Legal Spotlight

NASBP Presents Third Annual SSLAB Awards

NASBP is proud to present its Third Annual Special Surety Language and Bond (SSLAB) Awards. This relatively new awards tradition has received a very positive response from NASBP Members and Affiliates, as there is little more gratifying that recognition from peers in the industry for special accomplishments. The SSLAB Awards were instituted to recognize achievements in outstandingly special bond and contract language. The recipients of these singular awards earned their honors by meeting some or all of the following bond and/or contract language criteria: treating surety bonds as traditional insurance policies, placing undue and onerous risks on contractors and sureties, restricting competition, using ambiguous and/or non-standard clauses, and penalizing small and emerging contractors.

Yes, the SSLAB Awards are tongue-in-cheek awards; but they are given for real-life bond and contract language forwarded to NASBP by its members and affiliates. This year there was a singular bond form that so excelled in various categories that NASBP has determined to grant one SSLAB Award of Merit in 2016. Indeed, when the bond form was forwarded to NASBP by a chagrined member, I responded that it was one of the worst bond forms, if not the worst, I had ever seen. The Member, who shall remain anonymous unless the Member chooses to self-identify, has taken an especial sense of wonderment in providing a bond form of such model egregiousness. And, for once, the year’s worst bond form, at least of those forms reviewed by NASBP, is not out of the state of California.

Congratulations to the NASBP 2016 SSLAB Award of Merit recipient, a “Performance & Maintenance Bond” (Bond) from a city in America’s Heartland (City)! Some of the more salient features of the Bond are addressed below:

First, the City is to be recognized for its foresight in combining features of a performance bond and a maintenance bond into one document, saving time on multiple bond executions. In a model of ambiguity and dispute encouragement, the Bond provides that “the Contractor shall in all particulars promptly and faithfully perform each and every covenant, condition, and part of the Contract, according to its true intent and meaning in each case . . . .” Whatever that means. Oh, yes: the judge can help us figure that one out. Near and dear to sureties’ hearts is the very short response time in the Bond, along with conflicting language concerning the Owner’s discretion: Upon the delivery of the Owner’s written notice of breach or default by the Contractor as provided in Paragraph 2 above, the Surety may promptly remedy the breach or default or must, within ten (10) days, proceed to take one of the following courses of action.  The Bond then gives several options, providing that all decisions are in the “Owner’s sole discretion” or the “Owner’s sole subjective discretion” but Owner’s discretion shall “not be unreasonably withheld.” Again, a judge can help the parties to the Bond figure out what that language means.   The most notable feature of the Bond is the lively and robust language that seems to transform it into a forfeiture bond:                      IT SHALL BE NO DEFENSE TO SURETY’S OBLIGATION TO UNDERTAKE ONE OF THE PRECEDING COURSES OF ACTION THAT THE CONTRACTOR CONTENDS THAT IT IS NOT IN BREACH OR DEFAULT OF THE CONTRACT, OR THAT THE NOTICE OF BREACH OR DEFAULT WAS DEFECTIVE, OR THAT THE CONTRACTOR HAS RAISED ANY OTHER CLAIM OR DEFENSE OR OFFSET, PROVIDED ONLY THAT SURETY HAS RECEIVED THE WRITTEN NOTICE OF THE OWNER AS SPECIFIED IN PARAGRAPH 2.  This language appears to eliminate any of the surety’s defenses, either those of the contractor or surety-specific defenses. Also, the drafter of this provision has creatively misinterpreted the surety’s duty to conduct an independent investigation. I think that this is another clause that must be interpreted by a judge.

It is bond forms such as this Performance & Maintenance Bond that keep our court systems robustly active and our construction and surety arbitrators off the streets. A well-deserved SSLAB Award of Merit!

In addition, and as an aside, I should mention that NASBP did not award the I-Don’t Need-to-Comply-With-the-Law Award this year, as there were just too many deserving recipients to bestow a single award. A number of jurisdictions, particularly local jurisdictions, across the country are still mandating resident agent signature and countersignatures on their bid, performance, and payment bonds; and those agencies will reject a bid that does not comply with this illegal requirement. NASBP sends numerous letters each year to such agencies, informing them that resident agent signature and countersignature requirements have been either held unconstitutional by courts or repealed in every state in the Union.

I hope that you have enjoyed these tongue-in-cheek NASBP Annual SSLAB Awards. In addition to offering a bit of fun, they serve to highlight—humorously—the serious subject of onerous bond and contract language. NASBP is grateful to its members and affiliates who have been forwarding such bonds and contracts to NASBP for advocacy assistance. NASBP drafted and sent dozens of letters this year to federal, state, and local contracting agencies regarding bond and contract language improprieties and difficulties. The staff at NASBP sends these letters in order to educate owners that onerous bond forms and contact terms will likely stifle competition, increase the costs on such projects (with the concomitant burden on taxpayers), and reduce the number of small and emerging contractors that are able to participate on such projects. And, while we have had a number of successes, there is always more work to do.

In recognition of and in response to the work needed to educate owners, NASBP has a new initiative underway, which will be “unveiled” in 2017, a new website, SuretyLearn for Owners, similar to the highly successful SuretyLearn for Contractors. The articles and information on the site will specifically target public and private owners, to educate them about bonds and the surety bonding process.

If you submit to NASBP a “problematic” bond or contract, in addition to obtaining advocacy assistance from NASBP, your bond or contract submission could very well be a contender for next year’s 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.