Under a construction contract, there is an Owner (project owner), Contractor, and Subcontractors. For the purposes of this article, the term “Obligee” refers to whoever has contracted with a lower tier party (Owner if contracted with Contractor or Contractor if contracted with a Sub). The term “Principal” refers to the lower tier party that provided the performance bond (Contractor if contracted with the Owner or Sub if contracted with the Contractor). The party that provided the bond is the surety.
The surety provides third-party assurance of the principal’s performance. The surety does not “assume” the primary obligation, but is secondarily liable. The principal remains primarily liable for performance of its contract. The obligee is protected by the bond against financial loss as a result of the principal’s default. The bond does not, however, guarantee that disputes will not arise between the obligee and the principal. If there is a legitimate dispute between the principal and obligee, the surety is not normally in a position to resolve it. That does not mean, however, that the surety will turn its back on a project dispute or disagreement. Disagreements can become disputes. Disputes can become breaches of contract. Breaches of contract can become defaults that justify termination of contracts.
Here are some reminders & tips when considering making that critical decision to default, terminate, and file a performance bond claim. However, please note that I am NOT an attorney, and one should seek legal counsel in contractual disputes and the performance bond claim process.
Overall, a performance bond claim is a serious matter as part of a contract dispute, and any party that commences with the claim process should be prepared for what they’re getting into. No one ultimately wants a bond claim to occur, and theoretically they should never happen, as the parties that enter into the contract should perform their respective obligations in the first place. But this does not always happen, which is why there is a place & purpose for bonds.
This article was written by Ben Dycus.
Ben has been with Houchens Insurance Group since 2008, when he started as an intern in our Lexington office. He became the Lexington surety department’s sales leader in 2012 and continues in this role today. He works with clients in various industries & situations where bonds may be needed, primarily in the construction industry. He understands the importance of the surety relationship in establishing, maintaining, and growing surety programs and accommodating individual bonds needs with the utmost efficiency, effectiveness, and proactiveness, supporting his clients and freeing them up to optimally pursue their business & personal goals.