This issue could be subtitled “Bonding Companies Behaving Badly.” Two cases involved sureties engaged in sharp, heavy-handed tactics. One got its way. The other didn’t. In this week’s first case, a surety informed the project owner that its indemnification agreement with the bonded contractor gave the surety the right to the contractor’s contract payments. The surety instructed the owner to direct all payments to the surety, even though the owner had not terminated the contractor for default and considered the contractor entitled to an outstanding progress payment and, eventually, the contract retainage. The surety got its way. The General Indemnity Agreement assigned all the contractor’s payment rights to the surety, even in the absence of default, and this was enforceable against the contractor.
The other surety attempted to disavow its performance bond obligations on the grounds the project owner failed to maintain adequate quality assurance, enabling the surety’s bonded contractor to perform noncompliant work. The owner had not insisted on shop drawings and had not inspected the progress of the work prior to issuing periodic payments. A Kentucky appellate court rejected this argument. Owner inspections are for the benefit of the owner. The surety is responsible for the performance of its bonded contractor. The surety was not discharged from its performance bond obligations.
The third case involved a “no-damage-for-delay” clause. The clause was not enforceable against the contractor because the project owner issued notice to proceed before a lead contractor completed its work, denying the contractor complete access to the job site. This was affirmative interference with the contractor’s work, an exception to enforceability under Pennsylvania law.