Booby trap performance bonds
The surety, for the value received, hereby provides and hereby agrees that if the contractor has been declared in default by the obligor, and there is no undisputed failure, not repaired or waived, the obligor shall pay the contractor the amount as required by the construction contract: (1) The sponsor must remedy the default immediately…”
Wah?! We read this over and over again to understand the implications. Is this just another form of boring bond, or is there a booby trap, an elaborate attempt to gain an advantage over a security?
Each bonding company has its own standard payment and performance bond forms. For us, we prefer to use the P&P Unmodified AIA A-312 Bond. This is a balanced and widely accepted form. When we receive a private pledge form, we must review it carefully. Why did the obligee spend time and money inventing this? There must be some advantages – for them.
Last week we received a sample obligatory bond to the obligee on a private contract and the key phrase mentioned above. Our client is a Main Contractor / GC. Sometimes, unique bond shapes aren’t so bad. Let’s choose this. Maybe you will encounter it at some point.
This language is very important because it is about Obligor’s responsibility under the contract. In order for the obligor to be entitled to make a good performance bond claim, it must meet the end of the bargain, which is payment for the work. Is a claim for non-performance reasonable if the obligor fails to pay the contractor? of course not! They cannot work for free.
What are the implications for the wording in this private bond form? Let’s use A-312 as a benchmark. (Malik means commitment) He says:
“If there is no default of the owner under the construction contract, the surety obligation under this bond arises after…” And in the definitions it goes on to say:
“Owner’s default. The failure of the owner, who has not been repaired or waived, to pay the contractor as required by the construction contract or to perform, complete or comply with other material terms of the construction contract.”
very simple. If the owner fails to pay for the work and then files a pledge claim, the surety has proper reason to deny the claim. So how does it work in Booby Trap Bond? Instead of complicated lawyer talk, let’s turn it into plain English. she says…
Conditions for failure of the obligor:
- Ignore the statement that the contractor is in default (formal written statement) and,
- There must be an unremedied or unaccounted failure to pay the contractor to whom it is obligated not disputed
Ah…that last part. Suppose that in each case the obligor will contest the claim that it has failed. When they do, the surety has no defense to the claim even if the contractor is not paid.
What a trap for the inattentive bond subscriber! It would have been fairer if the bond had said “the obligor is entitled to sue for surety even if they do not pay for the work”. But then people will understand …
Forms of private links can be benign or booby-trapped. We just have to read each one to find out.
