Booby Trap Performance Bond
“The Surety, for value received, hereby stipulates and agrees that if the Contractor has been declared in default by the Obligee, and there has been no uncontested failure, which has not been remedied or waived, of the Obligee to pay the Contractor as required under the Construction Contract: (i) The Surety shall promptly remedy the default… ”
Waaaa?! We read this over and over to understand the implications. Is this just another boring bond form, or is there a Booby Trap, an elaborate effort to gain an advantage over the surety?
Every bonding company has their own standard Performance and Payment Bond forms. For us, we prefer to use the AIA A-312 unmodified P&P bond. This is a well balanced, widely accepted form. Whenever we receive a special bond form, we must review it carefully. Why did the obligee spend the time and money to devise this? There must be some advantages – for them.
Last week we received an obligee’s mandatory bond form on a private contract and a key phrase is stated above. Our client is the GC / prime contractor. Sometimes the unique bond forms are not too bad. Let’s pick apart this one. Maybe you’ll run into it some time.
This language is very important because it concerns the Obligee’s responsibility under the contract. In order for the Obligee to be entitled to make a performance bond claim, they must fulfill their end of the bargain, which is to PAY for the work. Is a bond claim for lack of performance reasonable if the Obligee has failed to pay the contractor? Of course not! They can’t work for free.
What are the implications of the wording in that special bond form? Let’s use the A-312 as a benchmark. (Owner means Obligee) It says:
“If there is no Owner Default under the Construction Contract, the Surety’s obligation under this bond shall arise after… ” And in the definitions it goes on to say:
“Owner Default. Failure of the Owner, which has not been remedied or waived, to pay the Contractor as required under the Construction Contract or to perform and complete or comply with other material terms of the Construction Contract.”
Pretty simple. If the owner fails to pay for the work, and then makes a bond claim, the surety has an appropriate reason to deny the claim. So how does it work in the Booby Trap Bond? Instead of the convoluted lawyer talk, let’s turn it into plain English. It says…
Conditions for failure of the Obligee:
Neglected to declare the Contractor is in default (an official written statement) and,
There must be an unremedied or unwaived failure to pay the Contractor that the Obligee has not contested
Ugh… that last part. Assume that in every case, the Obligee will contest an allegation that they have failed. When they do, the surety has no claim defense even if the contractor has not been paid.
What a trap for the unwary bond underwriter! It would have been more fair if the bond said “Obligee is entitled to make a bond claim even if they don’t pay for the work.” But then people would understand…
Special bond forms can be benign or Booby Trapped. We just have to read every one to find out.
Steve Golia is the National Surety Director for Great Midwest Insurance Company, an A-8 carrier specializing in contract surety.
The company provides Performance and Payment Bonds with speed and creativity, up to $10 million per contract.