Pursuing a Performance Bond? Follow the Terms of the Bond

A contractor seeking almost $1 million in claimed cost overruns against a subcontractor’s bond has been reminded that the bond terms must be followed. Or else.

The bond required the prime contractor, as bond obligee, to do three things: (a) give notice to the sub and the surety that the contractor “was considering declaring a contractor default;” (b) issue notice of default and then notice of termination to the sub, with a copy to the surety; and (c) agree to pay the balance of the subcontract price to the surety or any replacement sub selected by the surety. Plus, the contractor was to give the surety seven days’ notice before making a demand on the bond. The prime contractor took the first step, but not the others.

After a lawsuit was filed, the surety moved to have the claims dismissed, and the trial court has agreed. The court noted: “By depriving [the surety] of its completion options, [the contractor] materially breached the bond.” Failure to take the other steps meant that the surety had no ability to mitigate its damages in arranging for a completion contractor.

A surety bond is a contract. Failing to follow the contract terms can have adverse consequences. A surety who agrees to be responsible to complete its principal’s work, subject to certain specified conditions, cannot be blamed for insisting those conditions be met. And the contractor (or owner, as the case may be) who fails to meet the conditions – or even fails to come close! – is in jeopardy of losing the benefit of the bond. The case is Arch Ins. Co. v. John Moriarty & Assocs. of Fla., 2016 U.S. Dist. LEXIS 172173 (S.D. Fla. Dec. 12, 2016) (LEXIS subscription required).

About Stan Martin

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Stan Martin holds a law degree and an undergraduate degree in architecture. He has been involved with the construction industry for more than 45 years, working in construction prior to law school and beginning his construction law practice. During his career, he has been actively involved with the Associated General Contractors of Massachusetts, the Boston Society of Architects, the American Arbitration Association, and the Massachusetts Building Congress.

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