UNDERSTANDING THE GENERAL INDEMNITY AGREEMENT AND OTHER SURETY ISSUES IN 2013
By Attorney Jonathan Sauer
An all-too-frequent situation we encounter at Sauer & Sauer is dealing with what the obligations of indemnitors are as to a surety under a general indemnity agreement. This is a document that you signed - hopefully, read - as part of the underwriting process in getting your first bond.
The GIA referenced below is from the, uh, Acme Surety Company. In the law business, we attorneys sometimes have unusual, even colorful, clients. Although not widely known, both the Roadrunner and Wile E. Coyote (sometimes simply called by his buds ‘Coyote’, for sure) are personal indemnitors to Acme with regard to the Film Completion Bonds they need for their various cartoons, which are required by some of the major production companies and studios. (These are needed as, uh, quite a few personal injuries occur during the making of these cartoons and quite a few things get blown up or are otherwise destroyed, both events frequently the subject of much merriment.) The principal on this bond is Wile E. Coyote Film Enterprises, a corporation organized in the Cayman Islands, not because of their secrecy or tax laws but because it’s a nice place to visit during the winter, especially when you are from the colder climes. Both the Roadrunner and Wile E. Coyote own all of the stock in the corporation and are, essentially, partners. Meetings of the board of directors can be contentious and quite often either of them might say ‘let’s take it outside’. As the cartoons in question are high risk, there are a number of other personal indemnitors, other than the corporation, which is the principal and an indemnitor also. A lawyer is not supposed to reveal to third persons what client(s) he or she represents. Suffice it to say, that in my professional capacity, the meaning of this GIA became necessary for me to understand as, uh, someone(s) had some personal reasons for understanding it.
Acme uses for its Film Completion Bonds the same type of agreement that another surety might use for construction payment and performance bonds because they are, well, a bit cheap and it costs a lot to write up these types of agreements as – so it is said by some non-lawyers – a lot of the lawyers who write these are lazy, too pricey and overfed, opinions I do not necessarily subscribe to myself (at least, entirely). Most of these agreements are prepared in the greater New York-New Jersey area, the mid-west or California, as these are the epicenters for a great many sureties, who tend to do these things at the home office (national) level. There are several good surety law firms in Massachusetts, who handle surety claims (not writing these agreements), and one truly excellent one located in Boston, which if any of the partners of which were to read this, he or she would know of whom I speak.
We suggest that you read the GIA by sections. Read section one in the GIA and then read the comments on section one. Read section two in the GIA and then read the comments on section two. A pattern is beginning to develop. You get the general idea. (Someone had to explain it to us. After a few tries, we got it!)
Now, since The Acme Surety Company writes virtually all of the payment and performance bonds executed in Massachusetts which I can read without my glasses, reading and understanding this agreement will be useful to you in understanding what your rights and obligations are under your surety’s GIA, as all of these agreements have very similar content as to 80% to 90% of the issues involved. This agreement doesn’t provide for ‘confessions of judgment’. Other agreements do.
This will be one of our lengthier articles. However, for any construction company that has a bonding line, a failure to generally understand the ‘rules’ may be at your peril. A poorly-handled surety default – even some properly handled surety defaults – can lead to business failure, your losing your home and, sadly, your losing your marriage. Knowledge of the contents of this article may be one of the best time investments you have ever made, particularly when it is read and understood before a serious default occurs. All the more so for personal indemnitors, who are often left holding the bag. Understanding what you might owe the surety under the GIA and what the surety is likely to do if there is a claim, should be helpful for you to better understand the issues that might be associated with a termination. In the same manner, understanding the GIA would be helpful to individual indemnitors planning to close down a company (e.g. bankruptcy) and start a new one. The article is in English and for many of you, that’s (at least) a first or second language! We’ll try to explain as much of the legalese as we can, as we move along. As with all of my articles, if a reader doesn’t understand something he or she has read, call me and I’ll try to explain it at no cost to you, (although this offer does not extend to analyzing specific situations you may be involved with but is limited to the provision of general information.)
As to this article’s length? Well, since I am now regularly sending out case comments – Scribbles Squibs – which are only two or three pages, I feel that a determination as to the length of my writings has to be both Scribbles and Scribbles Squibs considered together and divided by two. As with any good architect’s (I don’t usually like to use these two words in the same paragraph, let alone next to each other) minutes, all recipients of this issue will be deemed to have accepted the previous sentence unless we have a hand-delivered, notarized exception with a corporate vote within ten minutes of your receipt of this!
2. UNDERSTANDING THE GENERAL INDEMNITY AGREEMENT AND OTHER ISSUES
First of all, you know that whenever you need a magnifying glass to read a document, it can't be good. Literally, this is how I read it.
Let's define some terms. The ‘principal’ is the company for whom the bond is being written. This is similar to an insured under an insurance policy. The insurance company on a bond is referred to as the ‘Surety’. The party to whom the payment and performance bonds run - a beneficiary in an insurance contract - is the ‘obligee’. In the construction context, the obligee of a subcontractor’s bonds is the general contractor and the obligee of the general contractor’s bonds is the owner. I'll refer to the general indemnity agreement as a GIA. The parties signing the GIA are all ‘indemnitors’, which includes the principal and which includes individual indemnitors. The indemnitors personally back and guarantee the performance of the principal with regard to the obligations it assumes in the GIA and as to various bonds executed on its behalf by the surety and the contracts underlying those bonds. The 'penal sum' of the bond is, generally, the amount of the subcontract or of the general contract which is bonded and generally means that this is the maximum liability that the Surety could have on the job. Theoretically, with a one million dollar performance bond and a one million dollar payment bond, the Surety's maximum liability as to that project would be two million dollars. A ‘loss’ payment is a payment made by the Surety to a claimant with regard to that claim. An ‘expense’ payment is a payment made by the Surety to individuals assisting with the handling of a claim and would include payments to accountants, lawyers, claims services, etc.
By the way, suretyship is not insurance for some substantial legal reasons and grounds. It's not an insurance product per se although in a lot of ways, claims under bonds are handled similarly to claims under insurance policies. It is important to understand that not all of these terms referenced below might be enforceable in whatever state an indemnitor is sued as some of them might be seen as void as against public policy. For our present purposes, it is prudent to assume that all of these provisions are enforceable. This will be so if you didn’t read the agreement. This will be so if you didn’t understand the agreement. And, this will be so if someone – the surety underwriter, your insurance agent or, even, your own counsel – explained this to you in a way inconsistent with what the words actually say. It is important to understand that some of these rights given to the Surety - but not all of them - already exist under law. And, the most important thing to understand is that issues relative to these terms only arise occasionally and these usually within the context of a default situation and/or with regard to a suit by the Surety against the indemnitors to recover its losses and expenses paid. If any principal properly performs its jobs, pays its suppliers and subcontractors, none of this is ever likely to be a problem.
How best to understand this? Well, when you borrow money to buy a car, if you don’t make the payments, someone will take your car back (in the middle of the night or otherwise.) If you borrow money to buy a house, if you don’t make the payments, sooner or later, the bank will change the locks on the doors and you will find your possessions out on the driveway and front lawn. And, if you request a Surety to execute bonds on your behalf, if you default under those bonds or under the express provisions of the GIA underlying those bonds, no good thing will happen to you. Remember that a surety bond is essentially a financial instrument. The strict definition of a surety bond is ‘an extension of unsecured credit.’ Basically, a bond is a kind of loan or letter of credit. And, you know what happens to borrowers who default on their loans. But, here’s an important difference. The bank – on your auto loan – and the bank – on your homeowner’s loan – will not generally proceed against you until you are late on your payments. Under most indemnity agreements, once the surety has established a ‘reserve’ – an amount of money withdrawn from its investment portfolio to respond to a possible claim – you can be in default under the GIA if you fail to provide the Surety with collateral as to a possible claim or an anticipated loss. Therefore, unlike these other two loan situations, you can be in more trouble earlier under a GIA, even before the Surety has spent the first penny on your behalf. Something even more ominous. If it turns out that someone filed a claim against one of your bonds and lost, you still have to reimburse the surety for any monies it expended on your behalf which, in such a situation, would usually be its attorney and investigative fees. Your obligation to the Surety is ‘no fault’. It literally doesn’t matter whether you prove to be ultimately right or wrong with regard to the underlying dispute and your obligations to pay the freight.
If the Surety spends any money on your account – your being right or wrong – your obligation to reimburse the Surety is usually absolute. This makes this one of the more objectively ‘unfair’ documents you may ever execute with regard to your business. But, keep in mind that if the value of the collateral you post to secure your line of credit issued by a bank diminishes, the bank can also exercise certain options seeking additional security to secure the loan. As with any contract, it helps to read it. One of the jokes within the surety industry is the following statement to the beleaguered principal or obligee: “I am from the surety and I’m here to help you.” This will almost never be true.
