Date Published: June 5, 2015

A recent court case in Missouri made it somewhat more difficult for general contractors to collect on surety bonds in a decision that could have deep implications for generals and subs alike. If a subcontractor goes bankrupt, fails to complete the job, or just does terrible work, the general contractor can avoid the full cost of the sub’s ineptitude with a performance bond. This is why general contractors must be bonded for larger jobs, as well.

An air conditioning unit at this base became the site of a performance bond legal wrangle.
Image from Wikimedia

How Communication Affects Contracts

The case started at Fort Leonard Wood, Missouri. CMS, a general contractor, was hired to make significant renovations including replacing an air conditioning unit. For this, they turned to a subcontractor called Balkenbush. As per the contract, Balkenbush obtained a performance bond to guarantee their work.

Needless to say, Balkenbush did not perform. Their work fell behind schedule, and they eventually stopped altogether, then filed for bankruptcy. These delays put CMS at risk of violating their master contract. They had to scramble to complete the work so they would not be in violation of their contract with Fort Leonard Wood, which, as government property, was protected under the Miller Act. Because the project ran late despite CMS’ best efforts, CMS was assessed damages. CMS then asked Balkenbush’s surety company for restitution based on the bond and was declined — this sparked years of litigation.

The surety company claimed that CMS never advised Balkenbush of their intent to recover damages, nor did they advise the surety company that Balkenbush was not performing. The insurer’s argument was that this lack of notice made CMS ineligible for the recovery amount that was more than $65,000. The court ruled in favor of CMS, saying that the surety company was still obligated to pay.

But the insurer appealed, and the case moved on to a federal district court. The appeals court ruled that CMS’ failure to disclose to either party constituted a breach of contract and that the surety company was not obligated to pay. The technical ruling vacated the original ruling and CMS was left holding the bag.

The Implications of the Case for Contractors

This case will affect Missouri contractors, and offers broad lessons for businesses outside the “Show Me” state. This ruling demonstrates the importance of keeping open lines of communication. It’s easy to get frustrated with a shoddy subcontractor and not want to deal with them. It’s easy to say we’re going to hire someone else, especially as you are scrambling to get work done, and not think about the implications until later. After all, you have to finish the work to stay current on your contract – who has time to involve lawyers now?

It is important to inform all parties involved when issues arise, even if it is just an email stating intent. A paper trail showing good faith can be critical if a dispute arises. Litigation can impact your business significantly, as can choosing the wrong subcontractor. Don’t let a lack of communication damage your business. It is also important to work with a trustworthy surety company who understands your industry. At Surety1, we know that your job is hard enough as it is, which is why we operate fairly and work with you to keep the lines of communication open at all times.

Your contracting business needs a strong Surety standing with you. Contact Surety1 today for a quick and fair bonding process that’ll get you to work.

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