C111 Ch 10

Defined as the act of legally becoming liable to one party for the debt, default, or failure to perform of another party.

• Suretyship: If a loss occurs in a suretyship, the surety expects to recover any payments made from the principal, or indemnitors; essentially it is a loan.
• Insurance: Insurance contracts execute in the event of a loss and there is no expectation of recovery.

• understanding the contracted obligations;
• investigating those obligations;
• resolving the obligations in accordance with the bond.

An indemnity agreement is a side contract providing separate rights to the surety to relieve a default through indemnitors, salvage and other recovery forms.

They enhance the surety’s position to recover from any loss and can be used as leverage to resolve potential claim situations

The Bid Bond guarantees that the principal (bidder) will enter into the contract after the bid is accepted

10% of the amount bid or the difference between the amount bid and the amount eventually contracted with a new contractor.

• Financial collapse of the bidder after bid and before award of contract
• A revocation of the bid by bidder after recognizing a mistake in the amount of the bid.
• Delays caused by the obligee in executing the final contract.

The next bidder must be competent and must respond to the bid invitation in the same way as the principal.

• Delays may cause hardship for the principal and effect his ability to meet the terms of the contract.
• If the delay is longer than the time period allowed and the hardship is established because of the obligee, the surety and principal may be relieved of any further obligation.

Preparing a bid is a complex process involving many corporations and individuals not under the bidder’s control and a tremendous amount of information required.

• mistake affects a material element of the agreement that prevented a meeting of the minds;
• enforcement of the contract would be unconscionable;
• honest mistake and the not the product of gross negligence;
• parties remain in essentially the same position as before the bid

• original tender specifications;
• contract general conditions;
• bidder's working paper;
• actual bid itself.

Build the project

The surety remains responsible for the bond if the principal defaults and the claim can be asserted directly against the surety without joining the principal.

The principal must be proven in default of the contract independent of the obligee’s assertions.

• Most construction contracts have termination and default provisions.
• Work stoppage may not be the fault of the principal and so the obligee cannot invoke a termination provision.
• Investigation of work stoppage is important to avoid termination provisions.

• Bond forms,
• indemnity agreements, and
• the principals most recent financial reports

• monthly progress estimates;
• construction contract;
• job log records;
• correspondence between the obligee and principal;financial records of the principal.

• acknowledge communications relating to a claim;
• undertake an appropriate investigation to determine its liability;
• advise claimants of its position;
• provide the specific basis for denial of a claim;
• promote adherence to these principles by its employees, lawyers, and consultants.

• remedy the default;
• complete the contract;
• retender the contract and arrange for a new contract to contract directly with the obligee to complete the work remaining

• contract is close to completion;
• quality of the principal's workmanship;
• potential for delay penalties;
• any additional claims for or against the principal;
• funds available;
• cooperation of the principal;
• financial involvement of the indemnitors;
• cooperation of the obligee

The surety is a lender of last resort who advances money to the contractor to complete the project and cure the default.

Money advanced to a failing project are almost always a permanent loss and do not reduce the penal sum of the bond. (good money after bad).

• Lending the money directly to the principal through a jointly controlled bank account, or
• Guaranteeing a bank loan to the contactor.

The surety may decide to hire its own consultant or contractor to complete the project. The original workforce may be utilized in the completion and the surety retains control of the project.

Relet – award the job to another contractor

The original workforce may be utilized in the completion

• Difficulty in fixing a definitive cost for completion
• Warranty obligations that extend past the completion of the project

Buying the bond back is an extra-contractual alternative where the surety negotiate a cash settlement in exchange for the obligee’s surrendering the performance bond.

Statutes governing public bidding process restrict the surety from retendering the balance of any defaulted contract

The owner’s breach provides the surety with a defense to the extent of that breach

Generally, a two year time limit following substantial completion is imposed on any claim by the obligee. If a latent defect (those not detectable by a reasonable inspection) is discovered, a claim may be advanced after the two year period

A Bankrupt or insolvent principal may stay proceedings against them by their creditors while they restructure or tender proposals

Suppliers and sub-contractors of those parties having a contract with the principal

• progress certificates;
• change orders;
• invoices;
• payments; warranty obligations.

• shipping advices;
• invoices;
• payments;
• warranty obligations.

• The surety may take an assignment of the lien filed and then discharge it when appropriate.
• This allows the surety to holdback funds retained under the contract.

• Ensure that all warranties and guarantees are furnished in accordance to the contract provisions;
• If they are not, then the adjuster may hold back payment because the obligee does not have to pay.

The surety’s right to contractual indemnity and subrogation as well as common law and statutory claims.

Forfeiture basis – in the event of a claim the entire penal sum of the bond is payable to the obligee

...the act of legally becoming liable to one party for the debt, default, or failure to perform of another party

...mistakes in the bid are the result of the estimator’s poor judgement or misinterpretation of the contract specifications

… government agencies

• … all of the above;
• a) progress certificates;
• b) change orders;
• c) invoices

...is a form of financial guarantee and it is submitted with the bid

...the act of being legally liable to one party for the failure of another party to perform

...the beneficiary under the bond terms

...a general indemnity agreement

...within 2 years following the date the final payment under the contract falls due