Surety Questions

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Post by IRCOS, LLC »

A public works construction contract is bonded with a standard performance bond issued by a corporate surety. Job problems arise leading to default of the contractor. The surety steps in, and after deciding not to pay the bond penalty, exercises the option of hiring a new contractor to complete the construction, which the surety tenders to the owner. It also tenders a takeover/completion agreement to the owner.

Question 1. What legal obligation does the owner have to accept the new contractor and the takeover/completion agreement?

Question 2. What legal obligation does the owner have to accept the new contractor if the takeover/completion agreement has conditions that deviate substantially from the original construction contract terms?

Question 3. Are you aware of any case(s) where owner did not accept the new contractor and/or takeover/completion agreement?

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Post by LaManchaDQ »


It has been some time since I was directly involved in surety underwriting. So I am definately not current on pertinent legal developments. However the basic concepts remain the same.

Questuion 1: The owner is obligated by their own laws, and the surety bond those laws require, to work with the surety. The surety in your case has taken an often used option to "finish the job" in place of the bonded contractor. This ususally follows a determination by the surety that it is less expensive for them to work the job than to pay the bond penalty. The surety bond guarantees the contract will be completed as agreed and written into the underlying contract. The underlying contract is the commanding document and will ususally lay out the options that each party has. The surety stands in place of the original contractor and has a right to hire subcontractors as did the original contractor. The relationship between the surety and the owner should be no more adversarial than was the original owner, contractor.

Question 2: The "new contractor cannot alter the terms as long as the underlying contract remains in effect. Any alterations to that contract must be agreed to by all parties to the contract. The original contractor may have defaulted but the underlying contract remains in force.

Question 3. My experience is on the underwriting side of the business so I don't have a broad basis from which to draw claims side experience that this question relies. For what it's worth, though, I am not aware of any owner rejecting the surety's contractor. I cannot speak at all to the subsequent agreement part of this for the reason I previously stated.
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Post by jwbond »

You should be able to find the answers to your questions at the <a href='' target='_blank'>Surety Bond Forums</a>
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Re: Surety Questions

Post by NFPSurety »

I have a great resource to help you out. You can find everything you need to know about bonds here... Please reach out, if there is anything we can help you with.
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