Contract Bond FormsContract Bond Forms

What to Look For and What Might be MissingWhat to Look For and What Might be Missing

Presented byPresented by

Steve NelsonSteve NelsonEVP & General Counsel

SureTec Insurance Company

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BIOGRAPHYBIOGRAPHYSteve Nelson is the Executive Vice President and General Counsel of SureTec Insurance Company and President of SureTec Information Systems, Inc. Prior to SureTec, he practiced construction law for 20 years in Dallas, Texas, and was CEO of a large commercial construction company in Central Texas for six years. Mr. Nelson oversees SureTec’s Claims, Funds Disbursement, and Subcontractor Prequalification operations, mediates construction industry disputes for others, and teaches construction and procurement law and dispute resolution at the University of Texas, where he is an adjunct faculty member in its School of Engineering. He is a Fellow of the Center for Public Policy Dispute Resolution and a Distinguished Credentialed Mediator by the Texas Mediator Credentialing Association. He is a Fellow of the American College of Construction Lawyers and a past Chairman of the Construction Law Sections of the State Bar of Texas, Austin Bar Association, and Dallas Bar Association. He is active in the ABA Fidelity & Surety Committee, the ABA Forum on the Construction Industry, the Surety Claims Institute, and National Bond Claims Institute.

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What are we looking for?What are we looking for?

Terms that expose the surety and/or the Terms that expose the surety and/or the contractor to risks that are:contractor to risks that are:

beyond commercially reasonablebeyond commercially reasonable

unconscionableunconscionable

unmanageableunmanageable

not “underwriteable”not “underwriteable”

beyond our appetites for riskbeyond our appetites for risk

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Why are we looking?Why are we looking?

To protect the suretyTo protect the surety To protect the contractorTo protect the contractor To preserve relationshipsTo preserve relationships To keep risks allocated to those best able To keep risks allocated to those best able

to handle/avoid/protect against themto handle/avoid/protect against them

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Where are we looking?Where are we looking?

In the bond formsIn the bond forms In the underlying contractsIn the underlying contracts In statutes, regulations, general In statutes, regulations, general

conditions, and other places that might conditions, and other places that might “read something in” to the bond liability“read something in” to the bond liability

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And what happens when we And what happens when we find a problem?find a problem?

Consider its implications and proceed Consider its implications and proceed without changeswithout changes

Suggest a different bondSuggest a different bond Make changesMake changes Negotiate for better termsNegotiate for better terms Not write the bondNot write the bond Write the bonds with additional premium, Write the bonds with additional premium,

safeguards, controls, etc.safeguards, controls, etc.

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Terms that make it easier for the obligee to pull Terms that make it easier for the obligee to pull the trigger and invoke the surety’s liabilitythe trigger and invoke the surety’s liability

Terms that increase the surety’s monetary Terms that increase the surety’s monetary liability beyond that originally stated in the bondliability beyond that originally stated in the bond

Terms that vary the burden or proof Terms that vary the burden or proof Terms that limit the options available to the Terms that limit the options available to the

surety in the event of defaultsurety in the event of default Terms that enlarge upon the obligations coveredTerms that enlarge upon the obligations covered Terms that control the length of time the surety Terms that control the length of time the surety

remains liableremains liable

Performance Bonds- What to look for

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Bond Terms & ProvisionsBond Terms & Provisions that make it easier to trigger surety liability- that make it easier to trigger surety liability-

breach, default, termination, or none of the abovebreach, default, termination, or none of the above

COMPARECOMPARE•The Surety further agrees that in the event of a The Surety further agrees that in the event of a breachbreach of the Contract on the part of the of the Contract on the part of the Principal (as determined by the Principal (as determined by the sole discretionsole discretion of of the Obligee)…the Obligee)…

•In the event the Principal is in In the event the Principal is in defaultdefault in any in any respect and/or there is a respect and/or there is a terminationtermination under the under the Contract in accordance with the terms thereof, Contract in accordance with the terms thereof, the Surety shall..the Surety shall..

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Bond Terms & ProvisionsBond Terms & Provisionsthat increase the surety’s $ liability that increase the surety’s $ liability beyond the bond’s penal amountbeyond the bond’s penal amount

• In addition to waiving notice of changes, In addition to waiving notice of changes, extensions of time, etc. the bond (or an extensions of time, etc. the bond (or an incorporated contract term) adds: incorporated contract term) adds:

“ “The penal sum of this Bond shall The penal sum of this Bond shall automatically be adjustedautomatically be adjusted to reflect the to reflect the addition or subtraction of amounts of all addition or subtraction of amounts of all change orders change orders issuedissued.”.”

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Bond Terms & ProvisionsBond Terms & Provisionsthat increase the surety’s $ liability that increase the surety’s $ liability beyond the bond’s penal amountbeyond the bond’s penal amount

• If the Surety fails to remedy the If the Surety fails to remedy the Principal’s default then Principal’s default then Surety shall paySurety shall pay Obligee’s attorneys’ fees and costs Obligee’s attorneys’ fees and costs incurred in enforcing Surety’s incurred in enforcing Surety’s obligations hereunder, and such obligations hereunder, and such obligation shall be in addition to and obligation shall be in addition to and not a part of the not a part of the penal sumpenal sum of this of this Bond.Bond.

