By Marchelle M. Houston, Joseph Monaghan, Armen Shahinian

I. Introduction

In the second edition of this Manual, the author of the opening chapter ¹ analogized the surety claims professional to the ship's captain called upon to navigate a stormy sea created by circlUllstances over which the captain had no control. In the ten years since that edition was published, sureties have encountered an unprecedented level of claims activity and an increasing number of inventive bond and contract provisions seemingly designed to expand the traditional scope of the surety's liability. Like the sea captain, the surety and its representatives must navigate these ever changing waters. This opening chapter again seeks to provide an overview of the provisions contained in the bonds, construction contracts, indemnity agreements, and statutes that must be considered when evaluating the surety's rights, remedies, defenses and options upon assertion of a claim by a bond obligee.

II. Bond Provisions

Unlike insurance policies which are typically drafted by the insurer, the bond form is usually chosen by the obligee and, in the case of a public project, is often prescribed by, or designed to meet the requirements of, a statute or applicable administrative regulations.² As a result, the provisions of a typical surety bond are favorable to the obligee and it is unusual for sureties to have the opportunity to negotiate the terms of a contract surety bond - i.e., either the bond is issued by the surety in the form presented by the obligee or the undelWriters decline Issuance.

Perhaps the most common bond forms in use today are those published by The American Institute of Architects, which promulgates forms of bid bonds, performance bonds and payment bonds. These forms are crafted by an association of architects, who, some might suggest, are primarily concerned with the interests of the owners who retain their services. Moreover, obligees sometimes modify these forms to further expand the surety's liability and/or restrict recourse by the surety to traditional common law defenses. As one author has recently noted:

An obligee promulgated bond form is often a product of that obligee's most recent bad experience. If the last surety on a default did not move fast enough, the time for performance is shortened. If some loss was not covered, the next bond is changed to include that element of damage. ³

For instance, obligees may seek to alter a bond form to enlarge the surety's liability or restrict its ability to mitigate its losses by, among other things: requiring the surety to perform the bonded contract upon assertion of a claim and thereafter litigate the propriety of the termination; . enlarging the obligations of the surety beyond the commitment to arrange and/or pay the net additional cost for performance of the balance of the contract work; varying the burden of proof applicable to its claim; precluding the surety from utilizing its defaulted principal in the performance of the contract; or unreasonably shortening the time frame within which the surety may assert any defenses.

In addition to changes wrought by owners by modification to bond forms, sureties are increasingly faced with requests by third parties for, not only traditional dual obligee status, but for expansive dual obligee riders that seek to increase the surety's exposure under the bonds. A traditional dual obligee rider grants rights to a third-party, ordinarily a lender,⁴ conditioned upon the satisfaction of the obligee's obligation to make timely payment to the principal in accordance with the terms of the contract. However, some lenders have recently begun to seek additional protections :trom the surety which alter the surety's rights and defenses.

For example, lenders may seek the right to receive independent notice and an opportunity to cure a default on the part of the obligee. Such a cure period, if unreasonably long, could effectively eviscerate any contractual right the principal may have to cease performance in the face of the obligee's non-payment, because -- in derogation of that contractual right -- the surety would have continuing exposure to claims by the dual obligee, and the principal would have a corresponding indemnity obligation with respect to such a claim. Moreover, by the time a principal has declared a default on the part of the owner for non-payment, there has already been a substantial gap in payment. Requiring the principal to continue to perform without compensation during an additional cure period could cause the principal's financial inability to perform the contract during the prolonged period of non-payment. Additionally, the surety would presumably have no control over whether the principal provided timely notice to the lender and yet might lose valuable defenses as to the lender under a bond form requiring such notice. Lenders may also seek to utilize the dual obligee rider to enlarge the surety's liability, calling for such damages as attorneys' fees or consequential damages not initially contemplated in the bond and not traditionally the surety's responsibility under a bond form requiring only that the surety either pay for or perform the work necessary to complete the bonded contract.

It has always been axiomatic that upon receipt of a claim, the surety claims professional should not assume the content of the applicable bond, contract or, for that matter, the indemnity agreement. Rather, each of those documents must be carefully reviewed at the inception of the claim, together with any applicable statute or regulations, in light of the disparity of rights and obligations often embodied therein and the potential impact to the surety of uncommon or obscure provisions. In more recent years, adherence to this axiom has become even more critical.⁵

The terms of the bond, like those of any other contract, establish the extent of the surety's liability. In most jurisdictions, the "liability of a surety should not be extended by implication beyond the terms of the contract, i.e., the performance bond" and "a surety on a bond does not undertake to do more than that expressed in the bond, and has the right to stand upon the strict terms of the obligation as to his liability thereon.”⁶ As one court has declared:

[T]he obligation of a surety is measured by the contract of surety. The surety's obligation cannot be extended by implication or enlarged by construction beyond the terms of the suretyship agreement, in a way to include any subject or person other than expressed or necessarily implied from the suretyship contract. In other words, a surety in Florida is bound to the extent and in the manner indicated in the undertaking, and no further. The Courts of Florida will not presume that the contracting parties intended to include in their agreement a provision other than, or different from, those indicated by the language used.⁷

This doctrine of contract interpretation is substantially different than that applicable to insurance policies where, as a rule, ambiguities are construed against the insurer. This disparity in the rules of contract interpretation is grounded in the fact that a surety bond, unlike an insurance policy, does not bear any of the elements of a contract of adhesion; notably, it is seldom drafted by the surety and the surety does not owe a fiduciary duty to either the principal or the obligee.⁸ The enforcement of the strict terms and limits of the surety's undertaking can often have very real practical effects and thus it is important to disabuse a claimant, or a reviewing court, of the notion that a surety bond is akin to an insurance policy for purposes of construing the surety's obligations and defenses.

Importantly, for instance, the bond may include notice or limitations provisions that, if not complied with, operate as a complete defense to any suit or claim. As a general rule, a reasonable contractual limitation is enforceable unless expressly prohibited by statute or contrary to public policy, even when a claimant had no knowledge of this bond provision.⁹ However, in some jurisdictions, specific statutes preclude parties from contractually limiting actions to a shorter time period than that established by the legislature. ¹⁰

A. Bid Bond

A bid bond typically provides that if the principal is the successful bidder, but does not enter into the contract and provide performance and payment bonds, the principal and the surety are bound to pay a stated sum to the obligee. The most common fonn of bid bond for private contracts imposes liability upon the principal and surety in the amount of the difference between the principal's bid and the bid of the next highest bidder, not to exceed the penal sum of the bid bond.¹¹ In some jurisdictions, though, the penal sum of the bid bond is deemed liquidated damages which are recoverable regardless of the actual damages incurred.

In the private context, where a liquidated damages provision is not reasonably related to actual damages, it would be unenforceable as a penalty.¹² However, with respect to public construction, bid bonds are usually required and designed in accordance with a statute, and where the penal sum of the bid bond is established as a liquidated damages provision by statute, it will be enforced as such regardless of the actual damages incurred by virtue of the principal's failure to execute the contract in accordance with its bid.

While the traditional surety defenses to a claim against a construction performance bond are seldom implicated by a claim against a bid bond, such a claim is nonetheless subject to any defenses the principal might have for relief from its obligation to enter into the contract. The most commonly litigated defense to a bid bond claim arises from the principal's error in its bid.¹³ While contract law disfavors rescission for unilateral mistakes, courts have allowed bidders to rescind their bids where it would be inequitable to require the principal to perform the contract at the bid amount; where rescission is appropriate, the surety is relieved of liability under its bond bond. The four factors which the surety must explore with the principal to determine whether the principal's mistake presents a viable defense are: (1) whether the mistake relates to a basic assumption on which the contract is made and is a mistake of fact rather than one of judgment; (2) whether enforcement of the bid would be inequitable; (3) whether the parties can be returned to the status quo, which often turns on whether the mistake was promptly discovered and communicated to owner; and (4) whether the mistake occurred regardless of the exercise of ordinary care. ¹⁴

The issuance of the bid bond does not in and of itself impose an obligation upon the surety to issue performance or payment bonds. However, some public entities, pursuant to statute, require that a bid bond be accompanied by, or serve as, a consent of surety to issue the final performance and payment bonds.¹⁵ In those circumstances, the bid bond and consent of surety serve as a guarantee to the project owner that the contractor's surety will furnish bonds in the amount required by the contract if the bid is accepted and the contract is executed by the successful bidder. ¹⁶

B. Performance Bond

A performance bond is conditioned upon the principal's full and faithful performance of the bonded contract. These bonds commonly contain provisions regarding such matters as: the conditions precedent to the surety's obligation; the time period for institution of suit against the surety under the bond; the relevant venue for any such suit; the timing for notice to be provided to the surety; the surety's performance options; the types and measure of damages for which the surety may be liable; and the surety's maximum liability - - the penal sum - - for damages under the bond.

Certain bonds set forth in detail the conduct required of -- or the options available to -- the surety in the event of a termination for default. For example, the current performance bond form published by The American Institute of Architects (the A312 bond form)¹⁷ expressly sets forth the conditions which the obligee must satisfy in the event of a default by the principal; and it then describes the surety's options in the event the obligee satisfies those conditions and asserts a claim on the performance bond, as follows:

3. If there is no Owner Default, the Surety's obligation under this Bond shall arise after:

3.1 The Owner has notified the Contractor and the Surety at its address described in Paragraph 10 below that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to be held not later than fifteen days after receipt of such notice to discuss methods of performing the Construction Contract. If the Owner, the Contractor and the Surety agree, the Contractor shall be allowed a reasonable time to perform the Construction Contract, but such an agreement shall not waive the Owner's right, if any, subsequently to declare a Contractor Default; and

3.2 The Owner has declared a Contractor Default and formally terminated the Contractor's right to complete the contract. Such Contractor Default shall not be declared earlier than twenty days after the Contractor and the Surety have received notice as provided in Subparagraph 3.1; and

3.3 The Owner has agreed to pay the Balance of the Contract Price to the Surety in accordance with the terms of the Construction Contract….

