Protecting the Job (Surety) Flashcards
Difference between surety and insurance
Surety provides guarantee, insurance based on indemnity principle
Indemnity principle
Insured indemnified for loss to the actual property for the actual lose
Surety bond
- Owners often require them
- Default: owner can call upon surety bond to complete obligation
Surety bond can be a pre-qualification tool
confirms tenderer has cash, character, capability, credit and continuity to pursue project (will only issue if they think you will get it done)
When will surety not be liable?
If default attributable to obligee
4 Criteria establish obligation in surety ship
- Must be a tripartite relationship
- Surety’s obligation must be collateral or accessory to the obligation of the principal
- Surety’s obligation to obligee must be the same as or less than the obligation of the principal
- The surety must be unconnected to the transaction except as surety
Tripartite Relationship
- involving the principal, the surety and the obligee
- Principal= general/subcontractor—person who bonds the job
Surety’s obligation must be collateral or accessory to the obligation of the principal
Surety’s obligations only triggered if principal defaulted
Principle not absolved
surety will seek recovery against principal
Accommodation Surety’s
Relationship entered into without expectation of renumeration, to accommodate and assist people (ex: parents cosigning)
*not common in construction
Compensation surety
entered with the sole objective of profit and gain, enter with the expectation they will profit
Types of surety bonds
- Bid bond
- Performance bond
- Labour and material payment bond
- Lien bond
Bid Bond
surety obligation assuring that if tender is selected the principal will enter into contract B
If principal defaults (bid bond)
defaults surety will pay oblige the difference between the bid of the principal and the amount of the substituted contract
If new contract price lower (bid bond)
surety may be absolved from paying
When will surety not be liable for bid bond
If a valid reason exists for principal not to enter into contract B
Performance bond
promises that if the principle defaults the surety will either remedy the default, complete the contract, or obtain bids to complete (pay difference to penal sum)
Penal Sum
bond creates a maximum amount of compensation the surety will provide (specified in contract)
What can surety pay in performance bond?
the lesser amount of the penal sum OR the obligee’s proposed cost of completion minus the balance of the contract price
Remedying the default (performance bond)
surety finances increased labour and material to get the job done
Completing the work
surety becomes contractor and responsible for hiring trades and suppliers (contracts assignable if penal sum reached)
Obtain bids
retender work and present lowest bid to obligee, if no complaints about the tender contract and obligee still says no the performance bond is discharged (pay difference to penal sum)
CA debate on what scope of performance bond is
- ON: surety obliged to fulfill all principals obligation including collateral financial obligations
- SASK: surety obligation limited to completing physical construction obligation
Surety defences to escape liability in performance bonds
- Underlying contract is unenforceable
- No default
- Failure to give notice
- Default can be traced back to obligee
- If there is a material variation between the principal and the obligee made to the contract without the surety’s consent
- Limitation for actions: standard bond has limitation period of two years
- Obligee has not suffered damages from principal’s default
- Obligee does not have a bond under seal at the time the claim is made
Failure to give notice
Obligee needs to give timely notice to surety of default that may lead to calling upon the bond AND actual prejudice suffered by the surety
What is the limitation period for performance bond calculated from?
The earlier of:
- The date from which the project is substantially performed
- Building in use
- Principle defaults
Labour and Material Payment Bond
surety’s obligation is to step in and pay principal’s direct subcontractors and suppliers if the principal fails to do so
Federal Government version of Labour and Material Payment Bond
the class is extended to second tier claimants (sub-sub-contractors)
Labour and Material Payment Bond limited to claimants who…
have provided labour and material that is reasonably required to be used in performance of the contract
Owner duty to disclose under Labour and Material Payment Bond
no duty to disclose the existence of the bond to possible claimants until someone makes a clear and unequivocal request about the bond
Defences for surety in Labour and Material Payment Bond
1) Failure to obtain proper notice (prejudice)
2) 1 year limitation period on the bond following the date on which the principal worked on the contract
*Material variation not a defence
Proper notice in Labour and Material Payment Bond
Standard bonds require 120 days after they have been paid in full
Lien Bond
- allows title to property subject to liens to be cleared
- Lien attaches to the bond instead of land
When are lien bonds registered?
Registered at the outset of asserting lien rights (not an admission of guilt)
If lien claim not made out (lien bond)
claim re-delivered to surety for cancelation
Lien bond needs to guarantee enough money to…
pay out lien claims
