Don’t Pay for Your Performance Bond More than Once

Bill Wilson | Construction Law Zone

An often-overlooked part of contract negotiations is the language included in the performance bond.  While the owner or contractor (bond obligee) requires a performance bond and pays for it, negotiating efforts are typically spent on the main contract language itself rather than the bond.  A common go-to performance bond form used in the construction industry is the AIA A312-2010 (A312).  If the bond obligee fails to make a simple change to the A312 form language, it can end up costing the bond obligee far more later when it seeks to enforce the bond and the surety declines coverage.

The A312 includes several express conditions precedent that must be satisfied before a surety’s obligation to respond to a claim on the bond is triggered.  The conditions precedent are contained in Section 3 of the A312.  Section 3 requires the bond obligee to provide notice of its intention to declare a default, an opportunity to cure, the declaration of default, and actual termination of the subject contract.  Section 5 of the A312 identifies the surety’s response options after the bond obligee satisfies the conditions in Section 3.  Many courts have held that the failure to strictly comply with all of the A312 Section 3 requirements renders the bond null and void and completely discharges the surety from all obligations under the bond.  A general contractor in Massachusetts recently learned this the hard way.

In Arch Insurance Co. v. Graphic Builders, LLC, 36 F.4th 12 (1st Cir. 2022), the contractor (bond obligee) made a claim under an unmodified A312 performance bond against a window supplier and its surety to pay for the multi-million-dollar cost to correct defective windows and to get a window warranty.  The contractor declared a default, but did not terminate the window supplier’s contract on the legitimate belief that since the work was substantially complete, such an option would have been a wrongful termination under Massachusetts common law.  The Circuit Court of Appeals acknowledged the contractor’s dilemma, but enforced the termination requirement in Section 3 in the A312 and affirmed the district court’s entry of summary judgment discharging the surety from liability on the bond.  The Court simply enforced the language in the bond to which the contractor had agreed.  As a result of not modifying the A312, the contractor was stuck not only with the cost of the bond and the window repair costs, but also significant legal fees to arrive at this court decision.

It is not uncommon for a claim against a performance bond to be asserted at the end of a project, after a party to the contract learns something went wrong and needs to be fixed.  To avoid the fate of the contractor in Graphic Builders, a bond obligee should remove the termination requirement in section 3.2 of the A312 (and from any other performance bond containing similar language), while negotiating the overall contract, to limit the final condition precedent in the bond to the declaration of a contractor default.  The bond obligee should not have to terminate the contract before the surety’s obligations are triggered and deal with the other potential issues that might accompany such an action late in a project.  Notice to the surety and principal that the bond obligee is considering declaring a default, providing an opportunity to cure, and a declaration of default should be all that is necessary before the bond obligee is entitled to the benefits of the performance bond for which it has paid.    


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Ways to Guard Against Insolvency Risks

Colm Nelson | Stoel Rives

Headlines such as “US set for recession next year, economists predict,” from the June 12 edition of the Financial Times, are a reminder insolvency risks are real and should be top of mind when moving forward with new construction projects. But there are ways to mitigate the risks.

Performance bonds, as their name implies, hold a surety jointly and severally liable to the owner for the contractor’s performance of the work. Depending on the bond’s form, if the contractor becomes insolvent and is put into default, the surety can either perform the work itself or indemnify the owner for costs incurred hiring a replacement contractor. Convincing a surety to take over a contract following a contractor’s default is not easy. When sureties do agree, the contractor is often insolvent. Generally, if the surety takes over under a bond, it steps into the defaulting contractor’s shoes.

A payment bond is different. Under this type of bond, the surety is jointly and severally liable to, and/or will indemnify, the owner against claims and liens by subcontractors retained under the prime contractor. The surety’s obligation to act under the bond may be contingent upon the owner paying the prime contractor in accordance with the contract. When a subcontractor lien is filed, the owner will notify the surety, and in theory, the surety will cause removal of the lien through a lien release bond or otherwise.

In deciding whether to issue either form of bond, a surety will typically scrutinize a contractor’s financials and require the contractor to indemnify and hold harmless the surety against any losses it incurs under the bond. This is one of the major differences between bonds and insurance policies: insurers cannot seek reimbursement from their insureds for amounts paid out under the policy, whereas sureties can require reimbursement from the obligor (contractor) for any losses incurred by the surety under the bond. Also, insurance policies can be modified only through boilerplate endorsements, and the language is often take-it-or-leave-it. In contrast, owners have input into how bonds are drafted and should negotiate for favorable language.