4. When the Owner has satisfied the conditions of Paragraph 3, the Surety shall promptly and at the Surety's expense take one of the following actions:

4.1 Arrange for the Contractor, with consent of the Owner, to perform and complete the Construction Contract; or

4.2 Undertake to perform and complete the Construction Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the Owner and the contractor selected with the Owner's concurrence, . . . and pay to the Owner the amount of damages as described in Paragraph 6 in excess of the Balance of the Contract Price incurred by the Owner resulting from the Contractor's default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment therefor to the Owner; or
.2 Deny liability in whole or in part and notify the Owner citing reasons therefor.

Courts have fairly consistently held that the provisions set forth in paragraph 3 of the AlA A312 performance bond are conditions precedent to the surety's liability and that the obligee's failure to comply with those provisions, or failure to permit the surety to exercise its performance options, discharges the surety from liability.¹⁸ Perhaps for that reason, wary obligees sometimes seek to modify the AlA A312 bond form to eliminate or diminish their notice and meeting obligations and/or the performance options available to the surety.

The surety claims professional must carefully review the bond to determine the obligations of the owner and whether those obligations have been met, as well as the scope of the surety's own performance obligations and the breadth of its performance options. Moreover, performance bonds invariably incorporate by reference the underlying bonded contract between the principal and the obligee, so that the surety must also thoroughly review the pertinent contractual provisions before considering its options and the risks associated with each of those options. Significant contractual provisions will be reviewed later in this chapter.

C. Payment Bond

The standard payment bond provides that the surety shall make payment to subcontractors, laborers and/or materials suppliers who are not paid by the principal. The provisions of the payment bond usually establish: who may assert a claim; the time for submission of a claim; the earliest point at which suit may be instituted; the limitations period beyond which suit may not be instituted; venue for any litigation; and the penal sum. Often the language of the payment bond is based upon, or even incorporates, relevant statutory provisions, which will be addressed later in this chapter.

In responding to payment bond claims, the surety has the right to assert all of the defenses. of its principal, as well as its own separate surety defenses,¹⁹ where applicable. Simply because a subcontractor or supplier is owed money by the principal, or may even have a judgment against the principal, does not establish liability under the payment bond. The claimant must also have complied with the notice and limitation provisions of the bond and prove that its work or materials were utilized on the bonded project or specially manufactured for the project. ²⁰ The subcontract and/or purchase order must be carefully examined to confirm that the claimant has fulfilled its contractual obligations, including any warranty obligations. And where the claimant has performed work on multiple projects for the principal, the account between the parties should be reviewed to ensure that payments made by the principal on bonded projects were properly credited against the bonded obligations.

Finally, the definition of "claimant" contained in the bond may also serve as a defense to a claim. Not every vendor who is owed money from the principal will be covered by the definition of claimant set forth in the payment bond or in the statute controlling that bond. In addition, courts have consistently rejected attempts by obligees to assert claims against the payment bond.²¹

II. Contractual Provisions

The provisions set forth in the contract between the principal and the obligee are obviously significant. The contract guaranteed by the bond is often expressly incorporated by reference and, even if not expressly incorporated, the surety's obligation is typically to perform the bonded contract upon the principal's default, including all of its terms.

The surety must be alert to onerous or problematic contractual provisions set forth in the contract between the obligee and the principal. For instance, where the principal undertook responsibility for any contamination on the site, a surety may elect not to undertake completion to avoid undertaking that obligation. This is especially true because, in some jurisdictions, once the surety elects to respond to an obligee's demand by undertaking performance rather than making payment, the surety is held to have thereby abandoned the protection of the penal sum limit of its liability.²² Thus, potential catastrophic exposures must be identified and all risks assessed before a decision is made which may expand the surety's otherwise limited liability.

Sureties are also being increasingly confronted by "design build" contracts, which may greatly expand the responsibilities of the principal and the completing surety. The primary distinction between design build projects and traditional projects is that in a design build project the design professional is no longer the owner's representative, but rather is partnered with, or acts as a subcontractor to, the bonded principal. This is a distinction that can substantially impact the surety's liability. For instance, in traditional construction contracts, it is the owner which is responsible for design errors. Where such errors cause damage to the contractor, it is entitled to recover for such damages.²³ Under a design build contract, it is the bonded contractor which bears responsibility for such errors; and by virtue of its bond, the. surety typically guarantees performance of such contractual obligation. As a practical matter, the extension of the surety's liability beyond the traditional "nuts and bolts" construction creates a need to identify and address potentially complex design issues at an early stage in the claims process.

Even under a traditional construction contract, a surety often encounters problematic contractual provisions which may require it to adjust the manner in which it responds to a performance bond claim. For example, the surety must be cognizant of the dispute resolution provisions of the underlying contract, which may: have short deadlines for submission of claims; dictate a mandatory arbitration or mediation proceeding; waive a right to a jury trial; impose onerous cure provisions; or preclude damage for delay claims.

To the extent any underwriting review of the bonded contract was undertaken at all, it would by and large have been limited to a determination as to whether the contractor possessed the expertise to perform the general scope of work set forth therein. The underwriter is often not equipped or called upon to thoroughly review all legal and technical aspects of the contract. And often the principal has merely entered into the contract including unfavorable terms, just as it was presented by the owner, without any negotiation. The surety must approach every contract with a wary eye for such terms, not merely in the body of the contract but in the often voluminous general and supplemental conditions and the Plans and Specifications which apply to the contract.

The general conditions contain important provisions, including the conditions under which either party may declare the other in breach and terminate their right or obligation of performance, as well as provisions governing notice, dispute resolution, payment, site protection and safety equipment, insurance coverage, changes to the work, time of performance and many other provisions which substantially impact the surety's exposure and options upon its principal's default. The specifications set forth how the work will be completed from a technical standpoint. Not only are such contractual provisions important from the standpoint of assessing the surety's potential liability and options, but any relet to a completion contractor must incorporate the applicable provisions of the underlying contract, unless the surety and obligee negotiate to the contrary.

A. Termination

The bonded contract invariably contains provisions for termination of the contract. Where the termination is for convenience, the owner/obligee cannot call upon the surety to complete the contract and/or to assume responsibility for any damages incurred by the owner/obligee because no default has occurred triggering any obligation on the part of the surety. However, a termination for convenience often signals a problematic project, which may mean that a principal may be experiencing financial difficulties and/or payment bond claims have been or may be asserted with respect to the project. As a result, the financial resolution of a termination for convenience may interest the surety, and the surety may seek to protect itself by utilizing the consent of surety requirement, if one is included in the bonded contract. Many owners, in any event, seek the surety's consent before releasing the retainage under the contract.

The surety, of course, is more concerned with a declaration of a default or a termination for cause of the contract. The bonded contract often imposes certain obligations upon the owner and/or its representatives in order to properly declare a default or terminate the contract. It is important to review those requirements, because the failure of the owner to comply with those requirements may constitute a breach of the contract by the owner and may also provide defenses to the performance bond claim against the surety. ²⁴

Bases for a termination for cause often include the following:

1. the contractor's commission of a substantial violation of the contract and, after notice from the owner, architect, or construction manager, failure to cure the violation within the time period set forth in the contract;
2. failure to supply adequate materials and/or properly skilled workers;
3. failure to promptly pay subcontractors and/or material suppliers and/or its workers;
4 persistent failure to comply with applicable laws, regulations, directives, etc., of a public agency or authority with jurisdiction over the project;

5 failure to complete the project in a timely fashion; and 6.adjudication of the principal to be a bankrupt or general assignment by the principal for the benefit of its creditors or appointment of a receiver due to the principal's insolvency.²⁵

When a contractor is terminated for cause, the owner normally has the contractual right to take possession of all materials and equipment on the site and may proceed to finish the remaining work and to withhold any further funds from the contractor until the work has been completed. As a general rule, the principal will be liable under the contract to the owner for any excess costs to complete the project over and above the monies remaining in the contract.²⁶ These termination provisions, and the remedies of an owner upon termination, provide the framework for the claim against the surety. They may also provide a completing surety with important rights against competing claims by third-parties to unpaid contract funds and/or to the materials and equipment on site, because the completing surety stands in the shoes of the owner following the principal's default under the bonded contract.

B. Disputes

Many general conditions provide for the method to resolve disputes, which vary widely by contract. Contracts may provide for an initial means to resolve disputes, such as a decision by the architect, meeting of representatives of the two parties, or a formal decision by a contracting officer or a designated public official with respect to public projects. When one of these initial procedures does not resolve the dispute, the dispute clause may then provide for resolution by mediation, arbitration or litigation. Where mediation or arbitration are set forth, the contracts frequently designate a certain association or organization, such as the American Arbitration Association, as the binding decision maker. Where litigation is designated, the general conditions often set forth requirements such as venue and whether or not a jury may be requested by a party. Regardless of which mode of dispute resolution is designated, the contract often contains the notice, conditions precedent and time parameters in connection with the commencement of a dispute resolution proceeding. Failure to adhere to these provisions can result in a waiver or forfeiture of rights.

Some courts have indicated that an arbitration or litigation as to which the surety has notice may be binding upon the surety regardless whether the surety participates, at least as to the scope of the principal's liability under the contract.²⁷ In addition, courts have held that when a bond provides for dispute resolution in court and a contract provides for arbitration, the surety may be compelled to arbitrate.²⁸ Nonetheless, the better reasoned approach binds the surety to the results of the arbitration of the contract dispute, but allows the surety to reserve its right to litigate any separate bond defenses. ²⁹

C. Payment Provisions

Virtually all contracts between principals and owners/obligees provide contain provisions governing the means, method and timing of requests for payment and the making of payment. Usually, the contract will provide for periodic payments based on the progress of the principal. Often the payments are to be made on a monthly basis with the principal being required to submit monthly requisitions or requests for payment. Following a termination of the principal, these requisitions provide the surety with information critical to a determination of the amount of contract funds remaining versus the estimated cost of completion, which often lies at the heart of a surety's evaluation of its completion options.

