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The Masquerade Of Low Bids_Phillips

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  • 1. The Masquerade of Low Bids – How To Protect Your City: Performance Bond Claims Indian Wells, California May 14, 2010 1
  • 2. Performance Bond Claims Performance Bonds – Incorporation into Contract – Triggering the Bond - Default by Principal (Contractor) – Claim against Surety – Surety “takeover” or “tender” – Surety defenses 2
  • 3. . . 3
  • 4. 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. 4
  • 5. Default by Principal • Surety’s obligations are triggered by a default in contractor’s obligations. Default events are typically defined in the contract. – Examples: • Failure to adequately staff project • Failure to maintain schedule • Failure to pay subcontractors/suppliers • Upon default, contract and bond notice requirements must be followed. 5
  • 6. Claim against Surety • Understand and comply with conditions precedent for pursuing a claim against surety. • Dictated primarily by language set forth in the bond. 6
  • 7. 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. 7
  • 8. 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 contractor) • 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 happens). – Surety allows defaulted contractor to sublet completion of its work (rarely happens). 8
  • 9. Surety Defenses • 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). 9
  • 10. 10