Construction Bonds

1
Construction Bonds

• What they aint
• What they are
• What theyre good for

2
Construction Bonds are NOT

• Insurance
• Warranty
• Guaranty (well, not exactly)
• An indemnity (well, maybe)
• A tripartite contract
• An agreement for the care and feeding of surety
  companies
• Worth much sometimes

3

• OK, fine.
• What are they?

4
Teeters Definition of aCompensated Surety

• A corporation, putatively solvent at the
  beginning of the project but located in another
  state, that buys legal services in bulk and that,
  for a large fee, sells the right for you to sue
  it if the contractor you have dealt with turns
  out to be an idiot
• (or worse).

5
Just remember, there is no short statement about
the law without an exceptionwith the possible
exception of this one.
6
Enough philosophy, What IS a Surety

• A surety is a person or firm that agrees to
  provide the performance of the contract of
  another, should that other fail in its
  performance.

7
A Few Words About Payment Bonds

• Many of the concepts and relationships are
  consistent across payment and performance bonds
• Pursuant to statute, the performance bond is
  solely for the protection of the owner and the
  payment bond solely for the protection of the
  contractors subs. Ergo, parallel prime can sue
  under neither(?)
• Payment bonds are based on rights guaranteed by
  the Constitution of North Carolina.
• The remaining slides relate solely to performance
  bonds.

8
The Real Names of the Players

• The Contractor -- AKA
• The Principal
• The Primary Obligor
• The _at_
• The Surety -- AKA
• The Obligor
• The Secondary Obligor
• The God-_at_ _at_
• The Owner -- AKA
• The Obligee
• The Patsy
• The Hosee

9
The Arrangement of the PartiesAccording to the
Surety ContractorThe Famously Described
Tripartite Contract
Owner
Surety
Contractor
10
The Arrangement of the PartiesAccording to the
Surety ContractorThe Famous Tripartite Contract
Owner
Wrong!
Surety
Contractor
11
The True and CompleteRelationship of the Parties
Owner
?
?
Surety
Contractor
?
Construction Contract
Contractors Guaranty Surety Bond
12
Who Owes Who What

• Under the Construction Contract
• Owner owes duties (including the duty to pay as
  provided in the K) to the Contractor and the
  Surety may rely on the Owner performing those
  duties.
• Contractor and Surety both owe the performance
  provided for in the bond and the contract JOINTLY
  AND SEVERALLY, although Suretys obligation is
  both limited in amount and is secondary.

13
The True and CompleteArrangement of the Parties
Owner
?
?
Surety
Contractor
?
Construction Contract
Contractors Guaranty Surety Bond
14
Who Owes Who What

• Under the Surety Bond
• Owner is NOT a party to the Bond, rather the
  owner is an express and intended beneficiary to a
  bilateral agreement.
• Contractor and Surety both owe the performance
  provided for in the contract JOINTLY AND
  SEVERALLY, although Suretys obligation is both
  limited in amount and is secondary.

15
The True and CompleteArrangement of the Parties
Owner
?
?
Surety
Contractor
?
Construction Contract
Contractors Guaranty Surety Bond
16
Who Owes Who What

• Under the Contractors Guaranty
• A bilateral agreement between the Surety and the
  Contractors Guarantor, a person or firm (often
  the individual principals of the contractor
  corporation), under which the guarantor agrees to
  put the surety in funds if the surety has to
  perform under the performance bond.

17
Inferences About What Sureties Could Be Good For

• The surety gets a big premium for
• Performing when its Principal does not
• Assuming the risk that it gets it wrong if it
  pays
• Assuming the risk that its Guarantor is insolvent
  
• Since a Surety has its principal and its
  guarantor firmly grasped by the tender parts, a
  Surety can be a great help in avoiding default, .
  . . sometimes

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A Few Things That You Thought You Knew About
Surety Law
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1. If the Owner defaults the Contractor, the
Surety, in its sole discretion, has three options

• Take over the project
• Tender a completion contractor
• Await the completion of the contract by the Owner
  and pay whatever it is determined to owe

20
BULL
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Take over the project?

• Sure, OK. Indeed this is the only option
  expressly provided for in NCGS Chpt. 44A

22
Tender a completion contractor?

• This may be an acceptable alternative
  performance, but alternative since it is not
  provided for in the statutory bond language, and
  most decidedly not an option in the sole
  discretion of the surety.
• NOTE WELL
• Whether your surety wants to take over or
  accept a tendered completion contractor, GET A
  COMPLETION / TAKE OVER AGREEMENT IN WRITING.

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Await the completion of the contract by the Owner
and pay whatever it is determined to owed?