The surety should carefully review the owner/obligee's compliance with the contract's payment provisions, because overpayment to the principal by the obligee may provide a partial or complete defense for the surety.³⁰ Indeed under paragraph 3.3 of the AlA A312 performance bond, it is a condition precedent to any obligation on the part of the surety that the obligee shall have agreed to pay to the surety the balance of the contract price. Moreover, in calculating such balance of the contract price, the owner is only entitled to credit against the contract price for payments properly made, and not all payments made. This provision implements the common law rule that the surety is discharged from its obligation to the extent of the obligee's improper or premature release of collateral it holds to secure the principal's performance.³¹ In the context of a construction contract, the contract balance and retainage comprise that collateral.

Additionally, most contracts provide for a review procedure with respect to the principal's requests for payment. The surety may have some defenses/affirmative claims if it is determined that work for which the principal has been paid was not performed properly. However, the majority of contracts, including those published by The American Institute of Architects, exculpate the architect-engineer from any responsibility for determining the quality or propriety of the work performed by the principal. Nevertheless, the surety may still have recourse with respect to the actions of the architect or engineer where the architect or engineer assumed responsibility for coordination, supervision and/or inspection, or the contract is silent as to the .architect's or engineer's liability.³²

Finally, many payment provisions require that the contractor utilize, or certify that it has utilized, the contract funds paid by the owner to pay subcontractors and/or material suppliers. These provisions are often consistent with trust fund acts³³ enacted in some states. Falsified certifications and/or violations of a trust fund act may result in personal liability of the principal's responsible officer or officers and even criminal prosecution.³⁴

D. Duties Relative to Protection of Persons and Property

As a rule, most contracts provide that, after issuance of the notice to proceed through the date of final acceptance, the principal/contractor shall be responsible for the worksite and all materials, equipment and other property located at that worksite, as well as for the safety of all employees and other persons involved or affected by the worksite. These provisions may concern the surety when the principal has been terminated for default, because the project site, as of that time, may be unsafe or vulnerable to weather conditions or vandalism. During its investigation, the surety may either attempt to secure the site, based upon an express and full reservation of rights, or it may require the owner/obligee to secure the site as part of its obligation to minimize or mitigate damages.

E. Insurance

Most contracts require the principal/contractor to obtain various kinds of insurance, including comprehensive general liability coverage, contractual liability insurance, and workers compensation insurance. The insurance requirements of the contract should be considered by the surety in two respects. First, any completing contractor, whether tendered by or retained by the surety to complete the project, must comply with these provisions unless the obligee agrees to reduce or waive these requirements. Secondly, the surety may benefit from pursuing a claim or claims against one of these carriers. For example, damage to property caused by defective workmanship (as opposed to the cost to correct the defective workmanship itself) may be covered by a comprehensive general liability policy.³⁵ Again, this is an area that the surety should consider during its investigation of the pre-default work on the project, beyond the immediate events leading up to the default and termination.

F. Changes in the Work to be Performed by the Principal/Contractor

Most contracts provide a mechanism to change the scope of work to be performed by the bonded contractor. These are commonly referred to as "change orders." Often, a request for issuance of a change order must be submitted within a short period of time after the contractor learns that there are bases for a change order or the right to a change order is deemed waived. These change order requests are usually reviewed by the owner's architect or consultant. Some contracts also provide a procedure for appeal from the denial of a change order.

The traditional common law rule is that a surety is discharged where the contracting parties alter the underlying contract - and thereby alter the surety's undertaking -- without its consent. ³⁶ However, in most jurisdictions, the rule of strictissimi juris is not rigidly to be applied in the case of a compensated surety on a construction contract.³⁷ Thus, courts have required, variously, that in order to discharge a compensated surety from its bond, a contract alteration: (a) must increase the surety's risk; (b) must be "material" or "substantial"; or (c) must be prejudicial to the surety.³⁸ Additionally, where the contract or bond contains language specifically making allowance for alterations to the work, the surety may be deemed to have consented to the changes, and the courts will look to the "materiality" of the change to determine if the surety is discharged from its obligations under the bond.³⁹ With respect to contracts or bonds containing provisions allowing for alterations to the work, the courts have held that only changes not fairly within the contemplation of the parties at the time the contract was made constituting a material departure from the original undertaking will release a non-consenting surety from its obligations under its bonds.⁴⁰ If the bond has no such provision, a significant change in the scope of the work may prove to be either a complete release of the surety's obligations under the bond or a partial release to the extent of the prejudice suffered by the surety.

Finally, changes in the scope of the work following execution of the bonded contract are important to the surety when investigating whether or not to complete or tender a completing contractor and in confirming that the contract price has been properly adjusted to meet those changes.

G. Multiple Prime Contracts

Some projects are undertaken with multiple prime contracts in which the owner enters into different contracts with different construction trades, such as general construction, plumbing, heating, venting and air conditioning, structural steel and electrical. Indeed, in some jurisdictions, multiple prime contracts are mandated by statute.⁴¹ Generally speaking, the surety for one prime contractor is not subject to exposure to claims from other prime contractors, notwithstanding the fact that such other prime contractors may have been damaged by the default ofthe bonded principal. The reason for this is that the only beneficiary of the performance bond is the named obligee; and co-prime contractors are not subcontractors or material suppliers coming within the scope of coverage of the payment bond.⁴²

Nonetheless, the surety must be mindful of the provisions in the general conditions of bonded contracts on multi-prime contract projects which govern scheduling, coordination of the work, interference and delays. Sometimes on multi-prime projects, the owner retains the obligation to coordinate all prime contractors in the performance of their work. In other projects, that responsibility is delegated in part to the prime contractor for general construction. Many such contracts contain "no damage for delay" clauses which, subject to certain limits, shield the owner from claims of damage from any prime contractor caused by the delays and interference of other prime contractors. ⁴³ Some of these clauses, however, provide that a co-prime contractor has the right to assert a claim of damages directly against another co-prime contractor, with each such prime contractor acknowledging the right of co-primes to assert direct claims against them as a third-party beneficiary of their respect contracts.⁴⁴

The potential exposure for delay damages in these circumstances can be substantial. Therefore, in considering a performance claim by an obligee under such a contract, the surety must be mindful not to undertake performance without an agreement with the obligee which protects the surety against exposure to such claims by co-prime contractors. The surety will certainly want to avoid being deemed responsible to perform all of the obligations of the defaulted contractor without limiting its exposure to claimants other than the obligee.

H. Subcontract Provisions

The nature of the provisions incorporated into a subcontract and/or purchase order will often depend upon which party drafted the document. If the subcontractor is sophisticated and/or is a specialty subcontractor or materials supplier, its form subcontract and/or purchase orders will often treat the transaction as separate and distinct from the relationship between the general contractor and the owner. When the materials have been provided and/or the subcontract work performed, the materials supplier/subcontractor is entitled to payment.

In contrast, the larger or more sophisticated general contractors with greater leverage may require that their forms be utilized. These forms often incorporate the general and special conditions of the general contractor's contract with the owner as well as technical specifications that relate to the work to be performed or materials to be provided by the subcontractor/materials supplier. Often they provide that, with respect to change orders, the general contractor will be responsible only for payments indicated on written change orders and only for the quantities and/or amounts approved by the owner.

Other subcontract provisions may address the timing of payments, amounts of retainage withheld and a variety of other issues, such as those addressed above. Familiarity with these provisions is important for several reasons. When the principal is a subcontractor or materials supplier, the subcontract and/or purchase order is typically incorporated into the performance bond by reference and sets forth the scope of the principal's obligations and those of any completing contractor. When the principal is the general contractor, its subcontracts may address important issues concerning: (1) consent to assignment of the subcontract to the surety by its principal; (2) agreement of the subcontractor/material supplier to adhere to the terms and conditions of the subcontract! purchase order in connection with completion efforts by the surety or its tendered contractor; and (3) the subcontractor's right to payment.

IV. Co-Surety Agreements

Sureties sometimes encounter claims activity on bonds issued pursuant to co-surety agreements which designate a "lead" surety that is charged with certain responsibility for investigating and resolving the claims in accordance with the terms of such co-surety agreement. Co-surety relationships usually arise in one of two ways: Where the principal is a joint venture and the joint venture is made up of distinct companies with separate ownership, represented by different agentslbrokers, each of the venture partners may be bonded with respect to their overall construction program by a different surety. In those instances, the surety for each of the venture partners may enter into an agreement whereby they apportion the risk between themselves on the joint venture account. As between the two sureties, there may be an allocation of liability under the bond, usually in proportion to the percentage or amount of participation of each partner within the joint venture. However, when performance and payment bonds are written on behalf of the joint venture, the sureties executing those bonds are jointly and severally liable to the obligee and claimants, without regard for the apportionment between them. As a result, the participating sureties should establish and document each venture partner's joint and several indemnity responsibilities to each of the sureties through separate indemnity agreements.

The other situation which is giving rise to co-surety arrangements with increasing frequency is the case of a contractor with a large work program which, through its broker/agent, approaches multiple sureties to "share" its account from an underwriting perspective. Through the execution of a co-surety agreement, the sureties will agree on their respective co-surety participation and designate a "lead" surety for purposes of underwriting and claims management. As with the joint venture scenario, the sureties in this arrangement are jointly and severally liable to an obligee on bonds executed for the shared account. Since each surety is jointly and severally liable to the obligee, if one surety is unable or unwilling to pay claims, the other surety or sureties must step up and satisfy those claims and seek reimbursement from the non- contributing co-surety pursuant to their agreement. If that surety is insolvent then the remaining sureties must guarantee its obligations to an obligee.