A final general comment. If a principal goes 'into claim' it has almost no ability to control the actions the Surety takes in either paying claims or completing projects. While there is some identify of interest between obligations of principals and sureties, sureties are a heavily regulated industry. They have to be approved by various federal authorities and, generally speaking, by the division of insurance in whatever states they write bonds. They are subject to various claims for unfair and deceptive trade practices and/or for unfair claims handling practices, which claims might provide for the award of multiple damages and attorneys' fees. And, it's a somewhat open topic in the law - not conclusively determined for all states - as to whether or not a Surety can pass on to its indemnitors the loss and expense payments it incurs with regard to its own unfair and deceptive trade practices or unfair claims handling practices, as compared with run of the mill loss and expense payments incurred with regard to payment and performance bond claims. I, myself, have seen one of my surety clients thrown out of Massachusetts with regard to the execution of surety bonds for claimed defective handling of various claims involving taxicab insurance, a completely different product. Also, sureties lose more than they win in most litigation other than indemnity matters, which they invariably win. Where most sureties earn more than fifty percent of their total premiums bonding public work, they are especially sensitive to potential exposures that they might face from obligees on performance bonds. For all of these reasons - and others - Sureties do not defer in all circumstances to the wishes of their principals with regard to claims. They are more likely to do so with regard to payment bond claims than with regard to performance bond claims. Also, they are more likely to defer to the wishes of their principals who generate large premium income. They are less likely to defer to the wishes of their principals when the principal has moved on to another Surety. I have never heard of any Surety that has varied any of the terms of the GIA as to any indemnitor. Success in these situations may be limited to trying to avoid being named a personal indemnitor, which occasionally happens in a competitive market with a principal with really good financial statements (i.e. substantial money in the corporation). I would urge anyone signing any GIA to read the document. Hopefully, these comments will make its content clearer.
A second final general comment. (If you haven’t figured it out yet, seldom is anything truly final under the law!) These agreements are serious business. The fact that you may have signed such an agreement as an accommodation to a spouse doesn’t change your potential liability to the Surety after that spouse is an ex-spouse, unless you exercise your rights under the TERMINATIONS section set forth below, which will only apply to future bonds.
Do yourself a favor. Pour yourself a stiff drink and read this article through to the end, if you are an indemnitor under a bonding arrangement or are thinking of becoming an indemnitor under a bonding arrangement. Understanding your potential liabilities and exposures to the Surety before they are incurred may assist you in managing them. In many ways, this article and the previous Scribbles article on avoiding terminations have some overlap. If you are in the soup before you get interested in understanding these things, it may be, at that juncture, that criticizing the broth at that time will be of no usefulness at all. Poorly seasoned soups can get you chopped on the Food Channel. Not understanding your legal rights and obligations before they become truly material can be even more serious.
As we approach the actual agreement, a blinking warning sign in iridescent yellow suddenly appears: WARNING: EXCESSIVE LEGALESE AHEAD. So, you can’t complain, already. After all, you’ve been warned! An indemnity agreement is a complex contractual agreement. It will be the rare reader who will understand the significance of each of these provisions in full. A lot of lawyers and judges will not necessarily understand what each clause means. Still, this will serve to give you a general idea of what the agreement provides for and to give you an indication as to which provisions you don’t understand for your further review with counsel familiar with these matters. The key thing, however, is to, uh, you know, like read it, hopefully before you sign it and, if not, then reasonably quickly after you sign it. This is especially true with regard to individual indemnitors. The GIA you have signed – or may sign – may have provisions somewhat different from these. But, if you hold them all up by their literary ankles, these agreements are remarkably similar as to their basic themes and ideas.
A final, final word. And, here is only one of the many ways that men are so much dumber than women. A man will look at some kind of complicated document (like a GIA) and say: ‘I’ll never understand this. If I try to read this and understand this, I’m only going to feel stupid. And, if I have to ask someone to explain it to me, I’m going to feel stupid.”
A woman, on the other hand, would say: “I don’t understand all of this. I need to discuss this with someone who can explain to me what it means.” Whether man or woman, if you read this agreement and the comments, you will get the general idea of what is involved. You can always ask someone like me what the parts you don’t understand actually mean. In fact, if any reader of Scribbles doesn’t understand any provision discussed below, call me and we can discuss it at no charge to you. How can you go wrong? As they say in New York, ‘such a deal!”
All of the above being said, let’s get going!
Section 1 – PREMIUMS. “The Undersigned will pay to the Surety at its Administrative Office in the City of Taos, New Mexico or at its office in Tijuana, Mexico, premiums or charges at the rate and at the times specified in respect of each such instrument in the Surety’s manual of rates which, with any additions or amendments thereto, is by reference made a part hereof, and will continue to pay the same where such premium or charge is annual until the Surety shall be discharged and released from any and all liability and responsibility upon and from each such instrument or matters arising therefor, and until the Principal and/or Undersigned shall serve or cause to be served upon the Surety competent written legal evidence of such discharge or release from each such instrument and all liability thereof. The Surety may also retain for the purpose of off set, any and all earned premiums subject to refund or rebate to the Principal and/or Undersigned in the event its right to indemnity is activated.”
COMMENTS on Section 1 - PREMIUMS. Bond premiums are, generally, for one year with regard to contract (payment and performance) bonds. If the job goes longer, you will most likely owe additional premiums. Something to be aware of when pricing multi-year jobs. Also, typically, most sureties will audit the final adjusted price of your subcontract when it is done and charge you a premium for that amount of the job that exceeds the original subcontract value. So, if you have a one million dollar job and the job ends up one million five hundred thousand dollars, you may have to pay a bond premium for the additional five hundred thousand dollars. Knowledgeable contractors include in change order pricing the value by which this change order increases your subcontract just at the rate you pay for your bonds for just this purpose. So, if you are paying a three percent premium for the bond, you should charge this to generals on add change orders. I should point out that while a bond has a 'term' for the principal - for the purposes of computing additional premium owed - most likely, the bonds given to the obligee will be in force as to the obligee for the duration of the job, unless there is very limiting language in the bonds saying that they are only covering a specific period of time, which is not at all usual. In fact, having read several hundred contract bonds, I don’t think I have ever seen any time-limiting language in any of them.
Section 2 – INDEMNITY. “ The Undersigned shall exonerate, indemnify, and keep indemnified the Surety from and against 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 Principal or the Undersigned 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 Undersigned as soon as liability exists or is asserted against the Surety whether or not the Surety, shall have made any payment therefore. In the event Surety shall have set a reserve, it may also retain any and all earned premiums which may be available for refund or rebate to the Principal and/or Undersigned. This right shall be in addition to its stated rights herein, not in substitution for same. Such payment shall be equal to the amount of the reserve set by the Surety. The Surety may pay or compromise any claim, demand, suit, judgment or expense arising out of such bond or bonds and any such payment or compromise shall be binding upon the Undersigned and included as a liability, loss or expense covered by this Indemnity Agreement. In the event of any such payment or compromise by the Surety, an itemized statement thereof sworn to by an officer of the surety, or the voucher or vouchers or other evidence of such payment or compromise, shall be prima facie evidence of the fact and amount of the liability of the Undersigned under this Agreement.”
COMMENTS on Section 2 - INDEMNITY. This paragraph and the one describing defaults are the most important provisions in the GIA. The above paragraph is fairly standard language. As I said above, if the surety incurs any costs on your account, you have to repay them irrespective of whether you were right or not. This includes that you would have to pay their legal fees if they have to sue you for indemnity. In any action on this GIA, an itemized statement of those costs or the voucher (check) or other evidence is prima facie evidence of liability. In an ordinary case on a contract, the plaintiff (suing party) has to prove liability for the debt and the amount of the debt. In indemnity cases, they simply have to provide copies of the checks or an affidavit and this accomplishes proof of liability prima facie. That means that they have put on enough evidence to prove their case. You could still put on rebuttal evidence to try to contradict their evidence. Most cases for indemnity end at the summary judgment level well before trial, a summary judgment motion being essentially a trial by affidavit - no witnesses.
