Representation of a General Contractor and Surety
Adopted: April 18, 2003
Opinion rules that a lawyer must withdraw from joint representation of a general contractor and a surety if a position advanced on behalf of the general contractor is frivolous, for the purpose of delay or interferes with a legal duty owed by the surety to the claimant.
Inquiry:
In North Carolina, a general contractor working on a public project in excess of a certain amount must acquire performance and payment bonds executed by one or more surety companies. The payment bond serves to protect subcontractors and materialmen providing labor, equipment, materials, and supplies for use on public projects. If a general contractor fails to pay a subcontractor or a subcontractor fails to pay a supplier, either the subcontractor or the supplier may make a claim against the general contractor's bond. The surety will respond to a demand by requesting a proof or affidavit of claim with supporting documentation. The surety will also reserve its right to assert any defenses available to the general contractor. Without action by the general contractor to tender a defense, the surety will ordinarily pay the claim.
A supplier advances a payment bond claim for materials supplied to a subcontractor for use on a public project. The supplier has provided the surety with documentation including invoices and delivery tickets clearly indicating that the materials were delivered to the project. The subcontractor disappears. The general contractor has paid the subcontractor in full for the project. According to the law, this does not abrogate the payment bond claim, so the general contractor is obligated to pay twice. If the general contractor allows the surety to pay, the surety will look to the general contractor for indemnification.
The general contractor gives notice that it is tendering a defense on behalf of itself and the surety. Discussions between the surety and the claimant cease. The claimant files a complaint to perfect the bond claim. The complaint names the subcontractor, the general contractor, and the surety as defendants who are jointly and severally liable for the debt.
The surety has an obligation to the claimant, absent valid defenses, timely to resolve a payment bond claim. The general contractor does not have any valid defenses under the law, but wants to delay the proceeding to avoid payment. Under these circumstances, may one lawyer represent both the surety and the general contractor in defense of the claim?
Opinion:
Ordinarily, the interests of the surety and the general contractor will be aligned in defending a payment bond claim. However, the lawyer has an obligation to assert only valid defenses to the claims asserted and to avoid unnecessary delay in the proceedings. Rule 3.1 and Rule 3.2. The lawyer should explain these duties to both parties at the outset. If the general contractor insists upon a course of conduct that would violate the Rules of Professional Conduct, the lawyer must withdraw from the joint representation and advise both the general contractor and the surety to obtain separate counsel. See Rule 1.7(b).
Similarly, if the lawyer believes that an appropriate defensive action taken on behalf of the general contractor would interfere with a legal duty the surety owes to the claimant/supplier, such that the surety could be exposed to a bad faith claim, a conflict arises. In this situation, the lawyer must withdraw from the representation of both parties and may only continue with the representation of the general contractor with the consent of the surety. Rule 1.9(a).