It is important for the surety receiving the initial claim notice against a co-surety bond to ascertain the nature and terms of any co-surety agreement governing that bond. As a threshold matter, it must be determined which of the sureties is the "lead" surety with respect to the investigation and resolution of claims. Then, the lead surety must be aware of the extent of its duties and obligations to its co-sureties, including any limitations on its authority, any notice requirements, and any consent required from the co-sureties. The lead surety must be careful to fulfill its obligations, but not overstep its bounds. Traditionally, co-surety agreements have been less formal than most of the documents involved in the performance of the construction contract and issuance of the bond. However, as co-surety arrangements are becoming more prevalent, sureties are recognizing the need to formalize, and more specifically spell out, the relationship among, and the respective responsibilities of. the co-sureties.⁴⁵

V. Reinsurance Agreements

It is commonly understood that reinsurers must follow to fortunes of their insured.⁴⁶ The "follow the fortunes" doctrine, which is both a legal rule and a custom developed from the economic and practical interests of both sides of the reinsurance relationship, requires the reinsurer to reimburse payments made by their reinsured, "as long as they are not fraudulent, collusive, or made in bad faith.”⁴⁷

While this doctrine insulates the surety from the sort of second-guessing that might otherwise inhibit its ability to efficiently and effectively make the kinds of claims decisions that are necessary to respond to a performance bond claim, the surety, nonetheless, must be aware of, and comply with, any reporting obligations or claims handling guidelines that may be part of its reinsurance agreements. For instance, a reinsurance agreement or treaty may require timely notice to the reinsurer of certain claims and subsequent periodic reports. Or the surety may be required to obtain the reinsurer's prior consent to the settlement of certain large claims or to the surety's entering into a financing agreement with the principal. Similarly, the reinsurance agreement may prescribe certain means or methods of handling claims or maintaining claims files or financial records. The surety must be mindful of these or any other conditions of its reinsurance agreements, so that its reinsurance coverage is not compromised by a failure to comply with such conditions.

VI. Statutory Provisions

The federal government regulates surety bonds by statute and virtually every state has enacted legislation pertaining to contract surety bonds for public construction projects. When a bond or contract provision conflicts with a statutory provision, the statutory provision usually controls,⁴⁸ so it is important to review the applicable statute in conjunction with a review of the bond. ill addition, various regulations, ordinances, orders and directives may be applicable to the work to be performed. Even when the contract does not expressly incorporate these items by reference, the courts usually deem them incorporated and rely upon them when applicable.

The Miller Act ⁴⁹ governs federal government construction projects and provides, in part:

§ 3131. Bonds of contractors of public buildings or works

(a) Definition. In this subchapter, the term "contractor" means a person awarded a contract described in subsection

(b). Types of bonds required. Before any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government the following bonds, which become binding when the contract is awarded:

(1) Performance bond. A performance bond with a surety satisfactory to the officer awarding the contract, and in an amount the officer considers adequate, for the protection of the Government.
(2) Payment bond. A payment bond with a surety satisfactory to the officer for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person. The amount of the payment bond shall equal the total amount payable by the terms of the contract unless the officer awarding the contract determines, in a writing supported by specific findings, that a payment bond in that amount is impractical, in which case the contracting officer shall set the amount of the payment bond. The amount of the payment bond shall not be less than the amount of the performance bond.

(c) Coverage for taxes in performance bond.

(1) In general. Every performance bond required under this section specifically shall provide coverage for taxes the Government imposes which are collected, deducted, or withheld :from wages the contractor pays in carrying out the contract with respect to which the bond is furnished.

(2) Notice. The Government shall give the surety on the bond written notice, with respect to any unpaid taxes attributable to any period, within 90 days after the date when the contractor files a return for the period, except that notice must be given no later than 180 days from the date when a return for the period was required to be filed under the Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.).

(3) Civil action. The Government may not bring a civil action on the bond for the taxes -

(A) unless notice is given as provided in this subsection; and

(B) more than one year after the day on which notice is given.

(d) Waiver of bonds for contracts performed in foreign countries. A contracting officer may waive the requirement of a performance bond and payment bond for work under a contract that is to be performed in a foreign country if the officer finds that it is impracticable for the contractor to furnish the bonds.

(e) Authority to require additional bonds. This section does not limit the authority of a contracting officer to require a performance bond or other security in addition to those, or in cases other than the cases, specified in subsection (b).

§ 3133. Rights of persons furnishing labor or material

(a) Right of person furnishing labor or material to copy of bond. The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond. The copy is prima facie evidence of the contents, execution, and delivery of the original. Applicants shall pay any fees the department secretary or agency head of the contracting agency fixes to cover the cost of preparing the certified copy.

(b) Right to bring a civil action.

(1) In general. Every person that has furnished labor or material in carrying out work provided for in a contract for which a payment bond is furnished under section 3131 of this title and that has not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished or supplied the material for which the claim is made may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due.

(2) Person having direct contractual relationship with a subcontractor. A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The notice must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served -

(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor's residence; or
(B) in any manner in which the United States marshal of the district in which the public improvement is situation by law may serve summons.

(3) Venue. A civil action brought under this subsection must be brought -

(A) in the name of the United States for the use of the person bringing the action; and

(B) in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.

(4) Period in which action must be brought. An action brought under this subsection must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.

(5) Liability of Federal Government. The Government is not liable for the payment of any costs or expenses of any civil action brought under this subsection.

(a) A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is-

(1) in writing;

(2) signed by the person whose right is waived; and

(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.

Most states have followed the federal government's lead and adopted so-called "Little Miller Acts." Like the Miller Act, these statutes require the successful bidder on a public project to provide performance and payment bonds⁵⁰ and set forth specific requirements as to the timing and venue of suits on the bonds.⁵¹

The Miller Act and its state counterparts impose obligations upon a surety and, at the same time, provide potential defenses to, or limitations upon the scope of, the surety's liability. For example, if a subcontractor or materials supplier has not instituted suit within the time prescribed by the Miller Act or a comparable state statute, the surety has no liability to the payment bond claimant. ⁵²

The investigating surety should avoid actions that may lead a claimant to believe it will be paid and should constantly reserve its rights and defenses to avoid any argument that it has waived these important limitations provisions. Timely receipt of notice of claim and acknowledgment of the receipt of such claim will not estop the surety from thereafter invoking a limitation defense in the absence of some affirmative act which reasonably leads the claimant to assume that it will not be required to meet the application limitations period.⁵³ Beyond those statutes specifically relating to surety bonds, other statutes may be of importance to the surety. For instance, many states have enacted trust fund acts, requiring that a contractor receiving contract funds in connection with a public project utilize those funds to pay its subcontractors and/or material suppliers.⁵⁴ Some of the statutory provisions impose liability (for fraud) upon the officers of the corporation, which liability may not be dischargeable in bankruptcy. ⁵⁵ These provisions, while not relevant to interpretation of the bond or the surety's obligations, can be effective in securing the cooperation of the principal and/or its officers and in augmenting the potential sources of salvage. Additionally, third parties who receive trust funds with knowledge of their source are required to hold such funds in trust and may themselves be liable for diversion of such funds and provide a source of salvage for the surety.⁵⁶

In addition, in instances where the surety may look to assert its subrogation and assignment rights to affirmative claims of its principal against public owners, the surety must be cognizant of statutes and regulations establishing notice of contract claims requirements. Such notice requirements must be strictly observed in order to mitigate damages or otherwise protect the surety's salvage rights.

VII. General Agreement of Indemnity

Surety bonds issued by compensated sureties are meant to function as credit accommodations in which the surety anticipates no loss. Before issuing its bond, the surety will have conducted an underwriting analysis to satisfy itself as to the principal's capacity to perform the bonded obligation, its character and commitment to the fulfillment of its obligations, and its financial "ability to perform the contract and, if necessary, fulfill its common law duties to indemnify and exonerate the surety against any loss sustained or threatened as a result of the issuance of the bond. The compensated surety will not rely solely upon its common law rights of indemnity and exoneration, however. A condition uniformly imposed by the surety is that its principal, and usually the individuals who control it in the case of a closely held corporation, execute an agreement of indemnity to augment the surety's common law rights.

One court, in discussing the essential nature of suretyship, described the indemnity agreement as the "heart of' the relationship among the parties, stating that:

A surety, its principal and its indemnitors are engaged in a commercial business relationship which establishes, by contract, specific benefits and burdens to the parties. By issuing its bond, the surety takes the risk that the principal will fulfill its obligations. If the principal does not do so, the surety is required to step in and bear the cost of satisfactorily completing the project and/or paying the principal's subcontractors and suppliers.In order to protect it from potentially substantial losses, the surety invariably requires the principal and indemnitors to enter into an indemnity agreement.

At the heart of the surety/principal relationship is the intention of the parties -- clearly established in the indemnity agreement -- that the surety will be repaid for all claims paid or expenses incurred as a result of issuing bonds on behalf of the principal. When the principals and their indemnitors seek to avoid their contractual obligations, the surety must not only discharge its responsibility under its bonds, but also take the necessary steps to enforce its indemnification rights as to the losses and expenses incurred. (Emphasis added).⁵⁷
This indemnification relationship is central to the difference between surety bonds and insurance policies. Whereas an insured purchasing a policy of insurance expects to be indemnified in the event a covered loss occurs, the principal is never indemnified by its surety. Rather, the principal retains the common law obligation to both indemnify its surety against loss⁵⁸ and to exonerate its surety against loss by paying and satisfying all obligations guaranteed by the surety before the surety shall have to perform such obligations itself⁵⁹These common law obligations are supplemented and extended by the general agreement of indemnity which the surety will invariably require as a condition to the issuance of bonds on behalf of the principal.

An important way a general agreement of indemnity expands the rights of the surety beyond the common law is by giving the surety the right to pursue individual indemnitors who are the owners of the principal and their spouses. When the corporate principal is insolvent or bankrupt, the surety's right of indemnification against the individual and his/her spouse can be extremely important both in order to secure the cooperation of the principal's officers as well as in providing a potential source of reimbursement for losses and expenses. The importance of a spouse's execution of a general agreement of indemnity cannot be overemphasized, because savvy contractors often place ownership of assets acquired. over the years in the name of their spouses or, in the alternative, own assets jointly with their spouses.