Massachusetts, by the way, has a case that says that allegations by indemnitors that the Surety did not act in good faith is not a viable defense to an indemnity action. (“Want of good faith involves more than bad judgment, negligence or insufficient zeal. It carries an implication of a dishonest purpose, conscious doing of wrong, or breach of duty through motive of self-interest or ill will.” Hartford Accident and Indemnity Company v. Millis Roofing and Sheet Metal, Inc. 11 Mass. App. Ct. 998,999-1000, 418 N.E.2d 645 (1981)). Yet, principals and individual indemnitors may disregard the provisions of a GIA as they feel they are right (as to the underlying contractual dispute with the oblige) or they feel the Surety did not act in good faith in the handling of a particular claim. Truth be told, in the majority of indemnity cases, either allegation isn’t even relevant.
Section 3 – SETTLEMENT OF CLAIMS. “The Surety shall have the exclusive right for itself and for the Undersigned to decide and determine whether any claim, demand, suit or judgment upon any such bond shall, on the basis of liability, expedience or otherwise be paid, settled, defended or appealed, and in its determination shall be final, conclusive and binding upon the Undersigned.”
COMMENTS on Section 3 - SETTLEMENT OF CLAIMS. Again, Surety can settle claims without your approval and the settlement of such claims by surety is conclusive as to its principal and, generally speaking, also to the individual indemnitors. (Unfortunately, this is as simple as that.) Many sureties, in addition, take the position that they have the right to sign the principal’s name to a settlement agreement, even when the principal does not want to settle. (Something to be aware of.)
Section 4 – ASSIGNMENT AND SECURITY INTEREST. “To facilitate the carrying out of all provisions of this Agreement and to secure the obligations in any and all paragraphs of this Agreement and the payment and all other performance of all the Undersigned(s), present and future debts, obligations and liabilities to Surety, of whatever nature (“Obligations”), the Undersigned assign, transfer and set over to Surety and grant Surety a security interest in all the Undersigned(s) equipment, fixtures, accounts, contract rights, chattel paper, instruments, documents, general intangibles and inventory, whether now owned or hereinafter acquired and all additions ad accessions to, and all proceeds and products of any of the foregoing (“Collateral”); and (a) all the rights of Principal in and growing in any manner out of, all contracts referred to in Bonds, or in, or growing in any manner out of the Bonds; (b) all the rights, title and interest of the Principal in and to all machinery, equipment, plant, tools and materials which are now or may hereinafter be 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 Principal 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 action, claims and demand whatsoever which Principal 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 of the and all contracts referred to in the Bonds; and against any surety or sureties of any subcontractor, laborer or materialman; (e) 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 Principal has an interest; (f) all rights the Undersigned have in patents, patented processes, licenses, copyrights, trademarks and all other intellectual property rights required for the performance of the work for which the Surety issued Bonds, and expressly authorizes the Surety to use these property rights as required in the Surety’s discretion to complete the work for which the Surety issued Bonds. The Surety and its attorneys are hereby authorized, without notice to the Undersigned, to make schedules of all property assigned under this Agreement, and to attach the same hereto at any time, and the same when attached, shall by this reference be incorporated herein and made a part of this Agreement, and when any such schedules have been made and attached, the Surety and its attorneys are authorized to record a copy of same under provisions of law governing such.”
COMMENTS on Section 4 - ASSIGNMENT AND SECURITY INTEREST. This is quite a bit different from usual assignment language. Basically, the indemnitors – individually and the principal - are assigning to the surety virtually everything the principal and the individual indemnitors own and the surety can claim a security interest in these things even when there has not been a claim. This is to set up the surety as a potential secured creditor, which is a higher level (having more rights) than an unsecured creditor in various collection situations, including bankruptcy. So, if, for example, the surety perfected this interest - more on this later - the surety could proceed directly against things such as your machinery, equipment, subcontracts, causes of action, patents, other contracts, your affirmative claims and suits against anyone. To accomplish this, under the Uniform Commercial Code, the surety could file 'financing statements' with appropriate authorities evidencing and claiming such an interest, which is notice to the world of their claims. In Massachusetts, last time I recall being involved with this, these would be filed at the state level and locally, the town or city in which the principal has its office. Irrespective of the above, Sureties don't tend to do such things until you are 'in claim', meaning that someone is making a claim against your bond.
There are several reasons for this. First of all, they tend to be very disorganized about such things. Namely, who would do this? Is this done from the central office for the Surety? Is it done by a local office of the Surety? Should this be done by the claims office or by the underwriters? Who pays for this: claims or underwriting? Is this something possibly that the insurance agent procuring the bond – or his or her agency – should do? Secondly, many sureties wouldn’t know how to do this. Thirdly, if they did make these filings, they would be constantly signing subordination agreements to your lenders, which is a pain and an expense. A subordination agreement is an agreement where one secured party formally recognizes that another secured party's interests are greater than that party's own interests. So, if, for example, there were financing statements as to the same property that a bank would look to as security, the senior creditor (such as the surety) would agree that the junior creditor (a bank) has superior rights to the surety and that the senior creditor's rights are subordinate - or, inferior - to the junior creditor's rights. For, your lender might not make advances on your line of credit without such subordination agreements and the surety understands that without giving the subordination agreements, that would put you out of business, which might cause the principal to sue them for bad faith and which would cause claims against your bonds, as you wouldn't be able to finance your work.
Here's something to keep in mind. Usually, sureties don't file their financing statements until you are seriously in claim and are unable or unwilling to pay their indemnity or are acting as if you will or might file bankruptcy. In bankruptcy, security interests created within 90 days of the filing of bankruptcy are automatically dissolved by a provision in the Bankruptcy Code. If the surety were able to file its financing statement more than 90 days before the filing of bankruptcy, this would mean that it could go through bankruptcy as a secured creditor which means that although its claims against the principal were dissolved through bankruptcy, they would still be able to proceed against the collateral - the various things listed above. If they don't file the GIA as a financing statement farther out than the 90 days, they are an unsecured creditor in bankruptcy which means, effectively, that in a Chapter 7 (liquidation), they usually won't receive anything and in a Chapter 11 (reorganization), they probably won't receive anything more than nickels or dimes on a dollar. This is generally more of a theoretical right than an actual, practical right because such financing statements are either not filed or are filed too late to actually accomplish anything.
What makes this agreement different, is that the indemnitors make the assignments when they sign the agreement. Most agreements say that the assignments only take effect once the principal has breached some aspect of the agreement. I think language is pretty unusual. You have to understand that a lot of lawyers who draft these things are 'academic' lawyers – they might faint if they had to try a case in court - and that they like more and more words. Why use five thousand words, when you can use ten thousand? Also, competition for surety business is intense and some lawyers feel that if they can create a tougher document, this gives them the inside track to get the surety's claim business. Now, the bottom of the first paragraph says "and expressly authorizes the Surety to use these property rights as required in the Surety's discretion to complete the work for which the Surety issued Bonds." One might infer that in having this language, the Surety is only taking the assignment and security interest for use in claims situations, which might carry the implication that all of these things only happen when you are in claim. But, that is not what the language, taken as a whole and on balance, says. I wouldn't be worried about this for the reasons indicated above but this does give the Surety very powerful rights.
Also, note that the indemnitors are assigning to the Surety interests that they have in other contracts, both bonded and unbounded. This would allow the Surety the right to tie up virtually all of your contract income, depending on the size of the claim.
Section 5 – DEFAULT. “ Upon the occurrence of one or more of these events of default: (a) any abandonment, forfeiture or breach of any contracts referred to in the Bonds or of any breach of any said Bonds; (b) any breach of the provisions of any of the paragraphs of this Agreement or the Obligations; (c) a default in discharging such other indebtedness or liability when due; (d) any assignment by Principal for the benefit of creditors, or the appointment, or any application for the appointment of a receiver or trustee for Principal, whether insolvent or not, or Principal becomes insolvent or the subject of bankruptcy or insolvency proceedings; (e) any proceeding which deprives Principal of the use of any of the machinery, equipment, plant, tools, or materials referred to in Section 4 hereof; (f) Principal dies, ceases to exist, absconds, disappears, becomes incompetent, is convicted of a felony , or imprisoned, if Principal shall be an individual; (g) any representation made to induce Surety to execute any bond is false in a material respect when made; or (h) any other event which causes Surety in the reasonable belief to deem itself insecure; all of the Obligations will, at the option of Surety and without notice or demand, mature immediately; and Surety will have all rights and remedies provided for herein, all rights and remedies for default provided by the Uniform Commercial Code as well as under other applicable law and provided for herein, as well as under other applicable law and the Obligations. With respect to these right and remedies, (1) Surety may require Principal to assemble the collateral and to make it available to Surety at a convenient place designated by Surety; (2) written notice, when required by law, sent to any address of the Undersigned in this Agreement at least five calendar days (counting the day of sending) before the date of proposed disposition of the collateral or other action is reasonable notice; (3) the Undersigned shall reimburse Surety for any expense incurred by Surety in protecting or enforcing its rights under the Agreement, including, without limitation, reasonable attorneys’ fees and legal expenses and all expenses of taking possession, holding, preparing for disposition and disposing of the Collateral. After deduction of these expenses, Surety may apply the proceeds of disposition to the Obligations in such order and amounts as it elects; (4) Surety may permit the Undersigned to remedy a default without waiving the default remedied, and Surety may waive a default without waiving another subsequent or prior default by the Undersigned.”
