DEPRIVING A PERFORMANCE BOND SURETY OF COMPLETION OPTIONS WILL RESULT IN A BREACH OF THE BOND

Posted on March 8, 2026March 8, 2026 by David Adelstein

“The purpose of a performance bond is to guarantee the completion of the contract upon default by the contract.” Arch Insurance Co. v. A3 Development, LLC, 2026 WL 632330 (S.D. Fla. 2026) (internal citations and quotations omitted).

If you are an obligee (beneficiary of a performance bond) looking to trigger the surety’s obligations COMPLETION OBLIGATIONS under the bond, make sure you properly comply with the terms of the bond. Failure to do so will result in a breach of the bond meaning you are discharging the surety’s obligations. This is the exact thing you DO NOT want to do.

A recent case supports the proposition that supplementing and performing remedial work to the bond-principal’s work, and using the bond-principal’s contract money to do so, results in a a breach of the bond. This is important, need-to-know information, because if you do this and then seek recourse from the surety, you could be sh*t out of luck!

Without going into all the facts in Arch Insurance Co., an obligee of a performance bond (AIA performance bond) undertook efforts and costs to remediate a subcontractor’s defective concrete work. Such costs depleted the subcontract balance as the subcontractor was backcharged and not paid to the subcontractor. The question was whether this resulted in a breach of the bond by the obligee. Yes, it did.

“Generally, an obligee’s action that deprives a surety of its ability to protect itself pursuant to performance options granted under a performance bond constitutes a material breach[.]”

Florida courts have consistently found that an obligee’s unilateral decision to hire an alternate contractor to complete a subcontract without first giving the surety proper notice of a default and an opportunity to exercise its completion options deprives a surety of its ability to protect itself and, therefore, such conduct constates a material breach of the bond.”

Arch Insurance Co., supra (internal quotations and citations omitted).

Here, the obligee breached the bond by performing remedial work before notification to the surety:

[Obligees] argue that the general prohibition against an obligee unilaterally hiring a contractor to perform remedial subcontract work does not apply to the Bonds here because there is no provision in the Bonds or Subcontracts that require [Obligees] to first give [Surety] notice or an opportunity to complete the Subcontracts before using an alternative contractor to supplement or remedy the subcontracted work. Notwithstanding [Obligee’s] contention to the contrary, the plain language of the Bonds precluded [Obligees] from remedying [subcontractor’s] materially inadequate or incomplete work through any means other than those expressly provided under the Bonds.

The procedures outlined in § 3 and § 5 were the Bonds’ exclusive remedial tools in the event [Obligees] determined that [subcontractor] was in default and unable to complete the Subcontracts. No provision in the Bonds or the Subcontracts suggests that, in lieu of the notice and default procedures in § 3 and § 5, [Obligees] could instead select an alternative or supplemental remedy not expressly provided for under the Bonds. Obligees therefore lacked any contractual basis to unilaterally hire a replacement or supplementary contractor, even if they reasonably believed such a course of action was a more efficient and cost-effective means of completing the Subcontracts. Consequently, because the Bonds governed how the parties were permitted to handle a default, once [Obligees] considered declaring [subcontractor] in default (i.e., when [Obligees] determined they would likely need a replacement or supplemental contractor to complete Subcontracts), § 3.1 required [Obligees] to promptly provide notice to [Surety] of the potential default. And if [Obligees] ultimately determined that [subcontractor] had defaulted on the Subcontracts, § 3.2 required them to declare a default to ensure that [Surety] was afforded its right to investigate the default and elect one of its completion options under § 5.

Arch Insurance Co., supra (internal quotations and citations omitted).

Please make sure to work with counsel if seeking to exercise the completion obligations of a performance bond surety.

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.

COMPLY WITH THE CONDITIONS OF THE PERFORMANCE BOND

Posted on April 19, 2020April 19, 2020 by Edward Garber

If you are bargaining for a contracting party to obtain a performance bond, it is imperative that you honor the conditions precedent to the bond in the event you need to trigger the bond’s obligations. If you do not, then you will breach the terms of the performance bond and lose the benefit of the bond. This is definitely NOT what you want because if you are looking to the performance bond than you are dealing with the default of its bond-principal and an incurred or anticipated loss. This is particularly true if dealing with an AIA performance bond form where the surety can rely on good case law that failing to comply with the conditions of the bond discharges the obligations under the bond.

