Some Do’s for Making a Claim Against a Surety Bond

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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.

Remake of a Classic – Changes to the A312 Bond Form (Part 2)

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In Part 2 of our series regarding the changes to the A312 Bond forms we examine the new A312-2010 Performance Bond.* 

The most significant change in the Performance Bond form involves the process for an Owner to declare a Contractor in default and to make a claim under the Performance Bond.  Under the old Bond form a Surety was not obligated to perform until the Owner notified the Contractor and its Surety of its intention to declare the Contractor in default and attempted to arrange a meeting with both parties.  This meeting had to be held within 15 days after receipt of the claim notice.  The Owner could not then declare a contractor in default or terminate the contractor until 20 days after the Contractor and Surety received notice of the default as described above. 

Section 3 of the 2010 Performance Bond form no longer requires the Owner to jump through these hoops in order to declare the Contractor in default and assert a claim under the Bond. 

Instead, under revised Paragraph 3.1, the Owner may request a meeting in its notice to the Surety, but isn’t required to do so.  If the Owner does not make this request, the Surety may within 5 business days after receipt of the notice request the conference.  If the Surety requests the conference, then the Owner must attend within 10 business days of the Surety’s receipt of the notice.  

Additionally, the A312-2010 Performance Bond no longer requires a waiting period before the Owner can declare the Contractor in default or terminate the Contractor. 

The most important aspect to the new claims process under the A312-2010 Performance Bond is new Section 4.  This section states:

Failure on the part of the Owner to comply with the notice requirement in Section 3.1 shall not constitute a failure to comply with a condition precedent to the Surety’s obligations, or release the Surety from its obligations, except to the extent the Surety demonstrates actual prejudice. 

Failure by an Owner to comply with the notice requirement is not a free pass, even under the new Bond form.  Most jurisdictions already have case law protecting a Surety where an Owner fails to give proper notice.  For example, in Dragon Construction Company v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. 3d 1997), where an Owner terminated a contractor and replaced the contractor without giving notice the Surety the Illinois Appeals Court held:

since the (owner) replaced (contractor) with (replacement contractor) before informing (surety) that (contractor) was to be terminated and without consulting (surety) as to the successor, (surety) was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. (surety) would be entitled to select, or at the very least participate in selecting, the lowest bidding contractor to complete the project in order to mitigate its damages under the performance bond.  Surely, (surety) would not have issued the surety bonds if it did not have the authority to protect itself through the selection of the successor contractor.

Generally under this line of cases, a Surety does not have to show prejudice before being discharged under the Bond. Performance Bond A312-2010, however, requires a Surety to show that it has been prejudiced by the Owner’s actions if proper notice was not given to the Surety under Paragraph 3.1.  What constitutes actual prejudice is unclear.  A Surety may be prejudiced if it was not given an opportunity to participate and mitigate its damages.  This standard could then be read in conjunction with current case law.  As the Dragon court states a Surety is entitled to mitigate its damages and it would not have issued the surety bonds if it did not have the authority to protect itself.  Or it may be that a Surety must show quantifiable damages in order to demonstrate prejudice.  Overall, it remains to be seen how the Courts will interpret this section, given existing case law, if the Bond, like its counterpart, is widely adopted. 

* Because I can’t end our flashback to 1984 without a bit of reminiscing, the #1 movie was Beverly Hills Cop, the most popular fiction was The Talisman, the most popular non-fiction was Iacocca: An Autobiography,  and the most popular television show…..Dynasty (should have been the Cosby Show!). 

More “Final” and More “Binding”?

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I recently came across a situation concerning a modification of the standard American Institute of Architects (AIA) general conditions that I found very interesting (hopefully you do as well).   

In this situation, an owner and a contractor entered into a contract for the construction of a project.  They used a modified version of the A201-1997 document.  As you may know, subparagraph 4.4.5 of the form document states that the approval or rejection of a Claim by the Architect shall be “final and binding” on the parties but subject to mediation and arbitration.  However, the parties decided to modify the contract and removed subject to mediation and arbitration, as well as all other references to mediation and arbitration.  No language was added concerning review.   

So what next?  What implications arise when the parties remove alternative dispute resolution from the equation?  Is the architect beyond reproach?  Can the parties still litigate?  Such questions made me look at the how Indiana treats situations where the parties to a construction contract designate a party as the final arbiter of all claims, without any articulated review process.

