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The Masquerade of Low
Bids – How To Protect
Performance Bond Claims
Indian Wells, California
May 14, 2010
Performance Bond Claims
– Incorporation into Contract
– Triggering the Bond - Default by Principal
– Claim against Surety
– Surety “takeover” or “tender”
– Surety defenses
Incorporation Into Contract
• Most prime contracts incorporate performance
bonds by reference (and vice versa). What does
that mean to a public agency?
– Agency may seek damages from surety consistent with
that of principal (i.e., the contractor).
• Recovery of attorneys’ fees by prevailing party (if set forth in
bond or prime contract).
• Recovery of liquidated damages called for in prime contract.
• Understand the public agency’s obligations under
the bond and contract.
Default by Principal
• Surety’s obligations are triggered by a default
in contractor’s obligations. Default events
are typically defined in the contract.
• Failure to adequately staff project
• Failure to maintain schedule
• Failure to pay subcontractors/suppliers
• Upon default, contract and bond notice
requirements must be followed.
Claim against Surety
• Understand and comply with conditions
precedent for pursuing a claim against
• Dictated primarily by language set forth in the
Bond Requirements – AIA
Example (Document A312 – 1984)
• § 3 If there is no Owner default, the Surety's obligations under this Bond
shall arise after:
• § 3.1 The Owner has notified the Contractor and the Surety that the
Owner is considering declaring a Contractor Default and has requested
a conference with the Contractor and the Surety to be held not later than
fifteen days after receipt of such notice to discuss methods of
performing the Construction Contract; and
• § 3.2 The Owner has declared a Contractor Default and formally
terminated the Contractor's right to complete the contract. (Default shall
not be declared earlier than twenty days after the Contractor and the
Surety have received notice as provided in Section 3.1); and
• § 3.3 The Owner has agreed to pay the Balance of the Contract Price to
the Surety in accordance with the terms of the Construction Contract or
to a contractor selected to perform the Construction Contract in
accordance with the terms of the contract with the Owner.
Surety “Takeover” or “Tender”
• Methods a surety may employ to satisfy its obligations:
– Takeover (surety enters into a contract with another contractor to
complete the work).
• Takeover Agreement (among public agency, surety and takeover
• Public Agency should demand that original contract terms be
incorporated into Takeover Agreement.
• Don’t let surety of the hook – surety might try to reduce damages arising
from original contract (e.g., delay damages) or limit surety’s exposure to
the amount of bond.
– Tender (surety requests or permits owner to complete the work).
– Surety finances defaulted contractor to complete work (rarely
– Surety allows defaulted contractor to sublet completion of its work
• Failure to satisfy conditions precedent.
• Wrongful termination/default of contractor.
• Owner default (e.g., payment issues,
defective plans/specifications, etc.).
• Exoneration (e.g.: contract is materially
altered after the surety executes the bond;
contractor is paid for work that hasn’t been
performed (front-loaded payments).