statute, the five percent cap also applies to retainage withheld by general contractors from payments to subcontractors.  The bill preserves the existing two and one half percent retainage cap for contracts awarded by the Department of Transportation, as well as the five percent  retainage cap for municipal contracts.

The portion of the bill amending Connecticut General Statutes § 49-42, which is part of Connecticut’s “Little Miller Act,” provides an additional right to claimants when the payment bond surety fails to pay the claim in a timely manner.  Under the existing legislation, as well as the proposed bill, when a claimant has served a proper notice of claim on the surety within 180 days from the date payment was due, within 90 days of service “the surety shall make payment under the bond and satisfy the claim, or any portion of  the claim which is not subject to a good faith dispute, and shall serve a notice on the claimant denying liability for any unpaid portion of the claim.”  Some Connecticut trial court decisions had previously found that a surety that failed to pay or deny a claim within the 90-day period was deemed to have waived its defenses to the claim.  However, in Elec. Contrs. v. Ins. Co. of the Pa., 314 Conn. 749, 750, 104 A.3d 713, 714 (Conn. 2014), the Connecticut Supreme Court held that the 90-day response requirement contained in § 49-42(a) is directory, rather than mandatory, and that a surety that fails to pay or to deny a claim by the statutory deadline does not waive any substantive defenses or forfeit its right to contest the merits of the claim.

The proposed bill adds language that codifies the Elec. Contrs. decision, but also provides a claimant the right to indemnification from the surety for the claimant’s reasonable attorney’s fees and costs incurred after the 90-day response period to recover any sums found due and owing.  Although this provision, assuming the bill is passed, would be subject to judicial interpretation, the claimant’s right to indemnification for reasonable attorney’s fees and costs appears to be mandatory.  This right to indemnification is distinct from the provision of the existing statute, which is retained in the proposed amendment, that authorizes a court in its discretion to award reasonable attorney’s fees to the prevailing party in a lawsuit to enforce payment of a bond claim if the claim, denial of liability, or defense is deemed to be without substantial basis in fact or law.

If passed by the full General Assembly, and signed by the Governor, the bill would be effective on July 1, 2016.