COMMENTS on Section 5 - DEFAULT. This is more or less standard language. Basically, if you don't pay a supplier or subcontractor or an obligee declares you to be in default, you go out of business, you file some procedure for insolvency (assignment for the benefit of creditors, receivership, bankruptcy), you do something dishonest (including lying on bond applications) or you breach any other provision of the GIA, you are in default. Many GIA's require principals to furnish collateral in the full amount of any reserve a Surety might establish as to the value of a possible claim. This agreement so provides in Section 11. And, when the principal fails to do that, that act alone and in and of itself is a breach of the agreement.
Here's the deal. From a Surety perspective, this is all they want from you. They want you to buy a lot of bonds. They want you to pay all of the premiums. And, then . . . . they never ever want to hear your name mentioned again in any other context, particularly, in a claims context! A former underwriter for one of the major sureties, an exceptionally classy lady, now retired, who really enjoys playing golf, once told me with a very straight face that "the surety earns its premium by just prequalifying the principal for any job". (For the rest of us in a depression, that’s nice work if you can get it!) If they have to do anything, then its principal and other indemnitors will have some difficulties. They will most likely lose any further bonding by this Surety. They may have an indemnity action filed against them which, more than nine out of ten times, they will lose.) Since most bond applications have questions asking the applicant whether or not any claim has ever been made against any of its bonds, just being in claim with one Surety may make it difficult to get bonded by another Surety.
Section 6 – COMMERCIAL CODE. “This Agreement shall constitute a Security Agreement to the Surety and a Financing Statement, both in accordance with the provisions of the Uniform Commercial Code of every jurisdiction wherein such Code is in effect and may be so used by the Surety without in any way abrogating, restricting or limiting the rights of the Surety under this Agreement or under law, or in equity.”
COMMENTS on Section 6 - COMMERCIAL CODE. Standard language. The GIA gives the surety the right to be a secured creditor, which I have explained above. Therefore, if this document is filed as a financing statement more than 90 days before the filing of bankruptcy, the security interest itself may not be capable of being discharged in bankruptcy. (The most accurate and up to date answer to that should come from a Bankruptcy attorney, if this becomes an issue for you.) In my experience, as I said above, not many sureties file this document while jobs are ongoing. For, if they did, they would constantly be beseeched by their principals and the lending bank for subordination agreements, which take time and constitute an expense. For, a lending bank seldom risks its own money in terms of advancing the same in the face of a senior security interest. This is one of the two reasons why most mechanics’ liens work. By statute, a lienor comes ahead of the bank on its prior security interest for all monies that have not yet been paid or committed to at the time the lien is filed.
As to courts of law and equity and, if my recollection is correct, this is something that originated in England. This is a difficult concept to explain. Suffice it to say that courts of equity were generally where one went to look for injunctive relief. One writer put it this way. Courts of law were like a stern father: the law was the law and it got enforced no matter what the consequences would be. A court of equity, however, would be somewhat more like a forgiving mother. Redress could be sought and obtained there that was not possible in a court of law. There are a variety of equitable remedies that, in Massachusetts, were not available (or as available) in a court of law as compared with a court of equity.
In 1974, Massachusetts adopted a version of the Federal Rules of Civil Procedure, which made huge changes in civil procedural legal practice. One of those changes was that the courts of law and equity were merged, which is the way the system currently works with only courts of law. Equitable remedies are now asserted in courts of law.
When I first started practicing law in 1976, the courtroom in which motions were heard in Suffolk County had on the door ‘equity session’. Even today – the law being what it is, difficult, self-contradictory and with enough holes for Stevan Riddley to put up at least four hundred yards a game, which, unfortunately, will not be until next season – certain legal procedures are listed as equitable procedures. For example, a claim on a general contractor’s payment bond in the current version of the statute requires a claimant to file a ‘petition in equity in the superior court’. This has caused all manner of confusion, as questions arose as to whether a claim could be filed in the superior court if the payment bond claim was less than twenty-five thousand dollars, which is generally the minimum amount in controversy which the superior court will handle. (Last time I looked, the amount in federal court was seventy-five thousand dollars.)
And, until recently, the state district court system did not have full equitable rights and powers. Some years back – because of chronic court congestion and back-log – the vast majority of Massachusetts enacted a ‘one trial’ system. It used to be that if one lost in the district court, one could appeal to the superior court for a new trial. There were certain counties which were ‘test counties’ for a ‘one trial’ system, meaning that there would be no appeal to the superior court of an adverse district court judgment. This is now, more or less, general throughout Massachusetts. Since district courts then had to be able to offer the same remedies as a superior court, the district courts now, generally speaking, have equitable parties. Some cautious lawyers – I, among them – still file all of my payment bond cases in superior court, although there are some court cases which have held the district court has the jurisdiction to hear them.
Section 7 – TAKEOVER. “In the event of any breach or default asserted by the obligee in any said Bonds, or the Principal has abandoned the work on or forfeited any contract or contracts covered by and said Bonds, or has failed to pay obligations incurred in connection herewith or in the event of the death, disappearance, Principal’s conviction for a felony, imprisonment, incompetency, insolvency or bankruptcy of the Principal, or the apportionment of a receiver or trustee for the Principal or the property of the Principal, or in the event of an assignment for the benefit of creditors for the Principal, or if any action is taken by or against the Principal under or by virtue of the National Bankruptcy Act, or should reorganization or arrangement proceedings be filed by or against the Principal under said Act, or if any action is taken by or against the Principal under the insolvency laws of any state, possession or territory of the United State or upon any other event which causes Surety in the reasonable belief to deem itself insecure, the Surety shall have the right, at its option and in its sole discretion and is hereby authorized, with or without exercising any other right or option conferred upon it by law or in the terms of this Agreement, to take possession of any part or all of the work under this contract or contracts covered by said Bonds, and at the expense of the Undersigned to complete or arrange for the completion of the same and the Undersigned shall promptly upon demand pay to the Surety all losses and expenses so incurred.”
COMMENTS on Section 7 - TAKEOVER. If the principal defaults - as defined above - the Surety has the right to take over the job. If it appears as if a termination is in the imminent future, it is a good idea to get all of your equipment and stored materials off of the job before this happens. Please keep in mind that most Sureties have absolutely no idea how they will complete your job. They may hire one of the outside claims services, which do this. They may contact previous bidders to see if they are interested in finishing. They may take bids from a list of contractors doing the same work, often offering this to other of their bonded principals.
It is important to note that the Surety will invariably pay a great deal more to finish your job than it would cost for you to finish the job. You have the benefit of the learning curve on the job. You know what materials you put in the walls (e.g. conduit and wiring). Since takeovers frequently happen late in the job, a completion contractor will want more money for having to perform the work in an accelerated fashion. And, completion contractors will try to charge the Surety more than the work is worth – the ‘cake and ice cream’ factor of working for an insurance company.
For all of these reasons and more, if you are an indemnitor under a GIA, you need to get the job finished any way you can. There is nothing the Surety can do to prevent ‘back door financing’ (having your suppliers and subcontractors supply labor and materials which you can’t pay for and which will end up as payment bond claims.) Frankly, since a Surety’s exposures are much greater on performance bond claims (e.g. liquidated damages or delay damages), a Surety more or less expects – possibly even hopes – that the Principal will try to find some way to finish the bonded jobs.
Sometimes, a Surety will hire key employees of the principal to oversee completion. And, if it is necessary to take over the principal’s work under a ‘Takeover Agreement’, sometimes the Surety will complete the job using the principal as its subcontractor. Most sureties believe that they have this right to use the principal on the bond arguably in default as a subcontractor. Some obligees may fight this. However, I have seen obligees not object to this many times. Sometimes an obligee will be willing to do this because it feel it may be necessary to get the Surety to acknowledge it’s on the hook for possible damages. Sometimes, the obligee’s approach is ‘let you deal with him’. Meaning, they are just happy that they no longer have to interface with what they consider to be an unreasonable principal.
Here’s a suggestion that might be helpful and might save you money. If you know you won’t be able to complete a bonded job, you, yourself, see if you can get someone to finish it. Because many competitors are (reasonably) friendly with one another, someone else might do this as an accommodation to you or because they need the work. In all likelihood, you can get a better price than would a surety trying to get a price from that very same contractor.
