Did the payment bond issued for a design-build project provide protection to an engineering subcontractor? Aztec Engineering Group, Inc. v. Liberty Mutual Insurance Company. United States District Court, Southern District of Indiana (2017), by Hugh Anderson.

Summary: Aztec Engineering Group provided design services for the upgrade of 21 miles of state highway near Bloomington, Indiana, under a professional services subcontract with design-builder Isolux-Corson. Isolux-Corson’s work was in turn part of a Public Private Partnership to “design, build, finance, operate and upgrade” the highway. The design-build contract between the project’s Developer and Isolux-Corson required the design-builder to furnish performance and payment bonds.

As the project progressed, Isolux-Corson fell behind in its payments to Aztec. Aztec ultimately filed a lawsuit in federal district court against the payment bond surety, Liberty Mutual, seeking $4.6 million in unpaid (and uncontested) fees. Liberty first asserted that the arbitration clause in the professional services agreement required that the claim be sent from federal court to arbitration; the court rejected that assertion, noting that the claim was made under the bond (which did not have an arbitration requirement, and did not reference or incorporate the professional services agreement), not under the professional services agreement. The case was then decided based on summary judgment motions by both the surety and the unpaid engineering firm. The primary issue was whether the payment bond provided recourse to unpaid design professionals.

Decision: The District Court held that Aztec Engineering was eligible to collect on the payment bond, rejecting both arguments made by the surety. The first argument was that Indiana public private partnership law did not require that the payment bond include design services. After examining the statutes, the court concluded that while it was true that Indiana did not have a statutorily-confirmed policy favoring (or mandating) payment bond protection for design services, “it cannot be said that Indiana has prohibited parties from contracting for such protection.” Citing the principle of freedom of contract, the court held that the design-build contract required a payment bond for the “D&C Work” under the contract, with both “D&C” (“Design and Construction”) and “Work” being defined in the contract as including design and construction. Thus even if not required by statute to do so, the Developer and design-builder had agreed that the payment bond would cover design services.

The second issue was the wording of the bond itself. The court noted that the bond incorporated the design-build contract, which required coverage for design services The bond’s scope was payment for “labor performed and materials and supplies furnished,” which the surety interpreted narrowly as meaning construction only, arguing that design services are not “labor.” The court viewed the term “labor” broadly, citing a dictionary in ruling that “the common meaning of the word ‘labor’ includes human activity that provides services.”

The court’s decision in favor of payment bond coverage resulted in a judgment of the full $4.6 million in Aztec’s favor.
Comment: One point that might have been relevant was the amount of the bond. If the amount of the bond was the full amount of the design-build contract, then presumably it could have been shown that the design component of the contract amount was substantial. The bond’s premium was presumably based on this full amount, with no subtraction for the design component. This would indicate an intent to cover design-related payment claims.

EJCDC’s design-build payment bond (D-615) provides coverage for “labor, services, materials, and equipment” thus eliminating any plausible argument that services are not within the bond’s scope.