Payment bonds are intended to protect those who have supplied labor or materials for either public projects where mechanic’s liens are not available, or for some commercial projects where the owner seeks to encourage bond claims rather than lien claims.
They offer generally good protection for those who have supplied labor or material, but not yet been paid. However, because they seek to hold the payment bond surety liable even though they have not contracted with the subcontractor or supplier, they – generally – are strictly construed so as to protect the surety from conditions to which the surety was not a party. One of those principles results in discharge of the surety if the subcontractor or supplier changes the nature of its “deal” with the contractor principal to the bond. This may occur, for example, if the supplier is owed money and enters into a settlement agreement with the contractor rather than seeking recovery under the bond.
If the surety is not a party of the settlement, the settlement has the effect of discharging the surety, leaving the supplier only with the remedy of enforcing the settlement against the contractor breaching the settlement agreement, but not against the surety. Thoughts to consider if you’re contemplating a compromise of your claim regarding a bonded project.