Here’s another suggestion that might save you money. Namely, try to reach settlements for less than one hundred cents on the dollar of labor and material suppliers who have gone to the bonding company or are likely to go to the bonding company. You can ask for such settlements – and frequently get them – due to your personal relationships with the other company’s owners, past business you have done together and future business you might do together, even with you under a different corporate name. In my opinion, in most circumstances, it would be an unfair insurance claims practice for a Surety to try to negotiate a settlement on less than one hundred cents on the dollar unless it has defenses to the claim. (And, keep in mind that the Surety, as a matter of contract and as a matter of law, has all of your factual and legal defenses as its own.) You can do this as you don’t work for the insurance company. Your being able to save them some money on your bond claims may very well be a factor in their decision as to how hard they will chase you in an indemnity action (or, even, in some circumstances whether they will chase you at all.)
Here’s even another practice point that might save you money. If you know you are likely to have performance or payment bond claims, make sure you advise the surety in writing, as quickly as you can as to every factual and legal defense you have to the claim. Maybe the claimant didn’t finish its work. Maybe the claimant supplied inferior or non-complying materials. As to performance bond claims by obligees, maybe the obligee didn’t meet its payment obligations, either in terms of time or amount. Maybe the oblige forced you to change the terms of your performance due to budgetary reasons with substitute materials that did not perform as well as those specified. If there is going to be a claim(s) against one of your contract bonds (payment or performance), make sure that your letter to your Surety is their first notice of this, such letter being comprehensive and with exhibits supporting your position. Although you don’t have ultimate control as to what your Surety will do with claims against your Bonds, a majority of the sureties – possibly, the vast majority of the sureties – will evaluate what you say and consider your proofs and documentation.
Here’s even another practice point. As claims against general contractor payment bonds on state and federal payment bonds in Massachusetts require suits within one year from the date the claimant last worked, if such claimants don’t file suits in time, this is or might be a complete defense to their payment bond claims against your Surety. While you may be judgment-proof (won’t be able to pay the amount of any judgment), your Surety typically isn’t. Keeping your labor and material and subcontractor suppliers away from the bonding company as long as you can, possibly delaying such claims until more than one year has passed, is not likely to increase the amount of the indemnity obligation you might have down the road! Having said this, it’s not a lawyer’s job to comment on issues of a client’s morality and ethics. Seeing my ultimate obligation as to any construction company as being primarily to the owners (and indemnitors) of such companies, I pass along such knowledge and ideas that I and other construction law practitioners have either used or seen ‘in the trenches’.
Section 8 – RIGHT OF JOINT CONTROL. “If it becomes necessary or advisable in the judgment of the Surety to control, administer, operate or manage any or all matters connected with the performance of any contract within the purview of this agreement for the purpose of attempting to minimize any ultimate loss to the Undersigned or the surety or the purpose of enabling Surety to discharge the obligations of suretyship, the Undersigned expressly covenant and agree that such action on the part of the surety shall be entirely within its rights and remedies under the term of this agreement and as Surety.”
COMMENTS on Section 8 - RIGHT OF JOINT CONTROL. The meaning of this is not very clear. If the Surety believes it necessary, the Surety shall have the right "to control, administer, operate or manage any or all matters connected with the performance of any contract within the purview of this agreement." This could mean that the Surety may hire a lawyer or a construction service company to kind of oversee the work. The Surety might send a ‘freeze payment’ letter to the obligee on the bond, requesting that no further payments be made to the principal but, instead, they should be made to the Surety. There is a lot of redundancy in these agreements – as you have already seen, and will see later - and sureties probably already have this right by virtue of other paragraphs in the GIA.
One less than reputable principal I have dealt with several times – the key person forms new companies every few years, bankrupting the current company – would send the Surety notarized letters written by him admitting to owing the amount of the claim of various labor and material and equipment suppliers and subcontractors. This way, there would be fewer suits against his company, as a bonding company has little defense in such a situation provided the claim has been submitted within the appropriate period of time. This principal would do this to keep the subcontractor working and/or – I assumed – so that this company would work for him under his new company’s name. The principal could do this as he was, essentially, judgment-proof. On one of his bonded jobs, he was able to convince the obligee to up front most of the money due under the contract, claiming that if he had the money up front, he could give the obligee a better price. Having gotten a sizeable amount of money – ninety grand more than he was due – he then promptly defaulted on the job and the bonding company I represented had to come in and complete. I was able to negotiate on the bonding company’s behalf an agreement that the Obligee would reimburse the Surety for all monies it paid that were not due. So, at a closing on the performance bond claim, so to speak, the first check cut and received was the Obligee’s check to the Surety in the amount of the overpayment. Then, the Surety paid for the cost of completion.
Our last issue of Scribbles had as part of its title ‘A Brave New World’. If one thinks/is intending on treating its Surety this way, he better be very sure of his financial position and possible claims for fraud, which might not be merely limited to civil claims. Also, the majority of sureties have the capacity to litigate with its principal and indemnitors until the cows come home. Unless you have a similar ability – and most companies and individual indemnitors don’t – this should be a factor in your thinking, particularly when considering an action that you know the surety will not like.
Section 9 – BOOKS, RECORDS AND INFORMATION. “At any time, and until such time as the liability of the surety under any and all said Bonds is terminated, the Surety shall have the right to reasonable access to the books, records, and accounts of the Undersigned and any bank depository, materialman, supply house or other person, firm or corporation when requested by the Surety is hereby authorized to furnish the Surety any information requested including, but not limited to, the status of the work under contracts being performed by the principal, the condition of the performance of such contracts and payments of accounts.”
COMMENTS on Section 9 - BOOKS, RECORDS AND INFORMATION. The principal has to make its records available to the Surety for their review with 'reasonable' access. They can also check with the principal’s bank and with its material suppliers as to matters available to them and this access is extended to any "other person, firm or corporation". Note that this doesn't mean that any of these other parties actually has to provide their records or information to the Surety, as this provision is not binding on them inasmuch as they have not agreed to this document. This language is here primarily to protect the Surety from claims from the principal for invasion of privacy or intentional interference with contractual or business relationships, which are torts (civil actions). My recollection is that under Massachusetts law, one must keep one’s records for a period of seven years, in any event.
Section 10 – TRUST FUND. “The Undersigned covenant and agree that all payments received for or on account of contract(s) which are bonded by the Surety shall be held as trust funds in which the Surety has an interest. To secure said interest, it is agreed that all monies paid to the Principal and/or Undersigned covered by the Bond(s) are trust funds for the benefit of and the payment for direct labor, materials and services furnished in the prosecution of the work specified in the contract(s) for which the Surety may be or become liable under any of said Bond(s). The trust funds are specifically reserved as set forth above, and any breach of said duty shall be deemed a breach of the duties or obligations of the Undersigned under this Agreement of indemnity.”
COMMENTS on Section 10 - TRUST FUND. This simply says that all contract income on a bonded job has to be dedicated first and foremost to the costs of performing that job. Some states are 'trust fund' states, making such provisions mandatory by virtue of their statutes or court cases. This simply means that in those states, the monies received by the general contractor are specifically allocated to paying downstream material suppliers and subcontractors, first and foremost. The 'trust fund' concept is enacted for your bonds as a matter of contract, which is the contents of the GIA. The last time I looked at this issue, Massachusetts was not a ‘trust fund’ state.
Section 11 – RIGHT TO DEMAND RESERVE. “If for any reason the Surety shall be required or at its option and in its sole discretion 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 one or more of the Undersigned or, (b) unadjusted claim(s) or other claim under said Bond or Bonds of which the Surety has notice or, (c) loss, costs, attorneys’ fees, engineers’ fees, investigative charges and other disbursements and/or expenses in connection with said Bond or Bonds or in anticipation of loss thereunder, whether or not the Surety shall theretofore have paid any such sums or any part thereof, or (d) any default(s) of the Principal or, (e) abandonment of any contracts, failure to comply with any material provision thereof or cease to promptly perform any part of the work required to be performed thereunder, or to pay claims of suppliers of labor, material or services required under such contracts, or, (f) liens filed or, (g) disputes with the owner or obligee or, (h) for any reason whatever and regardless of any proceedings contemplated or taken by the Principal or the pendency of any appeal, the Undersigned, within 10 calendar days after mailing by the Surety of written demand by registered or certified mail shall deposit with Surety, cash or collateral in the amount of such reserve and every increase thereof, to be held by the Surety as collateral with the right to use any such funds or any part thereof, at any time, without notice to the Undersigned in payment or compromise of any judgment, claim, liability, loss, damage, attorneys’ fees, engineers’ fees, investigative charges and other disbursements and/or expenses in connection with said Bond or Bonds or in anticipation of loss thereunder. If the Undersigned shall fail to deposit such cash or collateral with the Surety, upon such request, the Surety at its option and in its sole discretion may engage counsel to proceed by suit or otherwise to procure the deposit with the Surety of such cash or collateral and the Undersigned shall be obligated to pay the Surety its reasonable costs, charge and expenses including counsel fees, incident to such litigation.