The general agreement of indemnity is an important tool for the surety claims professional both in securing the cooperation of the principal and in taking preemptive measures to ensure that the principal and its indemnitors will save the surety harmless from losses and expenses. The specific terms of the general agreement of indemnity will vary from surety to surety, but most seek to accomplish similar results. The common objectives of such agreements are: to provide the surety with a contractual right of recovery against the principal and other named indemnitors of all losses, costs, and expenses, including counsel fees, incurred as a result of issuing the bonds; to facilitate the handling of bond claims by providing the surety with the discretion to settle and pay such claims; to require the deposit of collateral to secure the surety against losses once bond claims are asserted; to ease burdens of proof in actions to recover losses and expenses; to provide a security interest in the principal's equipment, machinery and receivables; to confirm the surety's right to decline to execute any further bonds on behalf of the principal; and to grant the surety the right to settle the principal's own affirmative claims against the bond obligee. By virtue of the broad grant to the surety of the right to payor otherwise settle its bond obligations, the general agreement of indemnity facilitates the surety's ability to avoid unnecessary and costly litigation while protecting its rights of indemnity against the principal and the named indemnitors.⁶⁰

A. The Indemnity Clause

Most general agreements of indemnity accomplish this objective by expressly requiring indemnification for all losses sustained by the surety in good faith as a result of its issuance of its bond on behalf of the principal whether or not the principal turns out to have been liable to the bond claimant paid by the surety. In short, the agreement gives the surety the right to be wrong in its assessment of its liability under its bond and in its decision to settle claims, provided that it acts in good faith. The impact of such indemnity clauses was recognized by one court as follows: Equity generally implies a right to indemnification in favor of a surety only when the surety pays off a debt for which his principal is liable. However, resort to implied indemnity principles is improper when an express indemnification contract exists. There can be no question but that a surety is entitled to stand upon the letter of his contract. . . * * * The indemnity agreement does not limit [the principal's] liability for indemnification to losses incurred based upon [an enforceable] judgment. The broad terms of the clause provide indemnification for any loss by [the surety] by reason of having executed the performance bond." [citations omitted]⁶¹

Thus, the general agreement of indemnity usually requires the named indemnitors to indemnify the surety for all losses incurred by it by virtue of its having issued its bond regardless of the surety's actual liability under the bond. An example of a common indemnity provision is as follows:

The Contractor and Indemnitors shall exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees) and from and against any and all such losses and/or expenses which the surety may sustain and incur: (1) by reason of having executed or procured the execution of the bonds, (2) by reason of the failure of the Contractor or Indemnitors to perform or comply with the covenants and conditions of this agreement or (3) in enforcing any of the covenants and conditions of this agreement.

Payment by reason of the aforesaid causes shall be made to the Surety by the Contractor and Indemnitors as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor. Such payment shall be equal to the amount of the reserve set by the Surety. In the event of any payment by the Surety, the Contractor and Indemnitors further agree that in any accounting between the Surety and the Contractor, or between the Surety and the Indemnitors, or either or both of them, the Surety shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed; and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety.

Courts have repeatedly upheld such contractual indemnity provisions subject only to the condition that the payment by the surety is not the product of its fraud or bad faith.⁶² The rationale underlying these decisions is that the expense, delay and risk of loss to the surety is a sufficient safeguard against an unwarranted payment by the surety.

B. The Right-to-Settle Provision

The right-to-settle clause augments the surety's ability to discharge the principal's obligations before suit without endangering its indemnification rights. A typical right-to-settle clause may provide as follows:

The surety shall have the right to adjust, settle or compromise any claim, demand, suit or judgment upon the bonds, unless the principal and the indemnitors shall request the surety to litigate such claim or demand, or to defend such suit, or to appeal from such judgment, and shall deposit with the surety, at the time of such request, cash or collateral satisfactory to the surety in kind or amount, to be used in paying any judgment or judgments rendered or that may be rendered, with interest, costs, expenses and attorneys' fees, including those of the surety.

Such provisions, which permit the surety to compromise and settle claims -- and which are often coupled with clauses providing that vouchers and other evidence of payment of claims shall be prima facie evidence of the propriety thereof -- have been routinely upheld. Courts have recognized that these provisions afford the surety broad discretion in determining which claims should be compromised and settled, and have held that the surety's decision will be binding on the principal and the indemnitors as long as the surety acts in good faith.⁶³ At least one court has suggested that imposing more strict duties upon sureties would make them reluctant to pay valid claims under their contacts:

Sureties enjoy such discretion to settle claims because of the important function they serve in the construction industry, and because the economic incentives motivating them are sufficient safeguard against payment of invalid claims. The many parties to a typical construction contract--owners, general contractors, subcontractors and sub-subcontractors-look to sureties to provide assurance that defaults by and of the myriad other parties involved will not result in a loss to them. Courts have recognized that "as a practical matter the suppliers and small contractors on large construction projects need reasonably prompt payment for their work and materials in order for them to remain solvent and stay in business.”⁶⁴

Thus, the surety should not be intimidated by indemnitors who assert challenges to the surety's right to satisfy a claim without providing the surety with evidence of a viable defense to such claim. Under the agreement of indemnity, the surety will not lose its indemnity rights where it makes a good faith payment to the claimant to mitigate its damages.

C. The Prima Facie Evidence Clause

In conjunction with the surety's right to compromise and settle claims, courts have consistently upheld clauses which provide that vouchers and other evidence of payment will be prima facie evidence of the propriety of the surety's payment and the amount of the indemnitors' liability to the surety. ⁶⁵

Because the courts have recognized the validity of prima facie evidence clauses, a surety which resolves claims under its right to settle clause will often be able to use vouchers and affidavits to obtain summary judgment enforcing its right to indemnification under the general agreement of indemnity to indemnification for the losses and expenses incurred in discharging its bond obligations. Even where summary judgment is not granted, the prima facie evidence clause effectively shifts to the indemnitors the burden of showing that the surety did not act in good faith in settling claims and incurring expenses. As sureties ordinarily make payments only upon a good faith belief that the expenditures are necessary or expedient, it is highly unlikely that indemnitors will be able to carry the burden in the usual case.

D. The Collateral-Deposit Provision

The collateral-deposit clause requires the principal or indemnitors to provide the surety with a reserve of funds when the surety is faced with claims on its bonds. Under such a provision, once a surety receives a demand on its bond, the principal and/or indemnitor must deposit with the surety, upon its demand, funds sufficient to secure the surety against the claim. If the claim must be paid, then the surety will do so out of the deposited funds. If the surety does not have to pay the claim, the remaining funds, net of expenses incurred, must then be returned. A collateral security provision may provide as follows:

If for any reason the surety shall be required to or shall deem it necessary to set up a reserve in any amount to cover any (a) judgment, actual or contingent, with interest and costs, in any action instituted against the principal and/or the surety or (b) unadjusted claims or (c) losses, costs, attorneys' fees and disbursements and/or expenses in connection with said bond or (d) default(s) of the principal or (e) abandonment of the contract or (f) liens filed or (g) dispute with the owner or obligee or (h) for any reason whatever regardless of any proceedings contemplated or taken by the principal or the pendency of any appeal, the undersigned shall immediately upon demand, deposit with the surety funds in the amount of such reserve and any increase thereof, to be held by the surety as collateral with the right to use such fund or any part thereof, at any time, in payment or compromise of any judgment, claim, liability, loss, damages, attorneys' fees and disbursements and/or other expenses.

As a rule, there is no requirement that the surety be liable to the obligee and/or claimant in order to demand that the principal post collateral. Instead, the only condition necessary to invoke the collateral reserve obligation is that there be a "claim" or "demand" upon the surety to perform under the bond. Thus, the surety should not hesitate to make a "routine" demand for collateral upon assertion of a claim. To enforce the collateral reserve provision in the face of the indemnitors' failure or refusal to comply, a surety can institute an action for specific performance. ⁶⁶

The surety's right to demand collateral is often coupled in the general agreement of indemnity with a provision that entitles the surety to demand that collateral be posted by the indemnitors as a condition to the indemnitors' request that the surety refrain from paying a claim. ill such situations, the surety should require that the indemnitors post collateral sufficient to cover the amount of the claim, estimated interest to the date of probable resolution, and the estimated expenses, including attorneys' fees, to be incurred by the surety in defense of the claim. ill addition to securing the surety against an adverse determination of the bond claim, the surety's demand for collateral will discourage the principal and indemnitors from raising spurious defenses merely to delay payment, because they must collateralize both the amount of the claim and the surety's cost of defending against it. As compliance with the demand for collateral is a condition to any objection which the principal may interpose to the surety's payment of a claim, the use of this provision can greatly assist in the resolution of claims without compromising indemnification rights. This provision may be particularly useful, and should be invoked, when there is reason to anticipate that the surety's good faith in settling a claim may be attacked by the principal or its indemnitors.