First, it appears to be well-settled in Indiana that contracts appointing a party as sole arbiter, like the situation discussed above, are valid.  Second, judicial review may still be available under certain circumstances.  The court in James I. Barnes Construction Co. v. Washington Township of Starke County, 184 N.E.2d 763 (1962), held that it is a rule of law in Indiana that where a contract provides that work shall be done to the satisfaction, approval or acceptance of an architect or engineer, he is thereby constituted a sole arbitrator by the parties, who are bound by his decision in the absence of fraud or such gross mistake as to imply bad faith or a failure to exercise honest judgment.  Thus, the decision is not absolute.  It appears that this is still the general rule today. 

Other states that appear to have similar cases on point are Massachusetts (Fontaine Bros., Inc. v. City of Springfield) and New Jersey (Ingrassia Construction Co., Inc. v. Vernon Township Board of Education).  This is by no means an exhaustive list. 

Overall, grounds for reviewing the decisions of appointed sole arbiters could include fraud, bad faith, gross mistake, failure to exercise honest judgment, arbitrary and capricious decisions, or decisions outside the scope of her authority.  However, parties should consider the full implications of removing ADR references and be sure that the modified agreement accurately reflects their intent. 

This post is neither final nor binding.  There are other concerns raised by the modification described herein, which may warrant further discussion.  If you have any experiences with such modifications or comments on a different state’s treatment of the issue, drop us a comment.

Remake of a Classic – Changes to the A312 Bond Form

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In 1984, Apple introduced the first mac computer, the world had only met Vice President George Bush, Miami Vice altered men’s fashion (for the better?), and the American Institute of Architects released the A312 Payment and Performance Bond forms.  The A312 bond forms have only grown in popularity over the years.  They have become some of the most commonly used forms for projects throughout the country.  This year, the AIA has released revised versions of the bond forms.  In this two-part series, we examine the most significant changes in each of the Payment and Performance Bond forms. 

For quick reference and a more thorough comparison, the AIA has provided a handy side by side comparison chart of the A312-1984 and A312-2010 Payment and Performance Bond forms which can be found . 

A312 – 2010 Payment Bond

Most significant, the A312-2010 Payment Bond addresses the consequence of the notorious Bramble case, Nat’l Union Fire Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005).  As most sureties are aware, following the Bramble ruling, a surety may waive its defenses for any portion of a payment bond claim if the surety does not strictly comply with Section 6 of the A312 payment bond which requires a surety within 45 days after receipt of the claim, to state the amounts that are undisputed and the basis for challenging any amounts that are disputed.  A surety must also pay or arrange for payment of any undisputed amount. 

The revised A312-2010 bond form Sections 7.1 and 7.2 increases the timeframe for a surety to respond and arrange for payment of undisputed amounts to a claimant from 45 days to 60 days.  New Section 7.3 expressly provides that a surety’s failure to discharge its obligations under Section 7.1 and 7.2 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a Claim, except as to undisputed amounts for which the Surety and Claimant have reached agreement.  However, if a Surety does fail in its obligations under Section 7.1 or 7.2 the Surety must indemnify the Claimant for reasonable attorney’s fees incurred to recover any sums found to be due and owing to the Claimant. 

Another significant revision of the A312 Payment Bond is the claim submission process.  Section 5 requires claimants to submit “Claims” to the surety, not just “Notice” of a claim.  Section 16.1 of the Bond defines “Claim” which requires a Claimant to submit a written statement and at a minimum the following:

  1. The name of the Claimant;
  2. The name of the person for whom the labor was done, or materials or equipment furnished;
  3. A copy of the agreement or purchase order pursuant to which labor, materials or equipment was furnished for use in the performance of the Construction Contract;
  4. A brief description of the labor, materials or equipment furnished;
  5. The date on which the Claimant last performed labor or last furnished materials or equipment for use in the performance of the Construction Contract;
  6. The total amount earned by the Claimant for labor, materials, or equipment furnished as of the date of the Claim;
  7. The total amount of previous payments received by the Claimant; and
  8. The total amount due and unpaid to the Claimant for the labor, materials or equipment furnished as of the date of the Claim. 

The changes to the claims process is intended to prevent claimants from submitting bare bones notice of claim in the hopes that a surety will be unable to timely respond.  As with any bond form, time will tell whether the new payment bond form will be widely adopted.  At a minimum the new A312 – 2010 Payment Bond addresses the significant challenges and concerns faced by sureties struggling to properly investigate a claim without waiving its entire defense of the claim under the Bond. 

Next time, we will review the more significant changes of the AIA A312-2010 Performance Bond. 

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