The Surety is hereby irrevocably authorized by the Undersigned to release or return to the Undersigned any part of such cash or collateral at any time, without prejudice to any of the Surety’s present or future rights, remedies and defenses against the Undersigned. The Surety shall have no obligation to invest or to provide a return on said cash or collateral deposited by the Undersigned. Any notice or demand hereunder shall be sufficient if sent by registered mail or certified mail to the Undersigned at the addresses stated in this instrument or the addresses last known to the Surety.”
COMMENTS on Section 11 - RIGHT TO DEMAND RESERVE. The principal has to deposit with the Surety upon ten days’ notice an amount of collateral sufficient to fund the Surety's reserve for claims and expenses or with regard to actually incurred loss and expense payments. The Surety does not have to have spent any money before such a request is made. This is fairly standard language. Under most of these agreements, a failure to post collateral is itself a breach of the GIA. Folks, before you even get started with contesting anything with your surety, you need to be clear that this is intended and designed to be an almost completely one-sided relationship, as is any relationship you have with a bank. If you take the unsecured credit – the execution of contract surety bonds – you do so under the surety’s rules, which are set forth in the GIA. Sureties may be very inflexible as to giving up their rights in any particular situation. And, in thirty-seven years, I am not aware of even one situation where a surety negotiated with a potential principal as to any of the terms of its GIA before the document was signed.
This having been said, I am aware of very few circumstances where a surety made demand upon the principal and indemnitors for collateral which the principal or indemnitors actually funded. And, while a failure to do so could bring about an immediate action for indemnity, my experience has been that this doesn’t happen solely for this reason. I have come across a few sureties that are aggressive about such things and sue principals and indemnitors early in the process. This could be because of the nature and temperament of their lawyers and it could also be because this is the way they choose to business. Over the years, I have seen various sureties fail who are litigation-happy. It’s generally not a very good strategy for sureties because a principal and indemnitors can often file bankruptcy and get rid of the debt/obligation that way.
Section 12 – NOTICE OF SUIT. “Upon any demand being made, notice given or action or proceeding commenced against the Principal upon any claim for which the Surety may be held liable in whole or in part, one or more of the Undersigned will immediately cause written notice thereof to be given by registered mail to the Surety at its Administrative Offices at the North Pole (in summer) and in the Bahamas (in winter). In the event of a suit or legal proceeding against the Surety upon or on account of any such Bond, the Surety shall have the right to apply to the court in which such action is brought for an order making one or more of the Undersigned parties defendant, and each of them hereby consents to the granting of such application and agrees to become such a party defendant and, in the event any judgment be rendered against the Surety to allow judgment in like amount to be rendered against one or more of the Undersigned, in favor of the Surety if the Surety so requests. The Surety shall be entitled to enforce the obligations hereof directly against the Undersigned, without the necessity of first proceeding against the Principal. The Surety shall be entitled to reasonable attorneys’ fees in the enforcement of this agreement.”
COMMENTS on Section 12 - NOTICE OF SUIT. This provides for three basic things. First of all, if the principal gets sued on a claim that could lead to Surety involvement, you have to let the Surety know of this. Secondly, if the Surety is sued on a bond claim, all of the indemnitors are agreeing in advance to the Surety's motion to add some or all of them in as parties defendant or as third party defendants in that bond claim suit. Thirdly, it is not necessary for the Surety to proceed first against the principal before proceeding against the individual indemnitors for indemnity. (This is also provided in a later section.) The first and third of these things are fairly standard. I don't often see the language in the second thing. However, under most rules of civil procedure, the Surety would be able to do this anyway, particularly in states who follow their own version of the Federal Rules of Civil Procedure, as does Massachusetts.
Section 13 – WAIVER OF EXEMPTIONS. “Each of the Undersigned does, jointly and severally, bind his or her property and does hereby release and abandon, as to the Surety all right to claim property including their homestead (except where prohibited by state law or constitution), as exempt from levy, execution sale or other legal process under the law of any state, province or other government, as against the rights of the Surety to proceed against the Undersigned for indemnity hereunder.”
COMMENTS on Section 13 - WAIVER OF EXEMPTIONS. All indemnitors waive any exemptions they may have as to statutory rights, such as homestead. As I said at the beginning, some of these rights may take precedence over the contractual language of the GIA based on the expressed ‘public policy’ of any particular jurisdiction. In the last decade or two, Massachusetts has enlarged the rights as to homestead to the point that one has a homestead on one’s house to the tune of five hundred thousand dollars. When I first looked into this subject matter in the 1970’s, my recollection is that a homestead was only for four thousand dollars in amount. Why such a big change? Easy enough to understand. As government entitlement programs have expanded - particularly in the medical field and with things like Medicare and Social Security – governments have less and less money to support their programs. The current Massachusetts governor says he has to raise revenue by a billion dollars, which is a lot of money unless you are Bill Gates or Richard Branson of Virgin Airlines fame. And, even Mr. Branson when asked to confirm he was worth over a billion dollars, fairly recently said 'Yes, I suppose it's true but a billion doesn't go as far as used to'. So a governmental entity looking at a family that has trouble paying its bills, is more likely to want to keep that family in their home as, otherwise, that family might need governmental assistance. And, a government comparing its budgets and liabilities and needs against what the private sector might do, will always favor orienting things in its favor. Which, whether intended or not, may very well work to your favor.
This is something very important for someone reading any contract Namely, don’t just assume because there are certain words in the contract, they are necessarily enforceable. For example, in Massachusetts, in the main, provisions stating that you give up the right to file a mechanic’s lien are unenforceable, as against public policy. You can’t have a contract that provides for the payment of anything other than prevailing wages on the vast majority of public jobs. I had a site contractor client who lost several hundred thousand dollars on site work done at a difficult subdivision with a great deal of water. I asked him why hadn’t he filed claims for extras and differing site conditions on the contract. He replied: ‘the contract said that there will be no change orders on this contract’ and he took that literally. It wouldn’t have been enforceable, in all likelihood. But, he never challenged it. And, the developer got away with it. Folks, I wouldn’t try to tell you how to run plumbing lines, how to wire electrical lines through switch gear or how to make sure that supporting steel members are driven sufficiently into the soil as to support a building. If that is so, then it may not be wise for you to refuse to get help when you are confronted with a contractual provision that seems inapplicable to your particular job and situation? Why are you trying to practice law without the training? I’m not suggesting that you spend legal fees for the sake of spending legal fees. I am simply suggesting that you spend legal fees before the problem becomes irreversible. That is almost always in your best interests when you are speaking with someone who knows what he or she is doing and will, quite likely, save you even more legal fees down the road. That you grew up with that individual, or that he or she is a friend or that he or she is a family member has little to do with the price of beans if they are not construction lawyers.
Bankruptcy exemptions - as to real estate, cash and personal property - probably cannot be waived and would control the language of the GIA. In fact, the last time I checked the Bankruptcy Code had a provision that said the mere act of filing bankruptcy does not constitute a breach of contract even where virtually every GIA I have ever seen says just the opposite! In some states, homestead rights may not be capable of being waived because homestead – and other rights – reflect public policy. In Florida, the right to homestead is contained in its constitution (or, at least, it was, the last time I looked at this issue.)
Section 14 – ASSIGNMENT NOT TO LIMIT RIGHTS. “The Undersigned shall continue to remain bound under the terms of this Agreement even though the Surety may have from time to time heretofore or hereafter, with or without notice to or knowledge of the Undersigned, accepted or released other agreements of indemnity or collateral in connection with the execution or procurement of said Bonds, from the Undersigned or others, it being expressly understood and agreed by the Undersigned that any and all other rights which the Surety may have or acquire against the Undersigned and/or other under any such other or additional agreements of indemnity or collateral shall be in addition to, and in not in lieu of the rights afforded the Surety under this Agreement.”
COMMENTS on Section 14 - ASSIGNMENT NOT TO LIMIT RIGHTS. This is unnecessary and essentially says that if, for whatever reasons, they waive certain parts of what their rights would be under the GIA, that doesn't mean that they would waive other parts of the GIA as to that situation and they wouldn't be waiving any of their rights under the GIA in a new situation. This is Massachusetts law, essentially, and is repeated at least once in a later section.
