When bidding bonded projects, the bond form should be a key consideration for contractors in negotiating terms and conditions and assessing commercial risk. Performance and payment bonds become relevant on distressed projects, often when the contractor is most at risk. Bond language that is favorable to the contractor and its surety can mean the difference in whether the contractor is put in default, terminated or liable to subcontractors for disputed payment obligations.
Since the contractor is typically liable to the surety under a General Agreement of Indemnity for the surety’s bond losses, the contractor’s risk under the bonds is tantamount to the surety’s risk. Thus, the contractor should review, assess and, where possible, negotiate the bond terms in the same manner that it negotiates other contract terms and conditions.
The AIA A312-2010 bond forms function as an industry benchmark and contain key provisions favorable to the contractor and its surety that contractors and their bond brokers must understand. However, contractors routinely encounter bonds that depart from the AIA standard. Each departure from the AIA A312 framework can materially alter a surety’s and contractor’s rights and exposure, making an understanding of these variations essential to sound risk management.
The A312-2010 Framework as a Benchmark
Under the AIA A312-2010 Payment Bond, a claimant without a direct contractual relationship to the contractor must notify both the contractor and the surety within 90 days of last furnishing labor or materials to bring a claim, but no such limit exists for claimants who contracted directly with the contractor. The 90-day claim period for downstream claimants gives contractors certainty and predictability in managing downstream payment claims since the contractor may be ignorant of payment disputes between its subcontractors and the subcontractors’ vendors.
This 90-day claim period is not necessary for claims between the contractor and its subcontractors since the contractor is presumably privy to any payment disputes with its own subcontractors. Section 12 of the bond creates a one-year abbreviated statute of limitations, which is advantageous to the contractor and its surety because it prevents claimants from prolonging the claim resolution process.
The A312-2010 Performance Bond is also favorable to the contractor and its surety in several respects. Section 3 builds in a structured sequence of claimant obligations before the surety’s duties arise. Section 3 requires the claimant to notify the contractor and surety that it is considering a default, to declare a default, to terminate the bonded contract and to pledge the contract balance to the surety. The requirement for pre-default notice is a key protection for the contractor and its surety because it creates a pathway for amicable dispute resolution before more drastic measures like termination, arbitration, or litigation.
Section 5 then affords the surety a variety of remedies, including the surety’s tender of the contractor to continue the work. This remedy further benefits the contractor because it allows the contractor and its surety to control completions costs, further mitigating risk. Section 11 imposes a two-year statute of limitations for claimants. This gives certainty and predictability to the contractor and surety by ensuring the suits are brought quickly when evidence is more accessible, witnesses are more likely to be available and events are fresher in witnesses’ minds.
Other Bond Forms
Although other standardized bond forms provide relatively equitable baselines, they do differ in material respects that may alter the contractor’s risk. For example, the ConsensusDocs CD260 performance bond, which is not as commonly used, contains no pre-default meeting and no requirement that the claimant terminate the contractor before the surety’s obligations arise. The Engineers Joint Contract Documents Committee forms establish a further differing framework. The EJCDC D-615 payment bond requires the contractor to make a claim within 30 days after having not been paid for 30 days, which affords more protection to the contractor and creates an even more drastic claim deadline than the AIA A312. The EJCDC D-610 performance bond requires at least 20 days between the required default meeting and any default declaration, effectively building-in a notice and cure period to bring a performance bond claim, even if the bonded contract is silent on a notice and cure period prior to termination.
Government and manuscript forms present the most significant departures from the AIA A312. The General Services Administration’s Standard Form 25 performance bond omits Section 3.1-style protections, a termination requirement and any abbreviated statute of limitations. The New York State Office of General Services performance bond provides protections similar to Section 3.1 and a strict schedule for the surety to investigate and remedy a default, which may impair the contractor and surety’s timeline to investigate and rebut a claim. Other manuscript forms require no termination as a precondition to the surety’s obligation, which creates risk to the contractor by creating liability to the surety under the GAI event where a default is not drastic enough to warrant termination.
Key Takeaways
Commonly used standardized bond forms provide clear and robust protections to the contractor and surety. Forms that follow the AIA A312 structure tend to provide greater predictability and can mitigate ultimate damages. Contractors should observe several recurring issues whenever a bond form departs from the AIA A312 model. A lack of stringent notice, pre-default protections or abbreviated claims bar dates increase risk to the contractor and its surety. Contractors should work with their counsel and bond brokers in assessing how the project’s bond form impacts overall project risk. Where the bond language cannot be negotiated, the contractor may look to mitigate risk through adjustments in its bid price.
