Every now and again I get a phone call from an obligee (the party that required the performance bond) asking me how to make a claim on a bond. This is really a pretty easy question to answer as the answer lies within the bond form itself.
- Rule #1 : When facing a default on a bonded project, the first thing to do is to read the actual bond. Most bonds list certain conditions that must be met before an enforceable claim may be asserted against the bond.
In order to recover on a bond certain conditions must be met. In this case, an A312-Performance Bond (one of the more commonly required performance bond types), the surety’s obligations is triggered only after
- The obligee has notified the Contractor and the Surety that the Owner is considering declaring a Contractor in default and request and attempt to arrange a conference with the Contractor and Surety no later than 15 days after receipt of the notice from the Owner;
- The obligee declares the Contractor in default and formally terminates the Contractor’s right to complete the contract. The Owner must not declare the Contractor in default earlier than 21 days after the Contractor and Surety have received the first notice; and
- The obligee has agreed to pay the balance of the contract price to the Surety.
A Surety Bond is Not an Insurance Contract. Most, if not all courts emphasize the unique nature of a surety contract. Insurance indemnifies another against loss, damage, or liability resulting from an uncertain event. A surety answers for the debt or default of another.
- Rule #2 Read your contract. What the above means is that the courts generally hold that a surety’s liability must be measured by the strict terms of the contract. As such, the surety is liable for no more than the contract provisions would dictate.
Sureties have the unenviable job of taking responsibility where others have failed. Rightfully, before a surety is required to undertake responsibility it may dictate its rights and the terms for its takeover for payment or performance.