The surety may also require personal guarantees from the contractor’s ownership team. Whether a contractor is bondable or not is a “stress test” that can provide a sense of the contractor’s financial health. If the contractor is not bondable, or has relatively low bonding capacity (i.e., the surety will issue bonds covering only a small dollar value), that could signal a failing grade.

As further protection, owners can consider structuring payments, not based on the contractor’s costs incurred, but based on the contractor hitting milestones throughout the project, so that payments are conditioned on progress. Depending on state law, the owner may elect instead, or in addition, to withhold retainage from each contractor draw. One problem with retainage is that it includes amounts earmarked for subcontractors, and withholding amounts due subcontractors because of prime contractor defaults will likely result in subcontractor liens. For retainage to protect against prime contractor default, it should be withheld from the contractor’s general conditions and/or fee.

Contractors also have tools to guard against solvency risks. In the standard AIA agreements, the contractor can request proof of financial arrangements for the project from the owner, both before the project begins and at certain times during the project, including when the contractor identifies in writing a reasonable concern regarding the owner’s ability to make payment when due. Sections 2.2.1 & 2.2.2, General Conditions of the Contract for Construction, A201 – 2017 (General Conditions). The owner’s financial arrangements should not materially vary without notice to the contractor. And should the owner fail to provide the information, the contractor can terminate for default. Section 14.1.1.4, General Conditions.

To guard against subcontractor insolvency, more and more prime contractors are acquiring subcontractor default insurance (SDI), which, when triggered, reimburses the contactor against certain costs incurred as a result of an enrolled subcontractor defaulting. Because subcontractors often work with the prime contractor on multiple projects, if a subcontractor fails, this can have a domino effect, ending in financial distress for the prime contractor. SDI can pass some or most of that risk onto the insurer, for a premium. Some contractors will in turn pass through the cost of the SDI premium and deductible to the owner as a cost of the work. Owners, however, typically have no rights under the insurance, unless both the contractor and subcontractor are insolvent, and therefore many do not agree to pay for this cost and/or markup on the cost. Owners often view the benefits of SDI as duplicative of payment and performance bonds and refuse to pay for SDI on this basis when the project is already bonded.

Contractors typically have mechanic’s lien rights arising from state law, which can provide some security for unpaid invoices, depending on the amount of equity in the project and whether the contractor has priority over the security interests of the project’s lender. However, an often-overlooked tool is what is referred to as a “stop notice” or “notice to lender.” Under some states’ laws, a contractor can issue a notice to the lender of non-payment and, if the lender fails to take certain actions, namely withhold payment to the owner, future payments issued by the lender to the owner become subordinated to any lien recorded by the claimant who issued the notice. Gaining priority ahead of the lender can be the difference between getting paid or not. This tool is not without risk. For wrongfully issuing a notice to the lender, claimants may face exposure for attorney’s fees and costs incurred by the owner and lender, as is the case in Washington.

A year ago, this author wrote about the early impacts of price escalation, which we have seen bleed into 2022. Hopefully, we’ll avoid the recession that some economists are predicting, and my next article will be on a more upbeat topic.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Performance Bond Primer: Need to Knows and Need to Dos

Rafael Boza | Gravel2Gavel

If you are a construction contractor, you deal with performance bonds as part of your business and daily work. They are necessary for almost every project you are participating or will participate in, and, along with other sister bonds, constitute a basic tool to be able to work in construction. However, how much do you really know about this tool? Who in your organization knows how to use it? Are you relying on your insurance broker to procure the bonds? Can your broker competently review the terms of the bond? Are you, as a contractor, relying on the surety to explain and determine what you need for the project—a fox guarding the hen house?

To understand how a performance bond works and how to effectively tailor it to your needs, we need to understand the basics. What is a performance bond? Who are the parties to a performance bond? What does performance bond not do? What should be covered under a performance bond? How does a performance bond fit in a company’s overall risk management processes? A clear understanding of these and other basic topics will facilitate operations and reduce the risk of claims.

This post will not directly address Federal performance bonds or bonds for governmental projects under the Miller Act, which, although they have similar features, are not exactly the same.

