Civil Engineering Chapter 25 Teaching Has Its Problems Principally Because The Terminology And Complexity

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Chapter 25

Teaching Chapter 25 has its problems, principally because of the terminology

and complexity of the surety transaction. The best way we can think of to teach

the material here is to slowly and carefully go over a surety bond. Figures 25.1

and 25.2 illustrate graphically the difference between performance and payment

bonds, using both standard and Restatement terminology. We would also

suggest that the instructor look at Appendix I (on the website) which contains

A312–2010.

Examine A312–2010 Paragraph 3.1 of the performance bond. It conditions the

surety’s obligation upon the owner notifying the contractor and the surety that it is

considering a contractor default and has requested and attempted to arrange a

conference with the contractor and surety to be held not later than 10 days after

completion of the project or correction of defective work is not the sole limit of the

surety’s obligation. A312 also states that the surety will not be liable for

obligations of the contractor that are unrelated to the construction contract.

Section 25.15 addresses bad faith claims, taking as a starting point the

statutory regulation of insurers. However, the common law duty of good faith and

bond are purchased by the principal so as to provide protection to the obligees:

the owner in the case of a performance bond and the subcontractors in the case

of a payment bond. By contrast, licensing bonds are statutorily mandated and

their value is determined by statute, rather than by the value of the project. While

owners who demand performance and payment bonds pay the premium, owners

do not pay additional consideration (i.e., money) for licensing bonds because, at

least in theory, only a licensed contractor may perform construction work.

Moreover, since, at least in theory, an owner cannot hire an unlicensed

contractor, there is no incremental additional licensing bond cost attributable to a

particular project. Finally, the state statute permits the deposit of cash with the

state agency (in lieu of a licensing bond). Since the homeowners admit they

would have no claim against the state agency holding a cash deposit, it makes

no sense to make the surety liable merely because the contractor chose instead

to get a licensing bond.

The O’Connor case illustrates two points. First, while surety bad faith law

arose by analogy from insurer bad faith law, the comparison between obligee

Answers to Chapter Questions

1. What are the requirements for a prime contractor under the Miller Act?

2. What is the function of a surety?

3. What is the function of a bid bond?

4. According to AIA A312–2010 Section 3, what are the three steps the owner

should take in order to trigger the surety’s bond obligations?

5. What are the four courses of action the performance bond surety has the

option of using in fulfilling its bond obligations, according to the AIA A312–

2010?

a. The four courses of action are (1) arrange for the original contractor,

with the owner’s consent, to complete the contract, (2) complete the

project itself, including through use of independent contractors, (3)

obtain bids or negotiated proposals from qualified contractors

acceptable to the owner and arrange for the owner to continue work

with that new contractor, backed up by new performance and

payment bonds, and (4) waive its right to perform and complete, and

instead (i) after investigation, pay the owner its costs of completion or

(ii) deny liability in whole or in part.

6. What are some actions that an owner may take that could discharge the

surety (release the surety from its obligations under the bond)?

7. What is the purpose of a payment bond?

8. According to the AIA A312–2010 document, who may sue on a payment

bond?

9. What did the federal court of appeals state was included in “sums justly due”

in a Miller Act payment bond in the case, United States for Use and Benefit of

Perlun Construction Co. v. Harvesters Group, Inc.? What was the basis for the

court’s reasoning?

10. What is a consequence to the surety if a court finds it acted in bad faith in the

(non)performance of its bond obligations?