• In an existential sense, this is an option.
  However, down at the law store, we have a special
  name for this option

Breach
24
So, how did everybody get the idea that sureties
have3 options?

• The AIA A-312 Bond Form says that the surety has
  those options.

25
Compare the A-312

• 4 When the Owner has satisfied the conditions
  of Section 3, the Surety shall promptly and at
  the Surety's expense take one of the following
  actions
• 4.1 Arrange for the Contractor, with consent of
  the Owner, to perform and complete the
  Construction Contract or
• 4.2 Undertake to perform and complete the
  Construction Contract itself, through its agents
  or through independent contractors or
• 4.3 Obtain bids or negotiated proposals from
  qualified contractors acceptable to the Owner for
  a contract for performance and completion of the
  Construction Contract, arrange for a contract to
  be prepared for execution by the Owner and the
  contractor selected with the Owner's concurrence,
  to be secured with performance and payment bonds
  executed by a qualified surety equivalent to the
  bonds issued on the Construction Contract, and
  pay to the Owner the amount of damages as
  described in Section 6 in excess of the Balance
  of the Contract Price incurred by the Owner
  resulting from the Contractor's default or
• 4.4 Waive its right to perform and complete,
  arrange for completion, or obtain a new
  contractor and with
• reasonable promptness under the circumstances
• .1 After investigation, determine the amount for
  which it may be liable to the Owner and, as soon
  as practicable after the amount is determined,
  tender payment therefor to the Owner or
• .2 Deny liability in whole or in part and notify
  the Owner citing reasons therefor.
• There are another Page and a Half of Conditions

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With the Statutory NC Bond

• THE CONDITION OF THIS OBLIGATION IS SUCH, that
  whereas the Principal entered into a certain
  contract with the Contracting Body, numbered as
  shown above and hereto attached
• NOW THEREFORE, if the Principal shall well and
  truly perform and fulfill all the undertakings,
  covenants, terms, conditions, and agreements of
  said contract during the original term of said
  contract  and any extensions thereof that may be
  granted by the Contracting Body, with or without
  notice to the Surety, and during the life of any
  guaranty required under the contract, and shall
  also well and truly perform and fulfill all the
  undertakings, covenants, terms, conditions, and
  agreements of any and all duly authorized
  modifications of said contract that may hereafter
  be made, notice of which modifications to the
  Surety being hereby waived, then, this obligation
  to be void otherwise to remain in full force and
  virtue.

NC Law dont saynothin bout options
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2. The statutes standardize the terms of Chpt.
44A bonds

• I hope your right, but I have a few concerns
• That aint exactly what the statute says
• It could be construed as only making 44A control
  in case of conflict
• Given the opportunity to go wrong, a court
  probably will
• The Rule 44A BONDS ONLY!!

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3. If the Owner overpays based on
designer-reviewed pay apps, the surety gets a
discharge
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(No Transcript)
30

• But if the Owner ignores
• contract payment provisions
• he may have
• put his foot in it.

31

• The Designer,
• on the other hand,
• may have a little problem.

32
4. The general statutes forbid the Owner from
requiring bonds to be countersigned by a licensed
NC agent.

• Not quite.
• There is a difference in a requirement for doing
  business IN NC, and a requirement for doing
  business WITH NC.

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A Desultory Tale AboutInsurance Certificates
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The State Contract Requires

• ARTICLE 34 - MINIMUM INSURANCE REQUIREMENTS
• The work under this contract shall not commence
  until the contractor has obtained all required
  insurance and verifying certificates of insurance
  have been approved in writing by the owner.
  These certificates shall contain a provision that
  coverages afforded under the policies will not be
  cancelled, reduced in amount or coverages
  eliminated until at least thirty (30) days after
  mailing written notice, by certified mail, return
  receipt requested, to the insured and the owner
  of such alteration or cancellation.

35
The DOI Prescribed Insurance Certificate Form
Contains This

• Cancellation
• SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE
  CANCELLED BEFORE THE EXPIRATION DATE THEREOF, THE
  ISSUING INSURER WILL ENDEAVOR TO MAIL ____DAYS
  WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO
  THE LEFT, BUT FAILURE TO DO SO SHALL IMPOSE NO
  OBLIGATION OR LIABILITY OF ANY KIND UPON THE
  INSURER, ITS AGENTS OR REPRESENTATIVES.

36

• The solution has been like the mating of
  elephants accomplished with great grunting and
  trumpeting but taking a year to show any results

37
These policies contain special provisions
regarding cancellation which shall control over
any pre-printed language on this form
Or words to that effect the precise content of
which is as yet undetermined
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The End