Perfecting Performance Bond Claims

I previously discussed the statute of limitations for performance bond claims. In addition to understanding the statute of limitations, obligees need to know how to properly preserve a performance bond claim. Not properly preserving rights under the performance bond defeats the very purpose the obligee required the bond in the first place.

Properly preserving performance bond rights requires the obligee:

  1. To unequivocally and formally declare the bond-principal (contractor or subcontractor that furnished the performance bond) in default.   This formal declaration cannot be wishy-washy.
  2. Make it clear that the obligee will be looking to the performance bond surety to remedy the default and demand that the surety remedy the bond-principal’s default pursuant to the terms of the performance bond.
  3. Comply with the terms of the performance bond. This means that if the bond requires the obligee to tender the contract balance to the surety in furtherance of the surety remedying the default, make sure to tender the balance.

For example, a roofing subcontractor furnished the general contractor (obligee) a performance bond. During construction, the general contractor sent notices to the roofer and the roofer’s surety regarding the roofer’s deficient performance. Without formally and unequivocally declaring a default, the general contractor supplemented the roofer’s work and exceeded the roofer’s subcontract balance in doing so.   The problem, however, was that because the general contractor never formally declared the subcontractor in default, it never triggered the surety’s role under the performance bond.

In another example, a painter furnished a performance bond to a general contractor (obligee). Post-completion, the owner of the project sued the general contractor for water intrusion. The general contractor sued subcontractors including the painter’s performance bond surety. The problem, once again, was that the general contractor never formally declared the subcontractor in default and never specifically demanded that the surety remedy the bond-principal’s default.

If you are an obligee under a performance bond and sense a performance bond claim on the horizon, consult with counsel to ensure you are properly perfecting your rights under the performance bond.   And, if you are a bond-principal that furnished a performance bond, make sure to consult with counsel so that you know your rights and can plan accordingly moving forward.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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