What Is a Performance Bond?
First and foremost, a performance bond is a contract. By this contract, a party promises another to fulfill a third party’s contractual obligations. This will translate, typically, into the financial burden to “do” or “perform,” which for a contractor are the costs of completing a project. As any other contract, a performance bond is fully governed by the terms contained in it and will be evaluated based on those terms.

The companies issuing performance bonds typically use templates or you may receive a template from your client, most likely the general contractor in the project. Do not accept these documents without a thorough review of the terms in them and without making sure that those terms match the terms of your agreement; include only the obligations you are assuming under your contract for work. In this post, we will refer to a specific template endorsed by the American Institute of Architects, Form A312TM-2010, as an example of a commonly used performance bond. Please review this or any other bond form thoroughly before signing.

Do not be afraid to negotiate with the company issuing the bond or with the client requesting it. Request changes if the performance bond document does not reflect the terms of your agreement. Too many contractors simply sign without reviewing, assuming risks far beyond what they should. Yes, your salespeople will, and your client may, complain and consider you difficult; however, these are also the things that show your experience and competency. Do not neglect them.

Need to Know #1: Know that the performance bond matches your needs, the needs of the Contractor, in the specific project.

Need to Do #1: Read the performance bond to determine if that is the case.

Who Are the Parties to a Performance Bond?
As mentioned above a performance bond is a contract with three (3) parties. Not all three parties sign the performance bond contract, but all three are named and benefit from it. Also, these parties may have different names, as traditionally has been used in the industry or based on the jurisdiction’s laws.

First is the party who needs the performance bond to perform work—the Contractor. Under the above-mentioned Form A312TM-2010, the party soliciting the bond is, unsurprisingly, called “Contractor.” This party is also referred to as the “Principal,” as this is the party with the main obligations under the contract for work, and it is the party who receives the main benefit from the bond—namely access to the work. Under the Restatement (Third) of Suretyship and Guaranty, the contractor is called the “Principal Obligor,” as this is the party who has to perform the obligations under the applicable construction contract (the work) and, naturally, the party who is ultimately responsible for paying the owner or general contractor for any failure to perform. Other terms used to refer to this party are “Primary,” “Primary Obligor,” or simply “Debtor.”

Second is the party issuing the performance bond—the Surety. Form A312-2010 uses that same name for this party, “Surety.” The Restatement calls it the “Secondary Obligor” because this party typically responds after the Principal, the Contractor, the first line of defense, has failed to comply. The term “Guarantor” is also used, although less favored, as this may be confused with other parties which may be providing other security for the project.

Third is the party who is receiving the performance from the Contractor. This party is normally the owner of or general contractor in the project. Form A312-2010 calls this party the “Owner.” The Restatement uses the term “Obligee,” although you may also find it referred to as the “Creditor.”

In addition, we need to identify the source and scope of the Contractor’s obligations which are protected by the performance bond. These are normally found in the contract for work, which defined the scope of the Contractor’s work in the construction project. The construction contract is referred to by Form A312-2010 as the “Construction Contract” while the Restatement uses the term “Underlying Obligation.” Other terms used are “Primary Obligation” or “Principal Obligation.”

Thus, based on our definition of the performance bond contract above (a party promises another to fulfill a third party’s contractual obligations to do something) we can now define this contract as: the Surety promises the Owner to fulfill the Contractor’s obligations to perform as agreed in the Construction Contract.

Need to Know #2: Know who the parties to the performance bond are—you (the Contractor), your Surety, and your client (the Owner).

Need to Do #2: Be certain that these are the only parties who are named in the performance bond, and no others.

Clarifying What a Performance Bond Is Not
A performance bond is not an insurance policy, or an insurance contract, and it is not a payment bond, or a bid bond. These are all different instruments which may be required, and typically they are, for a construction project. Let’s do a high-level exploration of the differences.

A performance bond is not an insurance policy, or an insurance contract. As described a performance bond is a three-party contract. If there is a claim under the performance bond the Surety pays the Owner, bypassing the Contractor. An insurance contract, also known as a policy, is only a two-party contract (insured and insurer), by which the insurer, the insurance company, will compensate the insured, the Contractor, when a covered loss occurs.

