NASBP Presents First Annual SSLAB Awards

NASBP is proud to present its first annual Special Surety Language and Bond (SSLAB) Awards. There is nothing more gratifying than recognition from your peers in the industry for special accomplishments and a job well done. The SSLAB Awards recognize achievements in outstandingly special surety bond language. The recipients of these singular awards earned their honors by meeting some or all of the following bond language criteria: ignoring industry customs and practices, treating surety bonds as traditional insurance policies, placing undue risks on contractors and sureties, restricting competition, and penalizing small and emerging contractors. In short, these obligees shifted construction risks in ways that were self-defeating to their ultimate goals.

Yes, the SSLAB Awards are tongue-in–cheek awards; but they are given for real-life bond language forwarded to NASBP by its members and affiliates. The obligees that either inadvertently or purposefully created the special surety bond language receiving award recognition shall remain anonymous. NASBP enthusiastically singles out the recipients of these awards, often through calls and comment letters, and fervently hopes that none of this year’s award recipients will be repeat winners in the future.

1. The I-Don’t-Do-Squat Award
This award is given for language in a performance bond on a public project that provides that the obligee has no responsibilities whatsoever to the surety:

“The Surety agrees that other than as is provided in this bond, it may not demand of the Owner that the Owner shall (a) perform any thing or act, (b) give any notice, (c) furnish any clerical assistance, (d) render any service, (e) furnish any papers or documents, or (f) take any other action of any nature or description which is not required of the Owner to be done under the contract documents.”

NASBP is pleased to bestow award recognition on this owner, who clearly adheres to the notion that notice to the surety is vastly overrated and busy owners should not be required to furnish any documents or information to the surety. This owner doesn’t want to “do squat” regarding its obligations. It’s another story for the surety! This award is also known as the Just-Do-It Award.

2. The Sky-Is-the-Limit Award
This award is presented for broad and vague language that creates significant uncertainly regarding whether the penal sum of the bond is a true limitation:

“Whenever Principal shall be, and is declared by the Obligee to be, in default under the Contract, the Surety shall promptly either remedy the default, or shall promptly complete the Contract through its agents or independent contractors, subject to acceptance and approval of such agents or independent contractors by Obligee as hereinafter set forth, in accordance with its terms and conditions and to pay and perform all obligations of Principal under the Contract, including, without limitation, all obligations with respect to warranties, guarantees and the payment of liquidated damages.”

NASBP is pleased to bestow this award recognition because such ambiguities—“without limitation”– create a robust environment for disputes and litigation, allowing all parties to flex their muscles and wallets and further enriching members of the legal profession. Heck, the sky is the limit of the surety’s obligation.

3. The Heads-I-Win-Tails-You-Lose Award
NASBP proudly bestows award recognition on bond language by which the surety must waive its full or pro tanto release for the obligee’s overpayment to the principal:

“Surety also stipulates and agrees that it shall not be exonerated or released from the obligation of this bond (either by total exoneration or pro tanto) by any overpayment by the Obligee.”

By this language, the surety agrees to waive its overpayment defense. The obligee should not be expected to know whether the approved payment applications are accurate; that is the responsibility of its architect, right? What fun to have the surety sue the architect if the principal has been overpaid for work performed!

4. The Remove-the-Mushroom-Caps-off-the-Rebar Award
There were many contenders for this very special award, as owners vie for the highest creative achievement in turning a performance bond into a project insurance policy so that the surety can skewer its loss ratio on the project. And the award goes to the following:

“Surety shall remain responsible for all patent and latent defects that arise out of or relate to the Contractor’s failure and/or inability to properly complete the Public Work as required by the Contract and the Contract Documents.”

Owners always want to control the risks of construction projects and to dump all the risk onto the surety—and, in due course, the principal—freeing up the obligee’s peace of mind and bank account. Vlad the Impaler would be so proud!

5. The Payment-Bonds-Are-Forever Award
This award is bestowed upon an owner whose payment bond language strongly suggests that the surety waives any time limitation to its exposure under the bond:

“It is further stipulated and agreed that the sole condition of recovery under this bond shall be that the claimant is a person described under [the relevant code section] and who has not been paid the full amount of his or her claim.”

This award winner received extra points for the ambiguity and vagueness of the intent of the “sole condition of recovery” language. Sureties should, after all, expect long-term recoveries under the bond, as their underwriting crystal balls permit forecasting far into the future. This award is also known as the Surety-Is-a-Psychic Award.

6. The Tag-You’re-It Award
This award goes to that very special payment bond, which provided that the surety would not be released from its bond obligation for any reason whatsoever:

“Under no circumstances shall the Surety be released or exonerated from the obligation of this bond by any conditions precedent or subsequent in the bond attempting to limit the right of recovery of claimants otherwise entitled to recover under the bond.”

Precluding the surety’s release for “any conditions precedent or subsequent” would include notice of a claim. What’s a little thing like notice? After all, claimants are busy too.

7. The We’re-All-Going-to-the-Trough Award
This prestigious award recognizes achievement in payment bond language that attempts to convert the payment bond into a project insurance policy AND a payment backstop for anyone who has ever worked for or on the project, or walked past the project, or read about it online, or has a cousin who has a friend who knows someone who might have done something on the project:

“The bond will insure [Freudian slip] to the benefit of all persons have just claims, whether or not they have any direct contractual relationship with the Principal, as well as to the benefit of the Owner.”

NASBP recognizes this payment bond language for having a completely undefined and broad list of potential claimants, including the obligee, the architect, the project manager, all tiers of subcontractor and suppliers, as well as pedestrians who trip on the broken sidewalk.

I hope that you have enjoyed these very tongue-in-cheek NASBP SSLAB awards. While I had a bit of fun with this article, improper and inappropriate bond language such as the recipients of the above awards is a real issue in the industry. NASBP is grateful to its members and affiliates who have been forwarding such bonds to NASBP for advocacy assistance. NASBP drafted and sent dozens of letters this year to federal, state, and local contracting agencies regarding bond language improprieties and difficulties.

We are trying to educate owners that onerous bond terms will stifle competition, increase the cost of projects, and reduce the number of small and emerging contractors that are able to participate in such projects. We have had a number of successes, although there is still much work to do. I urge you to forward onerous bonds (and contracts) to NASBP, along with full obligee contact information, so that we may consider advocacy options.

And, remember that your bond submissions could be contenders for next year’s NASBP SSLAB Awards.

The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or (202) 686-3700.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.