Booby Trap Link (Bad Drafting of Bail Bond)

Booby Trap Performance Bonus

“The Bond, for the value received, hereby stipulates and agrees that if the Contractor has been declared in default by the Obligor, and there has been no uncontested breach, that has not been remedied or waived, of the Obligor to pay the Contractor according to is necessary under the Construction Contract: (i) The Bond will promptly remedy the breach … “

Waaaa ?! We read this over and over again to understand the implications. Is this just another boring form of bonding, or is there a booby-trapped, elaborate effort to gain an edge on bail?

Each surety company has its own standard forms of performance and payment surety. For us, we prefer to use the unmodified AIA A-312 P&P bond. This is a well balanced and widely accepted way. Whenever we receive a special bond form, we should review it carefully. Why did the obligee spend the time and money to change this? There must be some advantages for them.

Last week we received a mandatory bond form from the obligee in a private contract and a key phrase is mentioned above. Our client is the main / GC contractor. Sometimes the unique link ways are not so bad. Let’s analyze this one. Maybe you will meet him at some point.

This language is very important because it refers to the Liability of the obligee under the contract. In order for the Obligor to be entitled to claim a performance bond, he must fulfill his part of the bargain, which is PAY for the work. Is a bond claim for non-performance reasonable if the obligee has not paid the contractor? Of course, no! They cannot work for free.

What are the implications of the wording in that special bond form? Let’s use the A-312 as a reference point. (Owner means Obliged) It says:

“If there is no Default of the Owner under the Construction Contract, the obligation of the Bond under this bond will arise after …” And in the definitions it goes on to say:

“Failure of the Owner. Failure of the Owner, which has not been remedied or waived, to pay the Contractor as required by the Construction Contract or to perform and complete or comply with other material terms of the Construction Contract.”

Pretty simple. If the landlord fails to pay for the work and later makes a claim for bond, the bond has a suitable reason to deny the claim. So how does it work in Booby Trap Bond? Instead of the complicated talk of a lawyer, let’s do it in plain language. He says …

Conditions of breach of the Obligor:

1. Forgot to declare the Contractor in default (an official written statement) and,

2. There must be a breach not repaired or not waived payment to the Contractor that the Obligor has not disputed

Ugh … that last part. Suppose that, in all cases, the Obligor will contest an allegation that he has failed. When they do, the bond has no claim defense even if the contractor has not been paid.

What a trap for the unsuspecting bond subscriber! It would have been fairer if the bond said “The obligee has the right to claim the bond even if they do not pay for the work.” But then people would understand …

Special forms of attachment can be benign or trapped. We just have to read all of them to find out.