As a Contractor, Here’s How To Pursue Your Rights Under a Surety Bond

By Mark McCallum posted 08-08-2019 04:48 PM

“Read and follow instructions.” What is good advice in grade school also rings true for maintaining and preserving surety benefits for multi-million dollar construction projects.

Raz-Andican-headshot.jpgRaziye “Raz” Andican, an attorney in the Tysons, VA office of Smith Currie & Hancock, said the best way for contractors to enforce their rights under a surety bond is to read and understand it. Then, once they have read the bond, the next step is to follow the guidelines “to a T,” Andican said.

Surety bonds serve as powerful backstops when things go wrong during construction. While they place financial obligations on a surety to complete a project if the unexpected happens, they also place obligations on the potential beneficiary of the bond, such as a general contractor furnished with subcontract bonds.

Andican represents both sides in construction disputes. In some cases she represents the surety; in others, she represents parties seeking payments or performance guaranteed by the bonds.

“Typically, the terms of the bond kick in when something goes wrong,” Andican said. “Examples include when a subcontractor is not being paid by the general contractor, or a contractor is not completing work it was hired to do.” Those terms must be adhered to strictly or bond claims may be waived.
That’s what happened in a 2017 Miami case in which a general contractor effectively lost out on a $1.1 million valid claim by failing to follow the notification and other provisions set forth in the surety bond.

In International Fidelity Insurance Co. v. Americaribe-Moriarty JV, 681 Fed. Appx. 771 (11th Cir. 2017), a surety issued a performance bond on behalf of a pool subcontractor, which subsequently failed to complete the work. The general contractor quickly obtained a new subcontractor, engaged it to finish the job, and then demanded payment from the surety. But the bond gave the surety several options to complete the project due to default. The surety and the general contractor held an initial meeting, as provided by the bond. However, the general contractor short-circuited other options for the surety by unilaterally hiring a new subcontractor to finish the project after that initial meeting.

The surety filed suit in the United States District Court for the Southern District of Florida, in which a judge declared the surety had no obligation to the general contractor under the bond. The Eleventh Circuit affirmed the ruling. In other words, the general contractor would receive nothing from the bond—all because it failed to fulfill the bond’s obligations.

The bond, explains Andican, is really a contract between the parties. When one of the parties fails to comply with the contract’s terms, the other party is no longer obliged to fulfill its end of the bargain. “You really have to read the bond: it sets the playing field,” Andican said.

While International Fidelity Insurance Co. v. Americaribe-Moriarty JV was about a general contractor that chose not to follow subcontract bond provisions, subcontractors may be in more complicated positions. For instance, subcontractors may not have possession of the payment bonds that set forth their rights; so they may not be able to see what conditions are required of them. Andican said there is a way of obtaining copies of payment bonds on federal projects.

The Federal Acquisition Regulations (FAR) provide authority for subcontractors and suppliers and prospective subcontractors and suppliers on federal projects to request and obtain copies of payment bonds from the contracting officer. FAR 28.106.6(d) provides as follows: 
Upon the written or oral request of a subcontractor/supplier, or prospective subcontractor/supplier, under a contract with respect to which a payment bond has been furnished pursuant to the [Miller Act], the contracting officer shall promptly provide to the requester, either orally or in writing, as appropriate, any of the following: 1. Name and address of the surety or sureties on the payment bond. 2. Penal amount of the payment bond. 3. Copy of the payment bond. The contracting officer may impose reasonable fees to cover the cost of copying and providing a copy of the payment bond. 
A subcontractor’s best bet may be to seek help from a knowledgeable attorney to pursue rights guaranteed by a surety bond.

When an unrepresented contractor is trying to invoke the terms of a surety bond, Andican suggests that he or she first read the bond; second, consult with the company’s surety bond producer; and third, consult an attorney experienced in surety and construction law.

But the first step is actually the simplest. Parties to the bond should ask themselves: “What do I need to do? Let’s look at language of the bond first,” Andican said.

For more information, see the NASBP publication, “Answers To 51 Questions Small Contractors Ask About Bonding."