Corporate sureties will not issue payment and performance bonds without collateral … and indemnification. In the event of a loss on the bond, the surety wants recourse. Very large, deeply capitalized construction companies may be able to meet these requirements within the business entity itself. The majority of construction companies cannot. The individual owners of the company must co-sign the industry standard General Agreement of Indemnification (GAI) and often pledge their personal assets.

A surety sued its principal/contractor on a bond loss. The performance surety had settled a bond claim by the project owner without the participation or consent of the contractor and without any judicial determination of contractor liability. The individual shareholders and their spouses, co-signers of the GAI, cried foul. However, a federal appeals court was unsympathetic, as the plain language of the GAI gave the surety these rights.

The second case in this issue involves a claim for changed work. The contractor had added a claim item for differing site conditions. The site condition claim was not viable—the contract provisions in question related to the manner in which the work was to be performed, not the physical conditions at the worksite.

Under a standard General Agreement of Indemnification, a performance surety had exclusive discretion to settle project-owner claims against the performance bond. The contractor’s lack of participation in the process and lack of consent to the settlement were not evidence of bad faith on the part of the surety.

A contract did not misrepresent physical conditions at the worksite. Contractor allegations indicated, however, that the government directed performance of the work in a manner which differed from the contract requirements.

The distinction between a subcontractor and a supplier of materials or equipment is sometimes blurred. Subcontractors perform construction work at the site. Suppliers have a more limited role at the site, typically delivering their product and sometimes installing it. The difference is more than semantic—it can affect rights to mechanic’s liens and payment bond coverage. It can also have an impact on licensing requirements.

A California company designed and furnished custom wine cellars. The general contractor discovered the company did not have a contractor license and attempted to use the unlicensed status to recoup payments it had made. The wine cellar company said it had merely installed the equipment it had delivered; however, a court ruled this was no “plug-and-play” situation.

The second case in this issue involves the authority of a project architect to block final payment after substantial completion and use and occupancy by the public project owner. The construction contract made architect approval a precondition to the final payment release, so the matter came down to the scope of the architect’s discretion.

The third case addresses a bid protest about a municipal project owner that mishandled procurement in a number of ways but showed no indication of favoritism or malintent. A Connecticut court expressed reluctance to impose its judgment and supersede the contract award decision of the municipality.

A subcontract called for improvements permanently affixed to a structure. This was not merely an equipment delivery—a contractor license had been required. The prime contractor did not lose its rights under the licensing statute when it terminated the subcontract for its own convenience.

The approval of a final payment application by the project architect was, under the terms of the contract, a prerequisite to release of final payment. The contractor could not use the state prompt payment statute to mandate release of payment, even though the project was certified substantially complete and was in use by the public.

Despite ambiguity in the specifications and the right for bidders to take exceptions to the specifications, a court would not supersede a municipality’s admittedly imperfect procurement process.

The AIA General Conditions calls for designation of an “initial decision maker”—usually the project architect—to respond to disputes. The process leads to nonbinding mediation and binding arbitration, if necessary. But, can the initial decision become final and binding, a damage assessment to be confirmed in court, much like an arbitration award?

A Texas court recently rejected this argument. The decision, issued by the project architect, adopted a repair contractor’s pricing spreadsheet that was unsupported by documentation or expert opinion. It was not credible evidence. The contractor, regardless of the initial decision, had not lost the right to contest the owner’s damage claim.

The other case in this issue involved a state “insurance bad faith” statute that imposed punitive damages on insurers that demonstrated a lack of good faith in processing claims. The Pennsylvania Supreme Court was asked if the statute also applied to a construction contract payment bond surety that had refused to compensate an unpaid subcontractor.

The initial decision of a project architect was not, under the AIA General Conditions, final and binding with regard to the cost of corrective work required on a project. The contractor could challenge the decision in court, and a trial court should not have turned that amount into a judgment against the contractor and its performance surety.

A payment bond on a construction contract was not an insurance policy. The state insurance bad faith statute did not apply to the surety’s conduct. However, the surety was responsible for an arbitration award in favor of an unpaid subcontractor.