A performance bond is not a bid bond. A bid bond is a preliminary bond the Contractor will issue to win the project. This is a bond issued before the Contractor is even hired. Bid bonds are issued, as the name implies, during the bid process, to help the Owner select which contractor will get the project. The bid bond ensures that the contractor will stand by its bid if it is selected as winner. On the other hand, the performance bond guarantees payment for the Contractor’s default, and it is issued after the Owner and Contractor have finalized the construction contract. Once that happens, the bid bond is normally cancelled.

A performance bond is not a payment bond. Although similar and sometimes bundled together, they are different because the payment bond is designed to guarantee that the Contractor pays its suppliers down the supply-chain line. These include, but are not limited to, laborers, vendors, subcontractors, etc. While, on the other hand, the performance bond, as mentioned above, guarantees payment for the Contractor’s default on its obligations under the construction contract, such as complete the construction of a furnace at the Owner’s plant.

A performance bond is not a warranty bond. Although also similar, they are different because the warranty bond is designed to guarantee that the Contractor will comply with its warranty obligations. For example, if you, as a Contractor, warrant to the Owner that a piece of equipment will perform to specifications for 24 months and, on month 18 the equipment fails, the Contractor is obligated to repair or replace. If you fail to perform this post-construction obligation, the Owner may collect from the bond. Thus, the warranty bond covers your obligations after the construction is completed. On the other hand, the performance bond, covers your obligations and protects the Owner against your default while you are working on the project.

A performance bond is not a letter of credit (LOC). An LOC is a promise by a bank that has obtained cash from or given credit to the Contractor, to pay the Owner, on the Contractor’s behalf, for an approved project, up to the stated LOC amount. The only requirement to trigger the bank’s obligation to pay is, normally, that the Owner makes written demand on the LOC. Sometimes, the Owner has to provide some evidence, such as invoices or other documents showing failure to perform, and the bank will immediately pay for them. An LOC is almost like giving cash to the Owner. This is radically different from the performance bond, which as mentioned guarantees payment for the Contractor’s default and has procedural and substantive protections.

Finally, a performance bond is not a “lottery ticket.” The Owner cannot simply waltz into the Surety’s office and demand payment. The Owner must comply with the procedures established in the bond and show the Contractor’s default and the damages caused. Under Form A312, the Owner must provide timely notice; allow for the Surety’s investigation of the alleged default; and sometimes, submit to meetings. Also, the Surety may propose solutions to the alleged Contractor’s default and “mediate” between the Owner and the Contractor to find a solution.

Need to Know #3: Know with certainty that the terms of the document you received from the Surety are in fact those of a performance bond. (You do not want to pay the Surety and provide the Owner the wrong document.)

Need to Do #3: Be sure that the terms of the performance bond match those you need and are not confused.

What Should Be Covered under a Performance Bond?
Your obligations under the Construction Contract and nothing more. Form A312 makes that very clear when it says “[the] Contractor and the Surety … bind themselves … to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.”

The drafting of Form A312 is broad; it includes all obligations under the construction contract. That is not ideal, although it is very common. However, it is important to limit the ability of the Owner to claim on the bond only when the default is material or involving the “core” obligations under the construction contract, such as the scope of work.

The performance bond should specify the actual, material work performance obligations agreed in the contract—the scope of work—and not include other ancillary obligations which are part of the overall construction contract but are not “core” to it. These secondary obligations may include, but are not limited to, providing weekly progress reports, providing notices, keeping files in a certain manner or in a certain location, providing employees or supplier’s lists, cleanup of work areas, etc.

The easiest way to accomplish this is to prepare a scope-of-work document and include it in the performance bond or refer to it. Then, limit the obligations under the performance bond to only those listed in the construction contract scope of work document. Other, less specific, methods of accomplishing this may include specifying that the performance bond responds for defaults of “material” obligations under the construction contract, as opposed to “all” obligations under the contract.

How you accomplish this is less important than actually accomplishing it. Keep in mind that this will require a double negotiation. On one side the Owner, who would like to have the broadest protection possible, and on the other hand the Surety, who would like to limit its exposure and provide the narrowest coverage possible.

Need to Know #4: Know you can and should negotiate the terms of the performance bond—with the Owner and the Surety—to include only those items you are interested in covering.

Need to Do #4: Prepare a document containing details of the scope of work you want to cover under the performance bond. (This document may also serve as a negotiating tool for the construction contract.)