Section 15 – CHANGES NOT TO AFFECT. “The Surety is authorized and empowered, without notice to or knowledge of the Undersigned to assent to any change whatsoever in the Bonds and/or any contracts referred to in the Bonds, and/or in the general conditions, plans and/or specifications accompanying said contracts, including, but not limited to, any change in the time for the completion of said contracts and to payments or advances thereunder before the same may be due, and to assent to or take any assignment or assignments, to execute or consent to the execution of any continuations, extensions or renewals of the Bonds and to execute any substitute or substitutes therefore, with the same or different conditions, provisions and obligees and with the same or larger or smaller penalties, it being expressly understood and agreed that the Undersigned shall remain bound under the terms of the Agreement even though any such assent by the Surety does or might substantially increase the liability of said Undersigned.”
COMMENTS on Section 15 - CHANGES NOT TO AFFECT. This provision is a bit unusual. First of all, it says the Surety can make any changes in the contract that is bonded without affecting the indemnitors' liability, even when such changes are made without the indemnitors knowing of them. This is unusual as the usual issue with bonds is that, as to the obligee, the obligee wants to hold the Surety liable even when some of the changes mentioned occur without the Surety’s knowledge. In the vast majority of situations I have been involved with sureties are almost always trying to reduce their obligations, not increase them. Generally speaking, when there are changes in the provisions of the bonded contract, the Surety is liable for them, whether it knows about them or not. What is really unusual - I don't think I have ever seen this before - is that the Surety says it can execute additional bonds with different obligees as to the bonded project without affecting the indemnitors' liability under the GIA when it executes or consents to "the execution of any continuations, extensions or renewals of the Bonds". And with such substitute bonds, it can agree to "the same or larger or smaller penalties." That means that, theoretically, if the principal has executed one million dollar payment and performance bonds securing performance in a contract of that size, if and when the surety 'continues, extends or renews' those bonds, it could execute bonds with a two million dollar penal sum with the obligation running to a different obligee and the indemnitors would be liable to indemnify the surety as to this larger amount, notwithstanding the fact that the obligee on the substitute bonds is different from the obligee of the original bonds.
I have never seen this before. The chance, however, of a principal’s ever being involved with such a situation is virtually nil if the principal properly performs its bonded contracts and pays its vendors and subcontractors. Sureties are extremely loathe to execute substitute bonds and I can’t conceive of a situation where they would increase the amount of their exposure and run the bond to a different obligee. As I have said earlier – and as is discussed in Coffee with the Counselor in the March, 2013 issue of Scribbles in a light-hearted way – I think a principal cause of very difficult agreements is lawyers showing off.
Section 16 – ATTORNEY IN FACT. “The Undersigned hereby irrevocably nominate, constitute, appoint and designate the Surety as their attorney-in-fact with the right, but not the obligation, to exercise all of the rights of the Undersigned that are assigned, transferred and set over to the Surety in this Agreement, and in the name of the Undersigned to make, execute, and deliver any and all additional or other assignments, documents or papers deemed necessary and proper by the Surety in order to give full effect not only to the intent and meaning of the written assignments, but also in the full protection intended to be herein given to the Surety under all provisions of this Agreement. The Undersigned hereby ratify and confirm all acts and actions taken and done by the Surety as such attorney-in-fact.”
COMMENTS on Section 16 - ATTORNEY IN FACT. This is mostly standard with a little twist. First of all, the indemnitors constitute the Surety to act as their attorney-in-fact to take whatever actions the Surety deems necessary with regard to the assigned rights and to make and execute "any and all additional or other assignments, documents or papers". What this means, practically, is that the Surety will contend that it can sign your name to requisitions, to change orders and to settlement agreements with payment bond claimants or the obligee, even when you actively oppose them. This is an extremely important provision! What makes this a bit unusual is that the assignment rights under this GIA take effect upon execution of the GIA, as discussed above, where most of these agreements provide that there is no assignment until there has been a default by the indemnitors under the GIA. Under this provision, all indemnitors approve of whatever actions the Surety takes in advance of such actions having been taken! This provision, if enforceable, is certainly almost as Draconian as any such clause can be.
Section 17 – NOTICE OF EXECUTION. “The Undersigned hereby waive notice of the execution of said Bond and of the acceptance of this Agreement, and the Undersigned hereby waive all notice of any default, or any other act or acts giving rise to any claim under said Bonds, as well as notice of any and all liability of the Surety under said Bonds, and any and all liability on their part hereunder, to the end and effect that, the Undersigned shall be and continue liable hereunder notwithstanding any notice of any kind to which they might have been or be entitled and notwithstanding any defenses they might have been entitled to make.”
COMMENTS on Section 17 - NOTICE OF EXECUTION. This is a little different. Usually, this provision says that indemnitors will be liable on this agreement even if they are unaware of what bonds are being executed. Principally, it would appear that this would be addressed to spouse indemnitors not actively involved with the business and who don't know the daily ins and outs of what goes on (e.g. what jobs are being bid, what bonds are being executed.) It also holds all indemnitors liable even in the event they receive no notice of any claim or of situations where the Surety may be liable or of default situations, even if they were entitled to receive notice and notwithstanding that they might have had defenses they wished to make (presumably, as to the claim or default situation.) It would appear that there would be a couple of words missing on the fourth line. It is unlikely that anyone other than a spouse not involved with the business would possibly be unaware of default and claims situations, as, presumably, all indemnitors other than some spouses work in the business and have access to its records and situations. (Another thing to keep in mind is that when a husband and a wife both sign a GIA, if there is a divorce, their individual obligations as to the Surety are completely unaffected with regard to the GIA. That the spouse in a settlement agreement may have an obligation to indemnify the other spouse as to such claims, this would have no impact on either spouse’s obligations to indemnify a third party, such as a surety, which is not a party to that settlement agreement.
My experience has been in claims situations that the first group of letters from the Surety deal with the claim and only copy the principal, not any individual indemnitors. The indemnitors would receive notice if the Surety were demanding collateral under Section 11 or if the Surety were commencing indemnity proceedings or was about ready to commence indemnity proceedings. While I have seen exceptions, most sureties do not commence indemnity actions until the claims situation has resolved itself or has almost resolved itself which, with regard to performance bond claims, could be six months or more down the road from the Surety’s receipt of the obligee’s first claim letter.
Section 18 – OTHER SURETIES. “In the event the Surety procures the execution of the Bonds by other sureties, or executed the Bonds with co-sureties, or reinsure any portion of said Bonds with reinsuring sureties, then all the terms and conditions of this Agreement shall inure to the benefit of such other sureties, co-sureties and reinsuring sureties, as their interests may appear.”
COMMENTS on Section 18 - OTHER SURETIES. If the surety procures bonds from another surety, that other surety will have the same rights under this agreement, even though they are not mentioned in this agreement by name. Typically, a situation where this might occur is where there is more than one surety on the bonds, which can often happen on very large projects where the risk is too large for any one surety to incur or the bond limit exceeds the amount of any single bond the surety is authorized to execute. It can also happen when the Surety on the bond has no co-surety but has a re-insurer who assumes responsibility for a portion of the loss, usually above the first surety’s healthy deductible. This is a typical clause.
Section 19 – ADVANCES AND LOANS. “The Surety is authorized and empowered to guarantee loans, to advance or lend to the Principal any money, which the Surety may see fit for the purpose of any contracts referred to in, or guaranteed by the Bonds; and all money expended in the completion of any such contract by the Surety, or lent or advanced from time to time to the Principal, or guaranteed by the Surety for the purposes of any such contracts, and all costs, and expenses incurred by the Surety in relation thereto, unless repaid with legal interest by the principal to the Surety when due, shall be presumed to be a loss by the Surety for which the Undersigned shall be responsible, notwithstanding that said money or any part thereof shall not be used by the Principal.”
COMMENTS on Section 19 - ADVANCES AND LOANS. The Surety can lend the principal money and, if it does, this becomes an obligation of the indemnitors as a loss. Sureties hate to loan money to principals. If they 'finance' a principal, they'll usually have a third party sign all of the checks out of some form of 'job control account', which the principal has no direct access to. In certain situations, sureties will not object (as much) to the principal's finishing the job with subcontractors and then having the Surety pay those subcontractors under the payment bond. This is called 'back door financing', discussed above, and sureties seem to prefer doing this rather than making advances or loans to the principal. This is for a number of reasons. Having been involved with such situations numerous times representing sureties, it is very difficult for a surety to give the principal money or the use of the money without ‘getting taken’ to some extent. A principal will present the surety with a budget for any particular week and trying to understand the significance of every number is a very hard thing to do, as this necessarily gets into issues as to how principals do business, something a surety doesn’t and can’t understand. I have had different situations where principals hide costs that a surety wouldn’t agree to pay under categories which the surety expects to pay. For example, a principal may try to include in its financing payments to creditors on unbonded jobs. A principal might try to include in the financing payments personal debts and obligations unrelated to the bonded project in trouble.
