Masonry Magazine July 1961 Page. 14
Contract Bonds
(Continued from page 9)
Should the surety give the contractor a loan just like a bank? Or should it decide upon some other course of action? There is no chart or blueprint to which the surety can turn for an answer. The claim man must approach the problem with an open mind and get a full picture of the situation as fast as circumstances permit. This may mean working fifteen or sixteen hours a day for several days.
There have been and will be cases where a surety can economically finance an insolvent contractor. There have been and will be cases where it will not help anyone for the surety to step into the contractor's shoes. If a surety first hears of a contractor's trouble because the contractor has filed a voluntary petition in bankruptcy, there is, of course, no chance to offer assistance, either financial or engineering. A trustee in bankruptcy is not likely to be interested in completing a defaulted job. So, in the event of bankruptcy, the bonding company is immediately faced with the completion problem.
There are, of course, various ways of arranging to have a job completed, i.e. (1) Re-advertise for bids. (2) Force account. (3) Cost plus a percentage with an upset price. (4) Cost plus a fixed fee. (5) Negotiated contract with a reliable contractor.
To select the most satisfactory way requires considerable study and is usually a difficult decision.
It is not unusual to find several different interests claiming the contract balance in the hands of the owner. The surety, of course, wants the money for completion of the contract and payment of bills on the bonded job. A trustee in bankruptcy wants the fund for general creditors. If the contractor had a bank loan, the bank will undoubtedly have an assignment on which to base its claim, and if the contractor is back in his tax payments, which is not unusual in an insolvency case, the United States Government will have a tax lien to file with the owner in an effort to reach the contract balance.
It is a recognized rule that the owner has the right to use the contract balance for completion of the work before the trustee in bankruptcy or the bank assignee or the tax collector can get his hands on any part of it. So, in some instances, the surety has no choice but to waive whatever right it might have to complete the work. In those instances, the surety often puts the remaining work out for bids, and after the bids have been opened, asks the owner to enter into a new contract with the low bidder who will file new bonds at the time the new contract is signed.
At the time the new contract is entered into, the surety can give the owner its check for the difference between the unpaid contract price and the amount of the new contract up to the bond penalty so that the owner may have in is hands at that stage the full excess cost of completion.
As soon as completion of the work has been lined up, the surety directs its attention to disposition of its liability for the contractor's unpaid bills. Of course, if there is any unpaid labor, that is paid immediately upon default, even before arrangements for completing the work have been started. Payments due subcontractors and furnishers are made immediately after arrangements have been lined up for completion.
A claimant, in order to protect his rights under the Payment Bond, must be familiar with any provisions having to do with the giving of notice or the institution of suit. Since almost every state has different requirements concerning notice and suit, I will confine my comments on this to the Federal Act.
The standard form of Payment Bond used by the United States requires that the contractor shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in the contract.
Persons who deal directly with the prime contractor are not required to give notice of their claims. However, persons who furnish labor or material to subcontractors do not have a right of action on the Payment Bond unless they have given written notice to the contractor within ninety days from the date on which such claimant performed the last of the labor or furnished the last of the material for which claim is made.
The written notice required by the statute is not a formal document. Nevertheless, it should contain sufficient information to enable the contractor to identify the claim with reasonable certainty. The most convenient method of service of such notice is by registered mail directed to the contractor at his place of business.
No suit shall be brought by a claimant after the expiration of one year after the day on which the last of the labor was performed or material was supplied by him.
The state statutes, like the Federal Miller Act, have provisions requiring notice and containing limitations concerning the filing of suits which must be complied with if a claimant desires to look to the Payment Bond for his protection. On private work, the bond itself contains similar provisions concerning notice and suit.
Before closing, I want to say something about the rights of a bonding company to recover a loss it sustains under a Bid Bond, a Performance Bond, a Payment Bond or a Maintenance Bond.
It is the practice of bonding companies to take, prior to the execution of any Contract Bond, a written application for the bond. The agreement in the application which the contractor signs, says, among other things, that the contractor will indemnify the surety from all loss and expense that the surety may incur or sustain as a result of executing the bond. And this means exactly what it says.
The agreement goes on to say that in event of default, there is assigned to the surety, among other things, the equipment and material at the site of the work and any money due
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MASONRY - JULY,