E. The Assignment Clause

Another useful clause of the general agreement of indemnity is the assignment provision which operates to assign to the surety various rights in the principal's equipment and receivables conditioned upon the receipt of claims under the surety's bonds or defaults under the indemnity agreement. These assignment provisions often include an assignment of all of the funds owed to the principal under both bonded and unbonded contracts and are effective against the principal whether or not the General Indemnity Agreement has been filed as a financing statement. One such assignment clause provides:

The Contractor, the Indemnitors hereby consenting, will assign, transfer and set over, and does hereby assign, transfer and set over to the Surety, as collateral, to secure the obligations in any and all of the paragraphs of this Agreement and any other indebtedness and liabilities of the Contractor to the Surety, whether heretofore or hereafter incurred, the assignment in the case of each contract to become effective as of the date of the Bond covering such contract, but only in the event of (1) any abandonment, forfeiture or breach of any contracts referred to in the Bond or of any breach of any said Bonds; or (2) of any breach of the provisions of any of the paragraphs of this Agreement; or (3) of a default in discharging such other indebtedness or liabilities when due; or (4) of any assignment by the Contractor for the benefit of creditors, or of the appointment, or of any application for the appointment of a receiver or trustee for the Contractor whether insolvent or not; or (5) of any proceeding which deprives the Contractor of the use of any of the machinery, equipment, plant, tools or material referred to in section (b) of this paragraph; or (6) of the Contractor's dying, absconding, disappearing, incompetency, being convicted of a felony, or imprisoned if the Contractor be an individual: (a) All the rights of the Contractor in, and growing in any manner out of all contracts referred to in the Bonds, or in, or growing in any manner out of the Bonds; (b) All the rights, title and interest of the Contractor in and to all machinery, equipment, plant, tools and materials which are now or may hereafter be, about or upon the site or sites of any and all of the contractual work referred to in the Bonds or elsewhere, including materials purchased for or chargeable to any and all contracts referred to in the Bonds, materials which may be in process of construction, in storage elsewhere, or in transportation to any and all of said sites; (c) All the rights, title and interest of the Contractor in and to all subcontracts let or to be let in connection with any and all contracts referred to in the Bonds, and in and to all surety bonds supporting such subcontracts; (d) All actions, causes of actions, claims and demands whatsoever which the Contractor may have or acquire against any subcontractor, laborer or materialman, or any person furnishing or agreeing to furnish or supply labor, material, supplies, machinery, tools or other equipment in connection with or on account of any and all contracts referred to in the Bonds; and against any surety or sureties of any subcontractor, laborer or materialman; and (e) Any and all percentages retained and any and all sums that may be due or hereafter become due on account of any and all contracts referred to in the Bonds and all other contracts whether bonded or not in which the Contractor has an interest.

As reflected by the quoted language, a major purpose of the assignment clause is to assign to the surety the proceeds of all contracts on which the principal is' working. The assignment is not limited to those projects on which the principal has been declared to be "in default." Once the principal is in default of any obligation on any bonded project, the surety has an enforceable assignment which extends to contract funds on all projects, even on projects on which the principal is not in default and on bonded projects where the surety's losses will be less than the remaining contract proceeds. Those funds may offset the surety's losses on projects on which the contract proceeds fail to cover its losses.

Even without its contractual assignment rights, the subrogation rights of the surety entitle the surety to recover the contract balances and retainage on bonded contracts to the extent of the sureties' losses.⁶⁷ Moreover, such rights take precedence over the rights of assignees of the principal and are enforceable without the need for any filings under the Uniform Commercial Code.⁶⁸ Nonetheless, the surety's assignment rights under the agreement of indemnity may be important in providing additional sources of recovery other than the proceeds of the bonded contract and any setoff rights which the obligee may have to which rights the surety is subrogated upon satisfaction of its obligations to such obligee. In order to properly perfect its assignment rights against claims of third parties, including lenders, judgment lien creditors, and trustees in bankruptcy, the surety must file a UCC-1 financing statement in order to provide public notice of its assignment rights. This is one of the first actions to be considered by the surety upon receipt of claims because such UCC-1 financing statements are not usually filed as a matter of course during the underwriting process.

F. Other Provisions

Other provisions found in the general agreement of indemnity may assist the surety in enforcing its rights in the event of a default by the principal and it is important to review all of the provisions. Common provisions that may be significant include clauses:

1. requiring the indemnitors to pay all premiums and charges of the surety with respect to bonds which it issues on behalf of the principal;

2. providing that the rights of the surety pursuant to the agreement are in addition to its legal and equitable rights at law;

3. definitional provisions, such as those defining the "loss" to include counsel fees and consultant fees and those defining "surety" to include co-sureties, reinsurers and any sureties issuing bonds on behalf of the principal at the request of the named sureties;

4. providing that the surety need not notify the indemnitors of the release of security, collateral and/or an indemnitor;

5. confirming that the surety may refuse to provide any bond even where it has already furnished the bid bond for an anticipated contract, and confirming that the surety need not provide notice as to any changes in any bond or contract;

6. providing that the liability of the indemnitors is joint and several, but that the surety is not obligated to pursue or exhaust its rights and claims against the principal or any other indemnitor before pursuing its claims against any of the named indemnitors;

7. providing the governing law and consent to jurisdiction and/or venue in any disputes by and between the surety and the indemnitors; and

8. providing that the agreement of indemnity shall continue to apply to all bonds theretofore or thereafter issued on behalf of the principal without notice to the indemnitors and that the indemnity agreement may only be terminated as to future bonds if such bonds are issued more than thirty days after notice is received by the surety and the surety did not issue bid bonds or consents of surety for such bonds prior to the expiration of that thirty day period.

The general agreement of indemnity provides substantial rights and protection to the surety, and in order that such rights may be vindicated effectively, it is advisable for the surety to 'address such rights promptly upon the receipt of claims. It is neither necessary nor advisable to await the occurrence of a loss before taking steps to enforce the terms of the agreement of indemnity. If enforcement of indemnity rights is delayed substantially, the risk increases significantly that other creditors might succeed in enforcing their own fights against the indemnitors, leaving insufficient assets available to satisfy such indemnitors' obligations to the surety. Moreover, indemnitors will often realize their imminent liability to the surety and take steps to transfer or otherwise dissipate the assets which might otherwise be available to the surety for execution upon obtaining an indemnity judgment. Thus, it is often advisable to take action promptly to seek specific enforcement of the indemnitors' obligations under the general agreement of indemnity or to otherwise preserve indemnity rights upon receipt of claims.

VIII. Conclusion

This Chapter provides a brief overview of some of the common and significant bond, contractual and statutory provisions governing the relationship among the surety, obligee and principal, which the surety must review and consider when determining its course of action upon receipt of claims. The implications of those provisions and strategies to be implemented in mitigating losses and maximizing recovery prospects are more fully discussed in the chapters which follow.

1. The corresponding first chapter of the second edition was authored by David C. Dreifuss.
   
   
2. See, e.g., Fla. Stat. Ann. §255.05(3) (West 2004); N.J. Stat. Ann. 2A:44-147 (West 2004); N.C. Gen. Stat. §44A-33 (2004) and Ohio Rev. Code Ann. §153.571 (West 2005).
   
   
3. S. Nelson, "Onerous" Bond Forms: A Look at Departures from Standard Performance and Payment Provisions (unpublished paper submitted at the A.B.A. Tort and Insurance Practice Section Fidelity & Surety Law Committee mid-winter meeting on January 29,2004).
   
   
4. Sureties also encounter requests by other non-parties to the bonded contract, like condominium associations, seeking dual obligee status under the bonds. The extension of protection and rights to such third-parties, who have no contractual obligations to the principal, is fraught with danger for the surety.
   
   
5. We note that the surety rarely has in its possession a fully executed copy of the bond prior to the assertion of a claim against that bond. As a result, it is important to obtain from the obligee or claimant a copy of such bond to ensure that there were no changes made to the bond after it was executed on behalf of the surety. Likewise, because the surety usually is not involved in the delivery of the bond to the obligee, it is important to obtain a copy of the bond held by the obligee to ensure that the bond was in fact delivered and thereby became effective. See 74 Am. Jur. 2d Suretyship § 16 (2004);Rachman Bag Co. v. Liberty Mutual Ins. Co., 46 F.3d 230, 238 (2d Cir. 1995).
   
   
6. See American Home Assurance Co. v. Larkin General Hospital, Ltd., 593 So.2d 195, 197 (Fla. 1992); see also United States v. Seaboard Sur. Co., 817 F.2d 956, 963 (2d Cir.);cert. denied, 484 U.S. 855 (1987);Monmouth Lumber Co. v. Indemnity Ins. Co. of N. America, 21 N.J. 439, 452, 122 A.2d 604,611 (N.J. 1956);Mendel-Mesick- Cohen-Architects v. Peerless Ins. Co., 426 N.Y.S.2d 124, 126 (N.Y. App. Div. 1980).
   
   
7. State of Florida ex rel. Westinghouse Elec. Supply Co. v. Wesley Constr. Co., 316 F. Supp. 490, 497 (S. D. Fla. 1970), aff'd by 453 F.2d 1366 (5 Cir. 1972)
   
   
8. See, e.g., Cates Construction, Inc. v. Talbot Partners, 21 Cal. Rptr. 4th 28, 56 (Cal. 1999);Great American Ins. Co. v. General Builders Inc., 113 Nev. 346 (Nev. 1997); Great American Insurance Company v. North Austin Municipal Utility District No.1, 908 S.W.2d 415 (Texas 1995)
   
   
9. See, e.g., Ribeira & Lourenco Concrete Constr., Inc. v. Jackson Health Care Assocs., 554 A.2d 1350, 1353 (N.J. Super. Ct. App. Div. 1989) aff'd. 571 A.2d 1311 (N.J. 1990) and cases cited therein.
   
   
10. See, e.g., Ala. Code 1975 § 6-2-l5 (2004); Fla. Stat. Ann. 䆛.03 (West 2004); see also Sheehan v. United Pacific Ins. Co., 410 N.W.2d 569 (Mich. 1987).
    
    
11. See American Institute of Architects Document A31O, Bid Bond, 1970 Edition; see, e.g., Peerless Ins. Co. v. United States, 674 F. Supp. 1202, 1208 (B.D. Va. 1987).
    
    
12. See 17 Causes of Action 253, Cause of Action to Enforce Contractual Provision for Liquidated Damages, §8(2004); see, e.g.. Interstate Markings, Inv. v. Mingus Construction, Inc., 941 F. 2d 1010 (9th Cir. 1991)
    
    
13. See generally 70 A.L.R. 2D 1370 (1960); 2 A.L.R. 4th 991 (1980). Delay on the part of the owner in awarding the contract may also serve as a defense to a bid bond claim where the owner fails to notify the successful bidder of the award within the prescribed period. See, e.g., Jay Township Auth. v. Cummins, 773 A. 2d 828 (Pa. 2001);Hanover Area School Dist. v. Sarkarian Bros., 514 F. Supp. 697 (M. D. Pa. 1981).
    