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Bond Terms & ProvisionsBond Terms & Provisionsthat increase the surety’s $ liability that increase the surety’s $ liability beyond the bond’s penal amountbeyond the bond’s penal amount

• Any provision that could expose the Any provision that could expose the surety’s liability beyond the penal sum surety’s liability beyond the penal sum of the bondof the bond

• Example : AIA provisions not limiting Example : AIA provisions not limiting exposure on surety takeoverexposure on surety takeover

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Bond Terms & ProvisionsBond Terms & Provisionsthat vary the burden of proofthat vary the burden of proof

• In the event of a In the event of a dispute between Surety dispute between Surety and Obligeeand Obligee related to the Contract or related to the Contract or the Bond, the dispute shall be resolved the Bond, the dispute shall be resolved by the dispute resolution procedures set by the dispute resolution procedures set forth in the Contract. Surety shall be forth in the Contract. Surety shall be bound by any decision or ruling issued bound by any decision or ruling issued in in any legal proceedingany legal proceeding relating to the relating to the Contract involving Contract involving Obligee and PrincipalObligee and Principal concerning Principal’s obligations under concerning Principal’s obligations under the Contract.the Contract.

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Bond Terms & ProvisionsBond Terms & Provisions that vary the burden of proofthat vary the burden of proof

• Surety does hereby relieve the Obligee Surety does hereby relieve the Obligee or its representatives from the exercise or its representatives from the exercise of of any diligence whatsoeverany diligence whatsoever in securing in securing compliance on the part of the compliance on the part of the Contractor with the terms of the Contractor with the terms of the Contract and the Surety hereby Contract and the Surety hereby waives waives any notice of default or delayany notice of default or delay and and agrees that the Surety shall be bound to agrees that the Surety shall be bound to take notice of and shall be held to have take notice of and shall be held to have knowledge of all acts and omissionsknowledge of all acts and omissions of of the Contractor.the Contractor.

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Bond Terms & ProvisionsBond Terms & Provisions that vary the burden of proofthat vary the burden of proof

Consider, for example, arbitration Consider, for example, arbitration provisions in a bond form or underlying provisions in a bond form or underlying

contractcontract•Is the Surety bound to arbitrate?Is the Surety bound to arbitrate?•Or…just bound by the factual results of Or…just bound by the factual results of the principal’s arbitrationthe principal’s arbitration•Or…not bound at allOr…not bound at all

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Bond Terms & ProvisionsBond Terms & Provisionsthat limit options available to the that limit options available to the

suretysurety

Anything that does not give the Surety all of its Anything that does not give the Surety all of its traditional options, ie:traditional options, ie:

•Cure/Finance/Shore upCure/Finance/Shore up•Take overTake over•Re-letRe-let•Deny LiabilityDeny Liability

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Bond Terms & ProvisionsBond Terms & Provisionsthatthat enlarge upon the obligations enlarge upon the obligations

coveredcovered

• Personal injury obligationsPersonal injury obligations• Obligations covered by insuranceObligations covered by insurance• Infringement of patent, trademark and Infringement of patent, trademark and

copyrightscopyrights• Liable, slander, defamationLiable, slander, defamation• Gross negligenceGross negligence• Negligence of the Obligee, Obligee’s agents Negligence of the Obligee, Obligee’s agents

and employeesand employees• Consequential DamagesConsequential Damages

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Bond Terms & ProvisionsBond Terms & Provisionsthat control the length of time a that control the length of time a

surety remains liablesurety remains liable

Does the bond containDoes the bond containNo limitation on time to file suit?No limitation on time to file suit?A specified, but long period of time, A specified, but long period of time, to file suitto file suitA time to file suit that is A time to file suit that is unenforceableunenforceable

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Bond Terms & ProvisionsBond Terms & Provisionsthat control the length of time a that control the length of time a

surety remains liablesurety remains liable

• Savings clauses:Savings clauses:• If any limitation embodied in this bond If any limitation embodied in this bond

is prohibited by law controlling is prohibited by law controlling construction hereof, such limitation construction hereof, such limitation shall be deemed to be amended so as shall be deemed to be amended so as to be to be equal to the minimum period of equal to the minimum period of limitation permitted by such law.limitation permitted by such law.

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Payment Bond Terms Payment Bond Terms & Provisions& Provisions

What are we looking for:Terms that vary the definition of a claimantTerms that vary notice requirements for perfection of claimsTerms that control the length of time the surety remains liable

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Payment Bond Terms Payment Bond Terms & Provisions & Provisions

– definition of claimant– definition of claimant How many tiers are covered?How many tiers are covered?

Sticks and bricks…or overhead, home office, Sticks and bricks…or overhead, home office, taxes, insurance premiums and similar items?taxes, insurance premiums and similar items?

Just those that are lienable?Just those that are lienable?

Named Obligee too?Named Obligee too?

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Payment Bond Terms Payment Bond Terms & Provisions & Provisions

– notice requirements– notice requirements

What notice is the surety entitled to?What notice is the surety entitled to? How about the principal?How about the principal? Every tier required to give notice, or just Every tier required to give notice, or just

those not in privity?those not in privity? Does the notice run from time of Does the notice run from time of

delivery? Last delivery? End of project?delivery? Last delivery? End of project?

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Payment Bond Terms & Payment Bond Terms & Provisions Provisions – – length of time the length of time the

surety remains liablesurety remains liable

Does the bond containDoes the bond containNo limitation on time to file suit?No limitation on time to file suit?A specified, but long period of time, A specified, but long period of time, to file suitto file suitA time to file suit that is A time to file suit that is unenforceableunenforceable

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Payment Bond Terms & Payment Bond Terms & Provisions Provisions – – length of time the length of time the

surety remains liablesurety remains liable

• Savings clauses:Savings clauses:• If any limitation embodied in this If any limitation embodied in this

bond is prohibited by law controlling bond is prohibited by law controlling construction hereof, such limitation construction hereof, such limitation shall be deemed to be amended so shall be deemed to be amended so as to be as to be equal to the minimum equal to the minimum period of limitation permitted by such period of limitation permitted by such law.law.

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Questions/Comments?

Steve Nelson(512) 330-1850 Direct

(512) 732-8010 Direct Faxsnelson@surete.com

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