How Does a Performance Bond Fit in Your Overall Risk Management Plan?
Never mind if you are a small or large construction contractor, you must have a risk management plan. Your risk management plan should include, among others, (i) your contract negotiation methods and preferred terms—scope restrictions, limitations of liability, liquidated damages, etc., (ii) your insurance policies, (iii) your safety procedures, and (iv) your bonding program.

Your bonding program, large or small, will allow you to consolidate your presence in your market as a reputable contractor. A solid bonding program will not only allow you to bid on projects (bid bonds), but it also signals to your clients that you are a reputable contractor who will make good on its obligations. The backing of the surety, who is willing to trust you, gives a strong signal to your clients.

Normally, your program should include the bonds that we have discussed above, which are: (i) the bid bond, (ii) the performance bond, (iii) the payment bond, and (iv) the warranty bond. You should work with your broker to find a suitable bonding company to establish a relationship with. Your broker and the surety will assist you determining the proper bonding capacity based on the value of prior projects and financial ability.

Need to Know #5: Know that having a risk management plan is essential, and should include performance bonds (and, more generally, bonds).

Need to Do #5: Make sure your risk management plan is updated and consult your broker to either stablish a bonding relationship or verify your bonding capacity

Conclusions
Overall, performance bonds, and bonds in general, are excellent tools of risk management and risk transfer. They are used regularly in the industry and allow for a sophisticated contractor to benefit from the financial security that the bond provides.

Recall that the specifics of the performance bond, or any bond, could be negotiated at the commencement of the contract, once the construction contract is signed it may be too late to try to change terms and negotiate with the Owner or the Surety.

Therefore, as any other contract, have the construction, insurance, and surety attorneys at Pillsbury review your bonds to ensure that they meet your needs and meet the requirements of the construction contract.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Obtaining the Benefits of a Performance Bond: Tread Carefully

Choity Khan | Construction Law Zone

When a party to a construction contract is faced with nonperformance of another party, often the desire to keep the project moving takes precedence in responding to the performance default. Problems arise, however, when the party who is owed the performance acts without first considering the terms and conditions of the written instruments governing the parties’ relationship on the project. For example, a construction contract may require the posting of payment and performance bonds guaranteeing, among other things, the performance of the bonded contract work by obligating the guarantor – a surety – to arrange for the completion of the work.  Where a party fails to perform as promised, the party promised the performance should first review the language of both the construction agreement and any associated surety bonds before taking action, so as not to lose the benefits of the contract and/or bonds, as was the case in Arch Ins. Co. v. Graphic Builders, LLC, No. CV 19-12445-NMG, 2021 WL 534807 (D. Mass. Feb. 12, 2021).

Performance bonds almost universally contain one or more conditions precedent to trigger the surety’s obligations. Generally, courts interpreting such condition precedent language often require strict adherence to the condition’s language to trigger the bond’s obligations, which often leaves the beneficiary of the bond – the bond obligee – without a remedy.

The general contractor in Arch Ins. Co. was one such obligee. During the construction of an apartment building in the Charlestown section of Boston, the general contractor deemed the subcontractor in default when the general contractor discovered that rain leaked through 260 of the modular window units that the subcontractor fabricated, delivered, and began installing. Rather than terminate the subcontractor, the general contractor instead hired several third-party subcontractors at a cost of more than $2.8 million to remediate the defective work. According to the general contractor, terminating the defaulted subcontractor would have been “the equivalent of shooting [itself] in the face.” Though that may have been the case, the general contractor’s decision adversely affected its right to invoke the performance bond, as the document’s language obligated the surety’s performance only on the condition (common among performance bonds) that the general contractor terminate its subcontract with the subcontractor. The District Court agreed with the surety that its obligation had not been triggered, holding that the general contractor “indisputably failed to comply with a condition precedent and, therefore, cannot enforce the obligation of [the surety] to indemnify which arises pursuant to the Performance Bond and/or the incorporated subcontract.” The Court added that, for the same reason, the general contractor materially breached the bond’s terms, and discharged the surety from any and all liability, including investigating and indemnifying the general contractor’s claims of losses sustained.

In reaching its decision, the Court disregarded the general contractor’s argument that notwithstanding any conditions precedent, the surety had an independent duty to indemnify the cost of remediating the subcontractor’s faulty work. The general contractor has appealed the District Court’s order, and it remains to be seen whether the First Circuit will arrive at the same conclusion and perhaps address the general contractor’s independent duty argument.