    
14. See generally 2 A.L.R. 4th 991 (1980); RESTATEMENT (SECOND) OF CONTRACTS, § 153 (1981).
    
    
15. See, e.g., NJ.S.A. 40A: 11-22 (2004).
    
    
16. Meadowbrook Carting Company, Inc. v. Borough of Island Heights, 650 A.2d 748 (NJ 1994).
    
    
17. American Institute of Architects Document A312, Perfonnance Bond and Payment Bond, 1984 Edition.
    
    
18. See, e.g., Seaboard Surety Company v. Town of Greenfield Massachusetts, 266 F. Supp.2d 189 (D. Mass., 2003); St. Paul Fire & Marine Insurance Company v. City of Green River, 93 F. Supp. 2d 1170 (D. Wyo. 2000), aff'd, 2001 WL 369831 (l0th Cir. 2001); Balfour Beatty Construction, Inc. v. Colonial Ornamental Iron Works, Inc., 986 F. Supp. 82 (D. Conn. 1997); Bank of Brewton, Inc. v. International Fidelity Insurance Company, 2002 WL 227934 (Ala. 2002);Dragon Construction, Inc. v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. Ct. 1997); 120 Greenwich Development Associates, LLC v. Reliance Insurance Company, 2004 WL 1277998 (S.D.N.Y. 2004).
    
    
19. See generally, THE LAW OF PAYMENT BONDS (K. Lybeck and H. Shreves eds., 1998).
    
    
20. Under some bond forms and under some statutes, actual incorporation of the materials into the project or consumption in furtherance of construction must be shown. See, e.g., N.J.S.A.2A:44-143; Poly Flex, Inc. v. Cape May County Utilities, 832 F. Supp. 889 (D.N.J. 1993).
    
    
21. See, e.g., Gross v. Nagori Corp., 282 AD. 2d 673 (N.Y. App. Div. 2001); Ayers Enterprises, Ltd v. Exterior Designing, Inc.,. 829 F. Supp. 1330 (N.D. Ga. 1993); Ribeira & Lourenco Concrete Constr. v. Jackson Health Care Assoc., 554 A2d 1350(N.J. Super. Ct. App. Div. 1989) aff'd. 571 A2d 1311 (N.J. 1990); Southwood Builders, Inc. v. Peerless Insurance Company, 235 Va. 164 (Va. 1988).
    
    
22. See, e.g., International Fidelity Insurance Company v. Rockland, 98 F. Supp 2d 400,428-30 (S.D.N.Y 2000); see generally BRUNER AND O'CONNOR ON CONSTRUCTION LAW, §12:21:Performance bond -- Financial limit of performance bond obligation: "Penal sum" (West 2002).
    
    
23. See, e.g., United States v. Spearin, 248 U.S. 132, 136 (1918) and its progeny.
    
    
24. See, e.g., Elm Haven Construction v. Neri Construction, LLC, 281 F. Supp. 2d 406 (D. Conn. 2003), aff'd 376 F. 3d 96 (2nd Cir. 2004); Enterprise Capital, Inc. v. The San-Gra Corp., 284 F. Supp. 2d 166 (D. Mass. 2003).
    
    
25. It should be noted that the Bankruptcy Code precludes enforcement of contractual forfeiture clauses triggered by a bankruptcy filing. See U.S.C.A. §365(e)(l).
    
    
26. See, e.g., American Institute of Architects Document A201 General Conditions, Article 14, 1997 Edition.
    
    
27. See, e.g. Raymond Int'l Builders v. First Indem. of Am. Ins. Co., 516 A.2d 620, 622 (N.J. 1986) and cases cited therein.
    
    
28. See Cianbro Corp. v. Empresa Nacional De Ingenieria y Technologia, S.A., 697 F.Supp. 15 (D. Me. 1988) (holding that contractual arbitration provision is incorporated by reference into surety's bond); see also United States Fidelity & Guar. Co. v. West Point Construction Co., Inc., 837 F. 2d 1507, 1508 (11 th Cir. 1988); Exchange Mut. Ins. Co. v. Haskell Co., 742 F. 2d 274, 276 (6th Cir. 1984). But see, e.g Aggrow Oils, LLC v. National Fire Ins. Co., 242 F. 3d 777, 782 (8th Cir. 2001) and Travelers Indem. Co v. Hayes Contractors, Inc., 389 N.W. 2d 257 (Minn. Ct. App. 1986). By the same token, when the contract provides for a dispute resolution through arbitration, the surety may choose to avail itself of that provision.
    
    
29. See Fidelity and Deposit Co. of Maryland v. Parsons & Whittemore Contractors Corp., 397 N.E. 2d 380 (N.Y. 1979); Gloucester City Bd. of Educ. v. American Arbitration Ass'n, 755 A.2d 1256, 1262 (N.J. Super. Ct. App. Div. 2000).
    
    
30. See generally, R. Marmor and G. Schroeder, Overpayment of the Principal as a Defense to the Surety (unpublished paper submitted at the A.B.A. Tort and Insurance Practice Section Fidelity & Surety Law Committee mid-winter meeting on January 24, 1997); BRUNER & O'CONNOR ON CONSTRUCTION LAW, §8:60: Overpayment: Defense for Surety (West 2002); J. Knox, Jr., Quid with Quo: The Surety's Overpayment Defense in CONSTRUCTION LAWYER (October, 1994).
    
    
31. See, e.g., Prairie State Bank v. United States, 164 U.S. 227, 233 (1896); United States v. Continental Cas. Co., 512 F 2d. 475 (5th Cir. 1975).
    
    
32. See generally, J. Ferrucci and S. Baron, The Surety's Claims Against Third Parties in SALVAGE BY THE SURETY (George J. Bachrach ed., 1998); M. Coleman, Design Professionals' Liability for Negligent Design and Project Management (unpublished paper submitted at the A.B.A. Tort and Insurance Practice Section Fidelity & Surety Law Committee mid-winter meeting on January 24, 1997); M. Chapman, The Liability of Design Professionals to the Surety, 20 FORUM 591 (1985); M. Andrew, Surety Recovery from the Architect or Engineer- Why Not?, 8 FORUM 570 (1973);. E. Etcheverry and G. Harrison,The Surety's Assertion of Construction Claims Against Third Parties (unpublished paper submitted at the A.B.A. Tort and Insurance Practice Section Fidelity & Surety Law Committee mid-winter meeting on January 30, 2003).
    
    
33. See, e.g. Del. Code Ann. Title 6, §3502 (2003); Minn. Stat. Ann. §514.02 (2002); Colo. Rev. Stat. Ann. §38-22-1-27 (2000); N.J.S.A. 2A:44-148 (2004); NY Lien Law, §70, et. seq. (McKinney 1999 & Supp. 2005).
    
    
34. See, e.g., Del. Code Ann. Title 6, §3502 (2003); Minn. Stat. Ann. §514.02 (2002); Woodworking Enterprises, Inc. v. Baird, 114 B.R. 198 (9th Cir. I 990)(interpreting Arizona's construction trust fund statute).
    
    
35. See generally,J. Brooks, B. King, and W. Lambert, The Importance of Insurance Coverage for Sureties (unpublished paper submitted at the Joint Meeting Program of the A.B.A. Forum on the Construction Industry and the A.B.A. Tort and Insurance Practice Section Fidelity & Surety Law Committee ("Are Your Covered? Insurance Products for Construction Products") on January 27, 2005); see, e.g., Warzek Constr., Inc v. Employers Ins. of Wassau, 679 N.W. 2d 322 (Minn. 2004).
    
    
36. See, RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY, § 41 (1996); M. Egan and M. Eastwood,Discharge of the Performance Bond Surety, THE LAW OF SURETYSHIP, 2d ed. (Edward Gallagher ed., 2000); see, e.g., United States. v. Freel, 186 U.S. 309 (1902).
    
    
37. See RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY, § 41 (1996); see, e.g., Hunt v. Bankers & Shippers Ins. Co. of New York, 400 N.Y.S.2d 645, 647 (App. Diy. 1977); Prestigiacomo v. Phoenix Ins. Co., 231 So. 2d 431, 435- 436 (La. Ct. App., 1970).
    
    
38. See, e.g., In re Liquidation of Union Indem. Ins. Co. (Success Construction Corp.), 220 A.D.2d 339, 632 N.Y.S.2d 788 (N.Y. App. Div 1st Dep't 1995); Varick Drywall v. Aniero Concrete Co., 237 A.D. 2d 348, 654 N.Y.S.2d 815 (N.Y. App. Div.), appeal denied, 90 N.Y.2d 807 (1997).
    
    
39. See M. Egan and M. Eastwood, Discharge of the Performance Bond Surety in, THE LAW OF SURETYSHIP, 2d ed. Edward Gallagher ed., 2000).
    
    
40. See, e.g., United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 219 F. Stipp. 2d 403 (S.D.NY 2002), aff'd in part, rev'd in part, 369 F.3d 34 (2d Cir. 2004).
    
    
41. See, e.g., New York General Municipal Law, §101 (McKinney 1999 & Supp. 2005) ("Wick's Law"); N.J.S.A. 18A:18 (West 2005).
    
    
42. See, e.g., Novak & Co. y. Travelers Indem. Co., 392 N.Y.S. 2d 901 (App. Div.), appeal denied, 398 N.Y.S. 2d 1027 (1977); Hartford v. Hayes & Lumsford , 1995 US App LEXIS 19197 (4th Cir. 1995); MGM Const. Corp. v. New Jersey Educ. Facilities Auth., 220 N.J. Super 483 (Law Div. 1987); Moore Constr. Co. v. Clarksville Dep't of Elec., 707 S.W.2d 1 (Tenn. Ct. App. 1985).
    
