Suretyship 101: Answers to Ten Frequently-Asked Questions November 14, 2011 Presented By: Chris Anzidei Law Offices of Christopher Anzidei, PLLC 8381 Old Courthouse Rd., Suite 160 Vienna, Virginia

MBP has met the standards and requirements of the Registered Continuing Education Providers Program (RCEPP). Credit earned on completion of this program will be reported to RCEPP. A certificate of completion will be issued to each participant. As such, it does not include content that may be deemed or construed to be an approval or endorsement by NCEES or RCEPP.

Learning Objectives At the end of this presentation, you should gain a better understanding of suretyship and be able to: Define the key characteristics of suretyship and types of surety bonds; Identify the role of sureties on construction projects; Interpret the language used in different surety bond forms and assess its potential impact; and Evaluate the scope of a surety’s duties, obligations, rights, and defenses.

Agenda Introduction: What Is a Surety and Why Should I Care? Answers to Ten Frequently-Asked Questions About the Surety Questions?

The big question: What the (bleep) is a surety? Definition: Suretyship is a three-party arrangement where a surety agrees to pay a debt or perform an obligation that the principal obligor owes to a third party obligee. – The principal (typically, the general contractor) remains primarily liable to obligee (typically, the owner) – The surety is secondarily liable to the obligee for the performance of the principal’s obligations Introduction to Suretyship

The Surety’s role is to ensure the Obligee gets the benefit of its bargain with the Principal if the Principal defaults. The Obligee is limited to one recovery of its losses, but the Obligee may obtain that recovery from either the Principal or the Surety (or jointly from both). Introduction to Suretyship

Surety’s obligation is typically spelled out in a Bond, which: – Identifies the three parties: surety, principal, obligee – States amount of Surety’s undertaking (penal sum) – Incorporates the terms of underlying contract – Includes additional terms, conditions, or definitions – Bears Surety’s seal and signature of attorney-in-fact Introduction to Suretyship

Why should I care about sureties? Sureties are involved in nearly every large construction project to: – Protect use of public funds on state & federal projects – Enhance the contractor’s credit on private jobs Whether or not you even realize it, your work at MBP may be impacting your client’s rights and duties vis- à-vis the surety – Construction management work for owners – Forensic claims work for owners, contractors, law firms, and even sureties Introduction to Suretyship

Insurance v. Suretyship Question 1: Is a Surety Bond just a type of construction insurance? Answer: No!

Insurance v. Suretyship Key FeaturesInsuranceSuretyship Parties2 parties (Insurer/Insured)3 parties (Surety, Principal, Obligee) UnderwritingPremiums determined by placement in Risk Pool (Losses Expected) Unique Assessment : 3Cs Character/Capacity/Capital (Losses Not Expected) Nature of ObligationPay money to/on behalf of insured upon occurrence of covered event Perform Principal’s obligation to Obligee upon default IndemnityInsurer indemnifies Insured for covered losses (e.g. car insurance) Surety entitled to indemnity from its Principal for any surety losses

Types of Bonds Question 2: What types of bonds are most commonly used in construction? Answer: – Performance Bond: guarantees completion of principal’s contract with obligee for contract price – Payment Bond: guarantees payment to subcontractors and suppliers

Types of Bonds Question 2: What types of bonds are most commonly used in construction? (cont.) – Other bonds used in construction: Bid Bonds Mechanic’s Lien Bonds Warranty/Maintenance Bonds Subdivision Bonds Reclamation Bonds

Types of Bonded Projects Question 3: What types of projects require bonds? Answer: Federal and State Contracts – Federal Contracts: Miller Act requires P&P Bonds for contracts in excess of $100,000 for the construction, alteration or repair of public lands/buildings – State Contracts: “Little Miller Acts” impose similar bond requirements for State public contracts Private Contracts: Not required but commonly used

Bond Language: Why It Matters Question 4: Does the bond language matter? Answer: Heck Yeah!

Bond Language: Why It Matters Performance Bond language could impact: – Definition of ‘Default’ – Notice requirements – Default procedures – Penal sum – Time limit to sue – Recoverable damages (atty’s fees, delay damages) – Owner obligations

Bond Language: Why It Matters Performance Bond Language—AIA 311 vs. 312 – AIA 311: True “performance” bond Requires declaration of default to trigger bond Surety has 3 options (remedy default, complete, re-bid) Case law holds that surety can’t choose “do nothing” – AIA 312: More detailed than A311 Owner must not itself be in default Requires owner to conduct conference with surety before declaring default Additional surety options after default (including pay penal sum, re-tender principal and deny liability)

Bond Language: Why It Matters Payment Bond language could impact: – Notice requirements – Time limit to sue – Tiers of coverage (e.g., first-tier, second-tier, etc.) – Penal Sum – Recoverable damages (atty’s fees, delay damages)

Scope of Surety’s Obligations Question 5: What is the scope of the surety’s performance bond obligation? Answer: The surety’s obligation is generally co-extensive with its principal’s, except as limited by bond language. – Surety succeeds to principal’s rights & obligations, plus has its own independent rights and defenses – Obligee retains rights to offsets, claims against principal (backcharges, warranties, LDs, etc.)

Involving the Surety Question 6: When should I get the surety involved in a project? Answer: It depends (typical lawyer answer!) – Sureties won’t take formal action without default and termination Bond language may require pre-default meeting (A312) – BUT, sureties often can assist without termination: Assisting or financing troubled contractor Ensuring contract funds are safeguarded Brokering a voluntary termination Procedure in lieu of termination (FAR )

The Surety’s Rights Question 7: Does the surety have any rights? Answer: Yes, many! – Right to investigate default – Right to takeover and perform Surety may be able to tender principal or other contractor, subject to obligee’s consent – Right to payment of contract balance and principal’s claims if it pays/performs (called “equitable subrogation”) – Right to limit liability to penal sum

Common Surety Defenses Question 8: Can a Surety have any defenses? Answer: Yes, lots of them! – Surety succeeds to all defenses of its principal Wrongful termination Obligee prior breach/default Improper notice/opportunity to cure Failure to recognize claims (delays, defective specifications, differing site conditions, etc.) – Sureties also have several independent defenses

Common Surety Defenses Independent Surety Defenses – Lack of Notice/Declaration of Default – Material Alteration of Bonded Contract – Overpayment of Principal – Release of Principal – Fraudulent Concealment These defenses are specific to surety and independent of any defenses of principal

The Surety’s Investigation Question 9: What should an obligee expect during a surety investigation? Answer: Expect surety to request documents and information necessary to determine (i) extent of its potential liability; and (ii) most efficient performance options. – This will take time (often several weeks) and will often involve consultants and lawyers – Sureties often propose to complete under a takeover agreement that reserves all rights

The Surety’s Investigation Typical Areas of Inquiry in Surety Investigation: – Original Plans & Specs – Remaining Scope of Work – RFIs and Change Orders – Payment Applications – Schedules/Updates – Claims – QA/QC Records, Defective Work – Punchlist (if job reached this stage)

The Surety’s Investigation Question 10: When does the obligee need to account for the surety’s interests? Answer: At every stage. – At bid and award (duty to disclose material facts) – When administering work/making payments (duty to avoid impairing surety’s rights) – When terminating Principal (duty to properly trigger bond and cooperate with surety) – When completing on its own post-termination (duty to mitigate)

Questions? This is the end of the program. Questions? Presenter: Chris Anzidei Law Offices of Christopher Anzidei, PLLC 8381 Old Courthouse Rd., Suite 160 Vienna, VA Phone: Williams Plaza Williams Drive, Suite 300 Fairfax, VA