To exemplify, in a recent opinion out of the District of Columbia Circuit, Western Surety Co. v. U.S. Engineering Construction, LLC, 2020 WL 1684040, (D.C. Cir. 2020), a performance bond surety filed a lawsuit seeking declaratory relief that it had no liability under the bond because the obligee failed to comply with a condition precedent to trigger the bond’s obligations.

In this case, a subcontractor hired a sheet metal subcontractor. The sheet metal subcontractor (principal of bond) obtained an AIA A312 performance bond for the subcontractor (obligee of bond). During construction, the prime contractor notified its subcontractor that it was causing delays. The delays were caused by the sheet metal subcontractor. The subcontractor, in turn, notified its sheet metal subcontractor that it had 72 hours to cure. The sheet metal subcontractor did not cure and the subcontractor formally terminated its sheet metal subcontractor. Prior to the termination, the subcontractor did NOT notify the surety that it was considering declaring the sheet metal subcontractor in default and terminating the subcontract. In fact, the surety was not notified of the default termination until the subcontractor sent a claim under the bond to the surety many months after the sheet metal subcontractor was terminated.

Notably, section 3.1 of the AIA performance bond required the obligee (subcontractor) to notify the principal (sheet metal subcontractor) and surety that it was considering declaring the principal in default. Section 4 excused the failure to do this except if the surety demonstrated actual prejudice by the lack of notice. Section 3.2, however, required the obligee, if ending the relationship with the principal, to declare the principal in default, terminate the contract, and notify the surety. Section 3.3 provided that the obligee must agree to provide the balance of the contract price to the surety or to a contractor selected to perform the contract. Section 5 provided that when the obligee satisfies the conditions of section 3, the surety shall promptly and at its expense take one of the actions in sections 5.1 through 5.4.

The subcontractor-obligee failed to comply with any of the obligations in the bond, which resulted in a harsh outcome to the subcontractor:

The A312 bond at issue in this case states that, in order to trigger Western Surety’s [surety] obligations under the bond, U.S. Engineering [subcontractor-obligee] must declare a United Sheet Metal [sheet metal subcontractor-principal] default, terminate the subcontract, and notify Western Surety. Similar to the A311 [AIA performance] bond, the A312 [performance] bond provides four alternative methods by which the surety can respond to the default [per Section 5 of the bond]. By unilaterally completing United Sheet Metal’s remaining contract obligations before notifying Western Surety [per Section 3.2 of the performance bond], U.S. Engineering deprived Western Surety of its contractually agreed-upon opportunity to participate in remedying United Sheet Metal’s default [per Section 5 of the bond].

In other words, despite the bond’s lack of an explicit timely notice requirement [as to when the surety must be notified of the default and termination], the performance bond is properly read as requiring U.S. Engineering to notify Western Surety of the default before engaging in self-help remedies. Otherwise, “the explicit grant to the surety of a right to remedy the default itself would be operative only if the obligee chose to give it notice,” thereby rendering the options in section 5 “nearly meaningless.” Accordingly, because the bond expressly provides the surety with the opportunity to participate incurring the subcontractor’s default, we hold that it is a condition precedent to the surety’s obligations under the bond that the owner must provide timely notice to the surety of any default and termination before it elects to remedy that default on its own terms. In light of U.S. Engineering’s failure to provide such timely notice, Western Surety was not obligated to perform under the bond.

Western Surety Co., 2020 WL at *4.

The morale is that if you are bargaining for a performance bond, do not neglect to comply with the very bond conditions you need if defaulting and terminating the principal of the bond. Otherwise, you may wind up with a similar harsh result, as the subcontractor did in this case by looking to the surety many months after it default terminated the bond-principal, and started remediating the default.

PROPERLY TRIGGER THE PERFORMANCE BOND

Posted on December 25, 2016November 8, 2024 by Edward Garber

A performance bond is a valuable tool designed to guarantee the performance of the principal of the contract made part of the bond. But, it is only a valuable tool if the obligee (entity the bond is designed to benefit) understands that it needs to properly trigger the performance bond if it is looking to the bond (surety) to remedy and pay for a contractual default. If the performance bond is not properly triggered and a suit is brought upon the bond then the obligee could be the one materially breaching the terms of the bond. This means the obligee has no recourse under the performance bond. This is a huge downside when the obligee wanted the security of the performance bond, and reimbursed the bond principal for the premium of the bond, in order to address and remediate a default under the underlying contract.

