A performance bond operates to guarantee the bond principal’s performance under its contract. If the general contractor obtains a performance bond, the bond is designed to guarantee the contractor’s faithful performance under the contractor’s prime contract. If the subcontractor obtains a performance bond, the bond is designed to guarantee the subcontractor’s faithful performance under the subcontract. In the event there is a formal default under the underlying contract or subcontract, the obligee of the bond (the owner or contractor, as may be applicable) may demand that the performance bond surety remedy the default.
Performance bonds have a five-year statute of limitations. The limitation period begins to run on the date of the project being accepted per the underlying contract and expires five years thereafter.
Obligees that have a performance bond for their benefit need to be cognizant of the statute of limitations of the bond. This way they can properly preserve their rights under the bond and still assert a performance bond claim within the five-year statute of limitations.
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