In a prior article, I discussed the General Agreement of Indemnity between a bond-principal and surety. This is a powerful agreement in favor of the surety outlining the surety’s rights in the event the bond-principal breaches the agreement. One favorable provision in the General Agreement of Indemnity is the surety’s right to demand collateral security from the bond-principal. A surety would request collateral security based on its assessment of the risk of a claim asserted against the surety.
Here is an example:
A general contractor is awarded a public project and provides public payment and performance bonds. During the course of the job, the public owner terminates the general contractor for default and asserts a claim against the general contractor’s performance bond. The surety works out a deal with the public owner that would have the general contractor completing the contract work provided the general contractor executes a memorandum of understanding with the surety that, among other things, requires the owner’s payments to be deposited in an escrow account until the surety approves payment to the general contractor. The general contractor refuses to sign the memorandum of understanding even though subcontractors have asserted payment bond claims against the surety. As a result, the surety creates a reserve account to fund potential claims, deposits approximately $200,000 into that account, and demands that the general contractor deposit another $200,000 into the account as collateral security. The general contractor refuses.
The surety sues the general contractor under the General Agreement of Indemnity and moves for a preliminary injunction requiring the contractor to post $200,000 into the reserve account as collateral security. The court agrees with the surety and grants the injunction ordering the general contractor to pay the $200,000 because the General Agreement of Indemnity authorizes the surety, upon to demand, to require the bond-principal to deposit money into a reserve account as collateral security.
Before getting crossways with your surety, it is important to review the General Agreement of Indemnity and consult with counsel to best understand your rights moving forward. Even if you dispute the underlying payment or performance bond claims, oftentimes working with your surety is the best approach so that you can fight the underlying claims instead of fighting against your surety.
Please contact David Adelstein at email@example.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.