Performance Bond Disputes

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 Performance Bond Disputes

Construction disputes are quite common and are sometimes unavoidable, despite the best intentions of contractors, consultants, and owners. Most disputes are caused by disagreements regarding the scope of work, design issues, and possible defects in the work. These disputes can be costly for everyone involved and lead to delays, protracted lawsuits, and even construction bond claims.

The biggest single cause of default notices is a delay. In the event of a delay beyond the contractors’ control, the contractor must adhere to the terms regarding the notice provided to the owner. In a recent court case, the contractor lost out on what would have been a substantial sum for a delay due to their failure to comply with the contract’s notice provisions.

The contractor should also be aware of the dispute resolution mechanism built into the contract and adhere to it. Most of these do not permit a suspension of work while the dispute is resolved. Stopping work almost always results in a claim that cannot be defended.

Understanding your contracts is crucial, but proper documentation is just as important. The days of verbal agreements are over, despite the best intentions of all parties. Documentation and communication are essential to prevent disputes and delays, or at the very least, they prepare you if they occur. You can avoid relying solely on verbal communication by documenting conversations with written correspondence.

However, disputes do occur. As a general rule, the side with documentation supporting its position will prevail. Understand your options under the contract and how they need to be communicated (time extensions, mediation, arbitration, etc. ), and be prepared to act quickly to protect your rights.

For so many owner-operators, however, time is precious and limited. Many contractors manage multiple job sites every day while also trying to keep a healthy backlog of future work to maintain a healthy backlog. Properly documenting your projects and reviewing each contract diligently can be quite time-consuming, and it is often pushed to the side for the next urgent task.

What Are Bonds?

Generally, a bond is a type of security interest where one party promises to repay the money they borrowed from another party by a specific date and at a fixed interest rate.

A company may issue a bond to an investor to borrow large amounts of money. At some point, the company will have to repay the investor for borrowed money. The company may have to pay monthly interest for the bond or fully reimburse the investor by a certain date, depending on the terms of the bond.

What Is a Performance Bond?

A performance bond is a type of surety bond issued by a bank or an insurance company to guarantee the completion of a project, usually by a construction contractor. The client can secure performance bonds to ensure that they will be compensated if the project is not completed.

A contractor may fail to complete the building project because they went bankrupt in the middle of it. In such cases, the client would be protected by the performance bond being issued in their favor.

In most cases, performance bonds are required for larger projects that require multiple contractors to bid for participation. They may also be known as “contract performance bonds” or “standby letters of credit.”

Is This the Same Thing as a Payment Bond?

Performance bonds are sometimes included as a larger “Performance and Payment Bond.” The “payment bond” ensures that the contractor will handle the labor and materials payment costs per the contract specifications. In contrast, performance bonds are not the same thing since a performance bond focuses mainly on the actual completion of the project (i.e., the “performance” of the contract).

Performance bonds are also related to other types, such as fidelity bonds. Performance bonds are not considered insurance as they typically cover 100% of the contract price.

How Do Performance and Payment Bonds Work?

Bonds are written obligations to pay a fixed sum of money in the event of a specific event or condition.

An event that may trigger performance bonds is when a project stops in the middle of the construction and is never completed. For payment bonds, the specified event is typically the non-payment of workers or other parties required to complete the project.

Typically, a contractor purchases a bond from an insurance company and then transfers the cost to the party who hired them (i.e., the construction project owner).

If the project is not completed or the parties are not properly paid, the insurance company will compensate the project owner.

Performance and payment bonds protect a construction project’s owner rather than the contractor or subcontractor.

Generally, performance and payment bonds are costly for contractors since they have to purchase a bond for each construction project.

Additionally, bonds are more commonly issued for larger construction projects, ranging from $25,000 to $500,000. Further, contractors a bond company has already approved are usually considered more reliable than non-bonded contractors.

What Happens in the Event of a Breach of Duties or a Default?

Whenever the principal fails to fulfill their contractual duties, the obligee will be able to recover their losses through the funds provided by the surety. In most cases, they will be able to recover lost profits, but in some jurisdictions, recovery may be limited to the bond amount. The obligee is usually required to pay a yearly premium to ensure that the funds are available in the event of a breach.

Once the surety has been reimbursed, it will turn to the principal for repayment. If necessary, the surety can also recover costs from the principal, such as litigation fees and court costs.
Occasionally, the obligee fails to pay the surety. This may result in a lawsuit requiring the obligee to pay the surety. If the principal fails to make payments, a lien may be placed on their property to recover the debt.

What Are Some Different Kinds of Performance Bond Disputes?

Performance bond disputes can involve several different legal issues. Most of these have to do with a breach of the construction contracts and can involve issues like:

  • Non-performance of duties
  • Unauthorized assignment of contract duties
  • Fraud with regards to performance bond agreement or with the project contract itself
  • Illegal activity associated with the project (such as hiring undocumented workers)

Performance bonds can be affected by these types of factors. In addition, if the client is found to be in violation, they may lose their right to be reimbursed under the performance bond. Often, these types of violations require the assistance of a lawyer, especially if the parties are required to go to court.

Do I Need to Hire a Lawyer for Help Resolving a Performance Bond Dispute?

Many types of projects require performance bonds. You may wish to hire a business lawyer if you need help reviewing or negotiating a performance bond. Your lawyer can help you understand the contract laws in your area and can help you achieve the most favorable arrangement for your goals.

Additionally, you can retain an attorney if you need to file a private lawsuit in connection with a performance bond.


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