A recent example of this downside can be found in the Southern District of Florida’s decision in Arch Ins. Co. v. John Moriarty & Associates of Florida, Inc., 2016 WL 7324144 (S.D.Fla. 2016). Here, a general contractor sued a subcontractor’s performance bond surety for an approximate $1M cost overrun associated with the performance of the subcontractor’s subcontract (the contract made part of the subcontractor’s performance bond). The surety moved for summary judgment arguing that the general contractor failed to property trigger the performance bond and, therefore, materially breached the bond. The trial court granted the summary judgment in favor of the performance bond surety. Why?

The performance bond in this case appeared to be an AIA performance bond (the AIA Document A312 Performance Bond or modified version thereof). This appears clear from the following finding by the court:

Under the bond in this case, Arch’s [performance bond surety] obligations are not triggered unless Moriarty [general contractor-obligee]: (1) first provides notice to R.C. [subcontractor-principal of bond] and Arch that it is “considering declaring a Contractor Default”; (2) “declares a Contractor Default, terminates the Construction Contract and notifies [Arch]”; and (3) “agree[s] to pay the Balance of the Contract Price … to [Arch] or to a contractor selected to perform the Construction Contract.” …Once Moriarty complies with those three conditions precedent, the bond then requires Moriarty to allow Arch to mitigate its damages by arranging for the completion of the subcontract itself. Lastly, before Moriarty may properly make a demand under the bond, it must provide seven days’ notice to Arch.”

The general contractor, as commonly done, notified the subcontractor and subcontractor’s surety that it was considering declaring the subcontractor in default, but never (i) formally declared the subcontractor in default, (ii) terminated the subcontractor, or (iii) agreed to pay the subcontract balance to the performance bond surety. Thus, the general contractor (obligee) never allowed the surety to mitigate damages by arranging completion of the subcontract upon the subcontractor’s (bond principal) default.

Remember, in order to preserve a performance bond claim it is important to properly trigger the performance bond and the surety’s role under the bond. This means dotting your i’s and crossing your t’s when it comes to declaring the bond principal in default under the specific terms of the bond. Moreover, if you are the obligee, consider preparing the performance bond form so that you can remove some of the underlying notice provisions in the bond to make the bond more favorable to you.

DRAFTING THE BOND FORM, PARTICULARLY THE PERFORMANCE BOND FORM

Posted on July 8, 2016November 8, 2024 by Edward Garber

Oftentimes, when it comes to payment and performance bonds (in particular), the bond forms are drafted by the obligee. For example, an owner (as the obligee) may draft the bond forms that it wants its general contractor’s surety to execute. And, a general contractor (as the obligee) may draft the bond forms that it wants its subcontractors’ sureties to execute. As an obligee, it is always beneficial to draft the bond form (particularly the performance bond) that you want the surety to execute. The bond is to benefit you—the obligee—so having a hand in creating conditions to trigger the application of the bond is important, specifically when it comes to triggering a performance bond upon the bond-principal’s default.

What if the surety executes a bond form prepared by the obligee and there is an ambiguity in the bond? Should the ambiguity be interpreted against the obligee as the drafter of the bond?

This issue was addressed by the Fourth District Court of Appeal in The School Bd. Of Broward County v. Great American Ins. Co., 807 So.2d 750 (Fla. 4^th DCA 2002) where the School Board owner prepared the performance bond form. The surety argued there was an ambiguity with the bond form and wanted the ambiguity to be interpreted against the School Board as the drafter of the bond. The court rejected this argument explaining:

Florida’s policy is to construe any ambiguity in a bond in favor of granting the broadest possible coverage to those intended to be benefitted by protection of the bond [e.g., the obligee]. This policy recognizes that the purpose of a bond is to protect a party to a contract; the burden is on the surety, who is in the business, to include the appropriate language in its bonds if it seeks to narrow its obligations after default.

The School Board of Broward County, 807 So.2d at 752 (internal citations and quotations omitted).

