In one of my first posts, I discussed changes to the A312 Performance Bond.  As I mentioned in that post A312 Bonds are widely used on many projects.  The golden rule when facing a default on a project is to read the bond.  Most bonds list certain conditions that must be met before an enforceable claim may be asserted against the bond.  In a relatively new case, decided by the Indiana Court of Appeals, the Court has reinforced this mandate.

In the Town of Plainfield v. Paden Engineering Co., Inc. 943 N.E.2d 904 (2011), which can be found , the Court granted partial summary judgment in favor of the surety.  The Court held that the claimant did not satisfy conditions necessary to recover from the surety on an A312 Bond.  Here are some of the most important points to take away from this case as it relates to making a claim against an A312 Bond:

  • Read the Bond.  In order to recover on a bond certain conditions must be met.  In this case, an A312-1984 Performance Bond, the surety’s obligations is triggered only after (1) the Owner 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; (2) the Owner 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 (3) the Owner has agreed to pay the balance of the contract price to the Surety.
  • In Indiana, there is a Rebuttal Presumption of Prejudice.  Many times, if a claimant fails to meet the technical requirements of making a claim against the bond, such as late notice, the Court will look to see whether or not the surety was actually prejudiced by the technical failure.  If the surety was not prejudiced, then the surety may still be liable under the bond.  The Court in Paden Engineering affirmed Indiana’s position that if a surety asserts a defense of untimely notice there is a rebuttable presumption of prejudice in favor of the surety.  The surety need not show actual prejudice.  It is then the claimant’s responsibility to rebut this presumption of prejudice.
  • A Contract of Surety is Not an Insurance Contract.  The Court emphasized 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.  Therefore, the Court held that a surety’s liability must be measured by the strict terms of the contract.  (Insurance contracts are typically read in favor of the insured.)  The Court summarized its position by stating “the Sureties are 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.  I’ve said it once, and I’ll say it again and again, always read the Bond.  There are steps that must be taken by a claimant before a surety is required to perform under the terms of the bond.