Regardless, when faced with nonperformance, a party should carefully review the terms of a performance bond to determine what conditions precedent are necessary to obligate the surety’s performance. Failure to do so may have devastating consequences.

Performance Bond Surety Takeover – Using Terminated Contractor to Complete Work

David Adelstein | Florida Construction Legal Updates

When a contractor is defaulted under a performance bond, can its surety hire the same defaulted contractor to complete the work?  Stated differently, can the performance bond surety engage its defaulted bond-principal in taking over and completing the same work the contractor was defaulted under?   The answer is “yes” if you are dealing with a standard form AIA A312 performance bond (and other bond forms that contain analogous language), as demonstrated by the recent decision in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, 2019 WL 4850194 (Fla. 3d DCA 2019).

In this case, a condominium association hired a contractor in a multi-million dollar contract to renovate condominium buildings.  The contractor provided the association, as the obligee, a performance bond written on an AIA A312 performance bond form.  During construction, the association declared the contractor in default and terminated the contractor. In doing so, the association demanded that the performance bond surety make an election under paragraph 4 of the AIA A312 bond form that gave the surety the following options:

4.1 Arrange for the CONTRACTOR, with consent of the OWNER, to perform and complete the Contract; or

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the OWNER for a contract for performance and completion of the Contract, arrange for a contract to be prepared for execution by the OWNER and the contractor selected with the OWNER’S concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the Bonds Issued on the Contract, and pay to the OWNER the amount of damages as described in paragraph 6 in excess of the Balance of the Contract Price incurred by the OWNER resulting from the CONTRACTOR Default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances;

4.4.1 After investigation, determine the amount for which it may be liable to the OWNER and, as soon as practicable after the amount is determined, tender payment therefore to the OWNER; or

4.4.2 Deny liability in whole or in part and notify the OWNER citing reasons therefore.

Seawatch at Marathon Condo. Ass’n, 2019 WL at *1-2.

The surety elected the option under section 4.2, underlined and bolded above.  The surety wanted to complete the construction contract and provided the association with a surety takeover agreementi.e., an agreement where the surety takes over the completion of the defaulted / terminated contractor’s contract.   The takeover agreement was predicated on the terminated contractor continuing to serve as the contractor to finish the contract.

The association rejected the takeover agreement largely because it was adamant that the terminated contractor cannot serve as the completion contractor under the takeover agreement.  The association also argued that the surety could not properly elect section 4.2 because it was not a licensed contractor and needed to be a licensed contractor in order to undertake the completion of the defaulted contract.  Because an agreement could not be reached, the association filed a lawsuit for declaratory relief on these issues seeking judicial intervention as to its rights under the performance bond.

A. The Performance Bond Surety Can Use the Defaulted Contractor to Complete the Work

The trial court, as affirmed on appeal, held that the surety was well within its rights under section 4.2 of the bond to complete the contract with the defaulted contractor (bond-principal).  Section 4.2 places NO restrictions on the surety in using the defaulted contractor or any other contractor, for that matter.   As noted by the appellate court:

Finally, “[i]t is common practice for a surety undertaking to complete the project itself to hire the original contractor, as [Guarantee] elected to do here.”  “By completing the project itself, the surety obtains greater control than it would have had if it elected to require the obligee to complete, because the surety can select the completing contractor or consultants to finish the project as well as control the costs of completion.”

Seawatch at Marathon Condo. Ass’n, 2019 WL at *4 (internal quotations omitted).

B. The Performance Bond Surety Does Not Need to be a Licensed Contractor to Enter into Takeover Agreement

The appellate court summarily rejected the argument by the association that the surety needed to be a licensed contractor to enter into a takeover agreement and undertake the completion of the defaulted contract.  Since the surety is not actually performing the completion, the court rejected this outright which would prohibit the surety from ever exercising rights under section 4.2 unless it was a licensed contractor.

One thing to consider after reading the outcome of the case is that there is nothing to prevent the obligee of a bond from modifying a standard form bond form, or my preference, creating its own manuscript performance bond form.  Creating your own performance bond form gives you more flexibility regarding rights to trigger a surety’s obligations under the bond and the recourse under the bond.