Protecting the Job (Surety)

Question 1

Difference between surety and insurance

Answer 1

Surety provides guarantee, insurance based on indemnity principle

Question 2

Indemnity principle

Answer 2

Insured indemnified for loss to the actual property for the actual lose

Question 3

Surety bond

Answer 3

• Owners often require them

- Default: owner can call upon surety bond to complete obligation

Question 4

Surety bond can be a pre-qualification tool

Answer 4

confirms tenderer has cash, character, capability, credit and continuity to pursue project (will only issue if they think you will get it done)

Question 5

When will surety not be liable?

Answer 5

If default attributable to obligee

Question 6

4 Criteria establish obligation in surety ship

Answer 6

1. Must be a tripartite relationship
2. Surety’s obligation must be collateral or accessory to the obligation of the principal
3. Surety’s obligation to obligee must be the same as or less than the obligation of the principal
4. The surety must be unconnected to the transaction except as surety

Question 7

Tripartite Relationship

Answer 7

• involving the principal, the surety and the obligee

- Principal= general/subcontractor—person who bonds the job

Question 8

Surety’s obligation must be collateral or accessory to the obligation of the principal

Answer 8

Surety’s obligations only triggered if principal defaulted

Question 9

Principle not absolved

Answer 9

surety will seek recovery against principal

Question 10

Accommodation Surety’s

Answer 10

Relationship entered into without expectation of renumeration, to accommodate and assist people (ex: parents cosigning)

*not common in construction

Question 11

Compensation surety

Answer 11

entered with the sole objective of profit and gain, enter with the expectation they will profit

Question 12

Types of surety bonds

Answer 12

• Bid bond
• Performance bond
• Labour and material payment bond
• Lien bond

Question 13

Bid Bond

Answer 13

surety obligation assuring that if tender is selected the principal will enter into contract B

Question 14

If principal defaults (bid bond)

Answer 14

defaults surety will pay oblige the difference between the bid of the principal and the amount of the substituted contract

Question 15

If new contract price lower (bid bond)

Answer 15

surety may be absolved from paying

Question 16

When will surety not be liable for bid bond

Answer 16

If a valid reason exists for principal not to enter into contract B

Question 17

Performance bond

Answer 17

promises that if the principle defaults the surety will either remedy the default, complete the contract, or obtain bids to complete (pay difference to penal sum)

Question 18

Penal Sum

Answer 18

bond creates a maximum amount of compensation the surety will provide (specified in contract)

Question 19

What can surety pay in performance bond?

Answer 19

the lesser amount of the penal sum OR the obligee’s proposed cost of completion minus the balance of the contract price

Question 20

Remedying the default (performance bond)

Answer 20

surety finances increased labour and material to get the job done

Question 21

Completing the work

Answer 21

surety becomes contractor and responsible for hiring trades and suppliers (contracts assignable if penal sum reached)

Question 22

Obtain bids

Answer 22

retender work and present lowest bid to obligee, if no complaints about the tender contract and obligee still says no the performance bond is discharged (pay difference to penal sum)

Question 23

CA debate on what scope of performance bond is

Answer 23

• ON: surety obliged to fulfill all principals obligation including collateral financial obligations
• SASK: surety obligation limited to completing physical construction obligation

Question 24

Surety defences to escape liability in performance bonds

Answer 24

1. Underlying contract is unenforceable
2. No default
3. Failure to give notice
4. Default can be traced back to obligee
5. If there is a material variation between the principal and the obligee made to the contract without the surety’s consent
6. Limitation for actions: standard bond has limitation period of two years
7. Obligee has not suffered damages from principal’s default
8. Obligee does not have a bond under seal at the time the claim is made

Question 25

Failure to give notice

Answer 25

Obligee needs to give timely notice to surety of default that may lead to calling upon the bond AND actual prejudice suffered by the surety

Question 26

What is the limitation period for performance bond calculated from?

Answer 26

The earlier of: - The date from which the project is substantially performed - Building in use - Principle defaults

Question 27

Labour and Material Payment Bond

Answer 27

surety’s obligation is to step in and pay principal’s direct subcontractors and suppliers if the principal fails to do so

Question 28

Federal Government version of Labour and Material Payment Bond

Answer 28

the class is extended to second tier claimants (sub-sub-contractors)

Question 29

Labour and Material Payment Bond limited to claimants who...

Answer 29

have provided labour and material that is reasonably required to be used in performance of the contract

Question 30

Owner duty to disclose under Labour and Material Payment Bond

Answer 30

no duty to disclose the existence of the bond to possible claimants until someone makes a clear and unequivocal request about the bond

Question 31

Defences for surety in Labour and Material Payment Bond

Answer 31

1) Failure to obtain proper notice (prejudice) 2) 1 year limitation period on the bond following the date on which the principal worked on the contract *Material variation not a defence

Question 32

Proper notice in Labour and Material Payment Bond

Answer 32

Standard bonds require 120 days after they have been paid in full

Question 33

Lien Bond

Answer 33

- allows title to property subject to liens to be cleared | - Lien attaches to the bond instead of land

Question 34

When are lien bonds registered?

Answer 34

Registered at the outset of asserting lien rights (not an admission of guilt)

Question 35

If lien claim not made out (lien bond)

Answer 35

claim re-delivered to surety for cancelation

Question 36

Lien bond needs to guarantee enough money to...

Answer 36

pay out lien claims