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 learn this time and again to know the implications. Is this simply one other boring bond kind, or is there a Booby Trap, an elaborate effort to achieve a bonus over the surety?
Every bonding firm has their very own normal Performance and Payment Bond kinds. For us, we choose to make use of the AIA A-312 unmodified P&P bond. This is a properly balanced, broadly accepted kind. Whenever we obtain a particular bond kind, we should evaluation it fastidiously. Why did the obligee spend the money and time to plot this? There have to be some benefits – for them.
Last week we obtained an obligee’s necessary bond kind on a non-public contract and a key phrase is acknowledged above. Our shopper is the GC / prime contractor. Sometimes the distinctive bond kinds aren’t too unhealthy. Let’s choose aside this one. Maybe you may run into it a while.
This language is essential as a result of it considerations the Obligee’s duty beneath the contract. In order for the Obligee to be entitled to make a efficiency bond declare, they have to fulfill their finish of the discount, which is to PAY for the work. Is a bond declare for lack of efficiency cheap if the Obligee has did not pay the contractor? Of course not! They cannot work at no cost.
What are the implications of the wording in that particular bond kind? 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 within 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 easy. If the proprietor fails to pay for the work, after which makes a bond declare, the surety has an acceptable purpose to disclaim the declare. So how does it work within the Booby Trap Bond? Instead of the convoluted lawyer discuss, let’s flip it into plain English. It says…
Conditions for failure of the Obligee:
Neglected to declare the Contractor is in default (an official written assertion) and,
There have to be an unremedied or unwaived failure to pay the Contractor that the Obligee has not contested
Ugh… that final half. Assume that in each case, the Obligee will contest an allegation that they’ve failed. When they do, the surety has no declare protection even when the contractor has not been paid.
What a lure for the unwary bond underwriter! It would have been extra honest if the bond mentioned “Obligee is entitled to make a bond claim even if they don’t pay for the work.” But then folks would perceive…
Special bond kinds will be benign or Booby Trapped. We simply should learn each one to seek out out.
Comments