    
43. See e.g., Landis & Gyr Powers, Inc. v. Berley Industries, Inc., 750 N.Y.S. 2D 82, 84 (N.Y. App. Div., 2d Dept. 2002); Roy A. Elam Masonry, Inc. v. Fru-Con Constr. Corp., 922 S.W.2d (Mo. Ct. App. E.D. 1996);State Highway Admin. v. Greiner, 577 A. 2d 363, 369-72 (Md. App. 1990). The exceptions to enforcement of such a clause occur where the claimed delays were either: (a) caused by bad faith or willful, malicious or grossly negligent conduct; (b) of a type not contemplated by the parties when they entered into the contract; (c) so unreasonable as to constitute an intentional abandonment of contract; or (d) result from breach of a fundamental obligation of contract. See Corinna Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 309, 502 N.Y.S. 2D 681 (N.Y. Ct. of App. 1986).
    
    
44. See, e.g American Institute of Architects Document A201 General Conditions, Article B, 1997 Edition.
    
    
45. See generally, E. Reilly and J. Franks, Modern Co-Suretyship (unpublished paper submitted at the Surety Claims Institute Annual Meeting on June 23-25, 2004).
    
    
46. See International Surplus Lines Ins. Co. v. Certain Underwriters and Underwriting Syndicates at Lloyd's of London, 868 F. Supp. 917, 920 (S.D. Ohio 1994).
    
    
47. See Commercial Union Ins. v. Seven Provinces Ins. Co., 9 F. Supp.2d 49, 66 (D. Mass. 1998), aff'd 217 F.3d 33 (I st. Cir. 2000), citing Aetna Casualty & Sur. Co. v. Home Ins. Co., 882 F. supp. 1328, 1346 (S.D.N.Y. 1995); accord American Bankers Ins. v. Northwestern Nat. Ins., 198 F.3d 1332, 1335 (11th Cir. 1999).
    
    
48. See, e.g., United States Fidelity & Guar. Co. v. Christoffel, 566 P. 2d 308, 310 (Ariz. Ct. App. 1971); Wichita Sheet Metal Supply, Inc. v. Dahlstrom & Ferrell Constr. Co., 792 P. 2d 1043, 1046 (Kan. 1990); Cruz-Mendez v. ISU/Ins. Services, 722 A. 2d 515 (N.J. Super. Ct. App. Div. 1999).
    
    
49. 40 U.S.C. §3131, et seq. (West 2005)
    
    
50. See, e.g., Ala. Code 1975 §§39-1-1 and 39-2-8 (2004); Ariz. Rev. Stat. Ann. § 34-222 (West 2005); Colo. Rev. Stat. § 24-105-202 (West 2005); Idaho Code § 54-1926 (Bender 2004); Ind. Code § 36-1-12-14 (West 2005); Kan. Stat. Ann. § 60-1111 (2003); La. Rev. Stat. Ann. § 38:2216 (West 2004); Mich. Comp. Laws Ann. § 129.201 (West 2004); Minn. Stat. § 574.26 (2005); Miss. Code Ann. § 31-5-51 (West 2004); Nev. Rev. Stat. § 339.025 (2005); N.M. Stat. Ann. § 13-4-18 (1994); N.J.S.A. 2A:44-143 (2004); Texas Govt. Code Ann. § 2253.021 (West 2005).
    
    
51. See, e.g., Ark. Code Ann. § 22-9-403 (2004); Ind. Code Ann. § 36-1-12-14(g) (West 2004); Kan.. Stat. Ann. § 60- 1111(b) (2003); S.C. Code Ann. § 57-5-1660 (b) (2004).
    
    
52. See, R. Carney, Suit Limitations in THE LAW OF PAYMENT BONDS (K. Lybeck and H. Shreves eds., 1998)
    
    
53. See, e.g., United States ex reI. Kane of New England v. Diamond Constr., Inc., 582 F. Supp. 886 (D. Mass. 1984); Farmers Union Center Exchange, Inc. v. Reliance Ins. Co., 626 F. Supp. 583 (D.N.D. 1985); J Caiazzo Plumbing and Heating Corp. v. United States Fidelity & Guar. Co., 2004 W.L. 2848548 (S.D.N.Y. December 9,2004); United States ex reI. East Coast Contracting, Inc. v. United States Fidelity & Guar. Co., 2004 W.L. 1686496 (D. Md. July 23,2004).
    
    
54. See, e.g., Del. Code Ann. Tit. 6, § 3502 (2004); Minn. Stat. Ann. § 514.02 (2005); Colo. Rev. Stat. Ann. § 38-22- 127 (West 2004); N.J. Stat. Ann. § 2A:44-148 (2004); Wash. Rev. Code § 60.28.010 (2004); N.Y. Lien Law § 70, et seq. (McKinney 1999 & Supp. 2005); See, generally, R. Carney, Payment Provisions in Construction Contracts and Construction Trust Fund Statutes: A Fifty State Survey (unpublished paper submitted at the Northeast Surety and Fidelity Claims Conference held on Sept. 30-October 1,2004).
    
    
55. See, e.g. In re Adams. 312 B.R. 576 (Bankr. M.D.N.C. 2004); In re Holmes, 117 B.R. 848 (BanIa. D. Md. 1990). In re Wright, 266 B.R. 848 (Bank. E.D. Ark. 2001); In re Smith, 238 B.R. 664 (Bank. W.D. Ky. 1999); re Jenkins,110 B.R. 74 (Bankr. M.D. Fla. 1990);In re Englund, 20 B.R. 957 (BanIa. E.D. Mich. 1982).
    
    
56. See, e.g.,Reliance Insurance Co. v. The Lott Group, 851 A. 2d 766 (N.J. Super. Ct. App. Div. 2004); Aspro Mechanical Contracting, Inc. v. Fleet Bank, NA, 1 NY 3d 324, 773 N.Y.S. 2d 735 (N.Y. Ct. of App. 2004).
    
    
57. Andre Constr. Assoc. v. Catel, Inc., 681 A.2d 121,293, N.J. Super. 452, 456-457 (N.J. Super. Ct. Law Div. 1996).
    
    
58. See RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY, §22-24 (1996); see generally Chapter 1, Creation of the Relationship among the Surety, the Principal and the Indemnitor in THE SURETY'S INDEMNITY AGREEMENT (M. Klinger, G. Judd, and G. Bachrach eds., 2002).
    
    
59. See RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY, §21(1996); Admiral Oriental Line v. United States, 86 F2d 201,204 (2d Cir. 1936).
    
    
60. See generally A. Shahinian, The General Agreement of Indemnity, Chapter 27, THE LAW OF SURETYSHIP, 2d ed. Edward Gallagher ed., 2000).<br
    
61. Commercial Ins. Co. of Newark NJ. v. Pacific-Peru Const. Corp., 558 F.2d 948, 953 (9th Cir. 1977).
    
    
62. See, e.g., United States Fidelity & Guaranty Co. v. Feibus, 15 F. Supp. 2d 579, 585 (N.D.P.A. 1998), aff'd 185 F. 3d 864 (3rd Cir. 1999); Engbrock v. Federal Ins. Co., 370 F.2d 784, 787 (5th Cir. 1967); General Accident Insurance Company of America v. Merritt-Meridian Construction Corp., 975 F. Supp. 511,516 (S.D.N.Y. 1997); Associated Indemnity Corporation v. CAT Contracting, Inc., 964 S.W. 2d 276 (Tex. 1998);Fidelity & Deposit Co. of Maryland v. Fleischer, 772 S.W. 2d 809, 815 (Mo. Ct. App. 1989); Fidelity & Deposit Company of Maryland v. Bristol Steel & Iron Works, Inc., 722 F. 2d 1160, 1163 (4th Cir. 1983); Transamerica Ins. Co. v. Bloomfield, 401 F.2d 357, 362 (6th Cir. 1968).
    
    
63. See, e.g., Commercial Ins. Co. of Newark v. Pacific-Peru Constr. Corp., 558 F.2d 948, 952 (9th Cir. 1977; Employers Ins. of Wausau v. Able Green. Inc., 749 F. Supp. 1100, 1103 (S.D. Fla. 1990) United States Fidelity & Guaranty Co. v. Feibus, 15 F. Supp. 2d 579, 585 (N.D. Pa. 1998), aff'd 185 F. 3d 864 (3rd Cir. 1999).
    
    
64. General Accident Insurance Company of America v. Merritt-Meridian Construction Corp., 975 F. Supp. 511, 516 S.D.N.Y. 1977).
    
    
65. See, e.g., Fallon Elec. Co. v. Cincinnati Ins. Co., 121 F.3d 125, 129 (3d Cir. 1997); Engbrock v. Federal Ins. Co., 370 F.2d 784, 786 (5th Cir. 1967); Transamerica Ins. Co. v. Bloomfield, 401 F.2d 357, 363 (6th Cir. 1968); United States Fidelity & Guaranty Co. v. Feibus, 15 F. Supp. 2d 579,585 (N.D. Pa. 1998), affd 185 F. 3d 864 (3rd Cir. 1999); Gundle Lining Canst. Corp. v. Adams County Asphalt, Inc., 85 F.3d 201,211 (5th Cir. 1996).
    
    
66. See e.g. American Motorists Ins. Co. v. United Furnace Co., 876 F.2d 293,302 (2d Cir. 1989); Safeco Ins. Co. v. Schwab, 739 F.2d 431,433 (9th Cir. 1984); Milwaukee Constr. Co. v. Glens Falls Ins. Co., 367 F.2d 964 (9th Cir. 1966); Tennant v. United States Fidelity & Guar. Co., 17 F.2d 38 (3d Cir. 1927).
    
    
67. See, e.g., Prairie State National Bank v. United States, 164 U.S. 227 (1964); In re Modular Structures, Inc., 27 F.3d 72 (3d Cir. 1994); Transamerica Insurance Co. v. United States, 989 F.2d 1188 (Fed. Cir. 1993); National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843 (Ist Cir. 1969).
    
    
68. See, e.g., Transamerica Insurance Co. v. Barnett Bank of Marion County, 540 So.2d I 13 (Fla. 1989); In re J. V. Gleason, Inc., 452 F.2d 1219 (8th Cir. 1971);Amwest Surety Ins. Co. v. United States of America, 870 F.Supp. 432, 434 (D. Conn. 1994).
    
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