To reiterate, it is always beneficial as the obligee to prepare the bond forms (particularly the performance bond) that you want the surety to execute since the bond is designed to benefit you. Work with counsel to ensure the bond form provides you the broadest or best coverage based on the anticipated risks.

SURETY BONDING – THE NUTS & BOLTS

Posted on July 12, 2014November 8, 2024 by Edward Garber

Surety bonding is necessary in construction, particularly on federal and Florida public projects where the contractor is required to furnish a payment and performance bond. Even certain owners of large-scale private projects want their contractor to obtain a payment and performance bond. Understanding the nuts and bolts of surety bonding is valuable for the contractor that wants to increase job opportunities and/or increase their bonding capacity.

There are three main parties to the surety bond:

1. The surety– the entity (typically, a division of an insurance company) that issues the payment or performance bond for the contract price; the surety guarantees obligations on behalf of its principal, whether it is the performance of the contract (performance bond) or the payment to those entities working under the contractor providing labor, services, or materials (payment bond)

2. The principal – the entity (contractor) that procured the bond from the surety and who the surety is issuing the bond on behalf of; the principal along with personal and corporate guarantors will execute a General Agreement of Indemnity before the bond is issued outlining the rights and remedies of the principal/guarantors and the surety

3. The obligee – the entity (or entities) that can make a claim against the bond and who the bond is ultimately designed to benefit

Not every contactor can get a payment and performance bond. This means that not every contractor can perform public work that requires a bid bond to be furnished with the bid/proposal and then a payment and performance bond upon the award of the contract. This is because sureties undertake rigorous underwriting to best assess their risk before issuing bonds. And, many contractors, even if bonds are issued, will have a bonding capacity meaning the surety will not issue an unlimited dollar amount for the bond(s) issued or will not issue an unlimited number of project bonds at the same time. Rather, it will issue a bond or bonds totaling the bonding capacity of the contractor.

To obtain a bond, a contractor will go to a surety bond agent/broker, commonly referred to as the producer. The producer represents select sureties. Certain sureties cater to certain market niches or contractors and the producer tries to fit the contractor with the surety that best fits the needs, strengths, and qualifications of the contractor. The producer will work with the contractor to fill out required forms and review and collect the material and information that will be needed by the surety in the underwriting process. As a contractor, it is important to develop a strong relationship with a producer that understands your construction business and capabilities and can assist you with obtaining bonding capacity.

In the underwriting process, the surety will want to determine the financial strength, creditworthiness, and condition of the contractor by analyzing extensive financial documentation along with the contractor’s operational ability to perform a contract based on the contractor’s history, equipment, personnel, etc. Underwriting needs to obtain and assess financial and operational material to best assess the surety’s risk (based on the surety’s appetite or market) because if the surety has to pay out a claim on the bond it will absolutely be looking to recoup the costs it incurs from the bond principal as well as the guarantors that executed the General Agreement of Indemnity. Among other things, the surety will run a credit check for the principal and likely the owners/guarantors; will analyze balance sheets, income statements, and other financial information to understand the contractor’s cash flow, working capital, net worth, and profitability history and forecasts; will want to know of judgments and lawsuits; will likely contact references; and will want to specifically understand past projects completed and current projects underway, including the project in which the bond is being requested, from an estimating and accounting standpoint, personnel and management standpoint, insurance standpoint, and possibly a scheduling standpoint. The surety will do its homework because the very last thing a surety wants to do is pay a claim or expose itself to massive liability with a bond claim from a contractor that failed to pay its subcontractors or abandoned a job without any true recourse to recoup money expended. The surety will consider the personal and corporate guarantors it requires from a contractual indemnity standpoint per the General Agreement of Indemnity and may require cash collateral or property collateral to be pledged for underwriting approval. Again, developing the relationship with the producer that understands your business is crucial as the producer will understand the underwriting process and facilitate the transmission of information and material between the contractor and the surety.

The surety charges a premium for the issuance of the bond. Payment and performance bonds are often single premium bonds. Depending on the producer you ask, the premiums typically range from 1-3% of the bond amount. Naturally, there are contractors that will have to pay in excess of 3% of the bond amount based on the associated credit risk with issuing the bond.

Once underwriting runs its course and the contractor is approved for the requested bonds, the producer typically signs the bonds on behalf of the surety. The producer is given a power-of-attorney to sign bonds as an attorney-in-fact on behalf of the surety.