Sureties also don’t object to ‘back door financing’ as much as they would to lending the principal money as sureties are, first and foremost, concerned with performance bond claims rather than payment bond claims. These are the claims where the surety has the best chance of taking a bath, both with inflated completion costs by completion contractors and an owner’s claims for liquidated damages and/or consequential damages or delay damages of one kind or another. Having dealt with bad faith claims against a surety representing the surety’s interests, these claims on a performance bond claim are a lot scarier than they are on a payment bond claim. More complaints to state insurance departments probably arise out of performance bond claims than would be the case for payment bond claims. More than half of the contract bonds sold in the United States are for public jobs. That means that, ultimately, the owner (obligee) is a town or municipality or a state or state division. These entities have a greater ability to cover the costs of litigation than does any particular payment bond claimant. Also, it is my sense that when a claimant presents a claim of unfair insurance claims practices to any state’s department of insurance, that department will give greater credence to claims that are filed by the government.
Section 20 – SETTLEMENT WITH ONE. “In the event of any claim or demand made by the Surety against the Undersigned by reason of the execution of any Bonds, the Surety is hereby expressly authorized to settle with one or more of the Undersigned individually and without reference to the others, and, such settlement or composition shall not affect the liability of any of the other parties included in the designation “Undersigned”, and the Undersigned hereby expressly waive the right to be discharged and released by reason of the release of one or more of the joint debtors, and hereby consent to any settlement or composition that may hereafter be made.”
COMMENTS on Section 20 - SETTLEMENT WITH ONE. A settlement between the Surety and an indemnitor does not affect the obligations of other indemnitors as to the remaining outstanding portions of the Surety's claims. My sense would be, based on experience, that if the individual indemnitors can agree on a plan to present to the surety jointly, this will benefit each individual indemnitor. More on repayment plans later.
Section 21 – RIGHT TO OBTAIN OWN RELEASE. “The Surety may at any time hereafter take such steps as it may deem necessary or proper to obtain its release from any and all liability under any Bonds and to secure and further indemnify itself against loss, and all damages and expenses which the Surety may sustain or incur or be put to, in obtaining such release, or in further securing itself against loss, shall be borne and paid by the Undersigned. In addition, the Undersigned will, on request of the Surety, procure the discharge of the Surety from any such Bond, and from all liability by reason thereof. Such request may be made and such discharge procured whether or to the Principal is in default of an undertaking underwritten by the Surety.”
COMMENTS on Section 21 - RIGHT TO OBTAIN OWN RELEASE. Two-thirds of this makes sense and the last third is just plain goofy. (That would appear to be a reference to a cartoon character working for a different studio!) The Surety can do what it feels necessary to get a release as to any particular claim. (This right is given them elsewhere.) The principal on request is required to obtain the discharge of a surety on a bond.
Now, for the goofy part. The latter demand may be made 'whether or not the Principal is in default of any undertaking underwritten by the Surety.' That could mean that, theoretically, as to a job that is proceeding nicely that is, say, half-done, if the Surety were to demand that the principal obtain a release of the Surety of its bonds, then the principal would have the obligation to do so. And, the only way I know of which would accomplish this satisfactorily to an obligee would be to obtain substitute bonds, which would cost a fortune. And, many sureties make it their policy to not bond jobs that have already begun.
I have never heard of this happening during my practice. One has to understand that suretyship is not insurance and that a lot of the rules sureties follow today - or try to follow today - have to do with the state of the law one hundred and twenty years ago. There were a few prominent court decisions by the United States Supreme Court in the last twenty years of the nineteenth century which some in the surety industry feel still have application (or should have application now). There were certain maxims that had a wide following such as ‘the surety should not be a volunteer’. That attitude would keep sureties from voluntarily settling claims, fearing that its own unilateral action might affect (diminish) its indemnity rights. There used to be a court remedy called "quia timet" (Latin for 'because he fears'), which was an anticipatory remedy available to one who could demonstrate the need to prevent future injury. In other words, a surety might see a situation developing down the road that might lead to a claim and attempt to 'head it off at the pass' by getting involved with some litigation now. There is Massachusetts common law that says an 'anticipatory breach of contract' (action taken as to something that hasn't happened but which one thinks might happen) is, in and of itself, a breach of contract.
Also, while a principal's and indemnitors' rights and obligations are fixed to a large extent by the GIA, these are only their contractual rights and obligations, leaving other avenues possibly open. A principal or an individual indemnitor could proceed against a Surety under, for example, a Chapter 93A action for unfair and deceptive trade practices. While I have seen some exceptions - one, of which, recently was taken over by a receiver - most sureties are practical and wish to minimize the amount of money spent on lawyers and do so relatively sparingly. I represented a surety twenty-five years ago in which one of its bond claims representatives seemed to pay the vast majority of all of her claims, not using lawyers. For a while, she was seen as the ‘fair-haired girl’. Of course, there may not have been liability in all of those claims situations.
I had another situation where a claims manager attempted to settle a performance bond claim herself and was willing to pay forty thousand dollars. She asked me to just prepare a release. Looking at the file, I saw that she had never even contacted the principal guy from the organization, even though the principal guy’s address and telephone number were clearly included in the file. I called him and met with the obligee and my recollection is that the case settled for a lot less than one-half of the forty thousand dollars. On my own initiative, I then sent a congratulatory letter to the claims manager complimenting her on holding out to get the very best settlement (which she greatly appreciated)! A very funny story associated with this that I can’t go into in, uh, writing!
Payments to lawyers are 'expense' payments and at least at one time, there was an expectation in the surety industry that the ratio of expense payments to loss payments should not exceed 15%. In other words, for every one hundred dollars a surety pays on a claim, it should not pay more than fifteen dollars to a lawyer, this figured over a whole host of matters and principals over a period of time. People, including claims managers and vice presidents, have been fired for exceeding predetermined limits. Also, if a surety has to pay a bad faith judgment to an indemnitor, this is what is called 'extra-contractual' liability', meaning a risk not covered by the bond. For sureties, this is a grave cardinal sin, something which sureties always seek to avoid.
So, while agreements like this GIA may give sureties a lot more rights than they are entitled to or would ever need, sureties are aware of the fact that unusual actions taken by the sureties are liable to cause suits against them by the principal. A war story I was not personally involved in. A major surety completed a school down south upon its principal’s default. The principal filed a suit against the surety alleging – whatever. The net result of this claims situation is that the surety did not collect any indemnity but ended up paying its principal about one million dollars. Not to get too Jewish with you, but there is no limit to what one might obtain by an enthusiastic use of chutzpah, however infrequently such a result can be accomplished! Not to get too Italian with you but capisce? Myself being mostly German, we are basically interested in beer, quality cars and what time the invasion begins.
Section 22 – DECLINE EXECUTION. “Unless otherwise specifically agreed in writing, the Surety may decline to execute any Bond and the Undersigned agree to make no claim to the contrary in consideration of the Surety’s receiving this Agreement; and if the Surety shall execute a Bid or Proposal Bond, it shall have the right to decline to execute any and all of the Bonds that may be required in connection with any award that may be made under the proposal for which the Bid or Proposal Bond is given and such declinations shall not diminish or alter the liability that may arise by reasons of having executed the Bid or Proposal Bond.”
COMMENTS on Section 22 - DECLINE EXECUTION. This says two things. First, the fact that a surety accepts a GIA from a principal is no guarantee that it will ever execute any specific bond. This is a customary provision. Secondly, the fact that the Surety executes a bid bond is not a guarantee that a surety will execute the final contract bonds: the payment and performance bonds. I have seen this situation happen a number of times. Between the time of the execution of the bid bond and the time that final bonds are required, there may have been a change in the principal's organization or financial statements. Or, during that time period, the principal went into claim or into too much claim. I have represented one general contractor for more than fifteen years and, over that period, the general probably averaged two or three payment bond suits against it per year. This didn’t impact the general’s ability to get further bonding from this company, one of more outstanding sureties. It was only after this principal moved on to another surety that this surety, like a scorned lover, began to act a bit chippy!
Another practice pointer! Since the principal and the surety have similar interests and defenses in defending a payment bond claim, quite often a surety will agree to ‘tender its defense’ to its principal and its principal’s attorney provided the surety has some evidence that this is an attorney knowledgeable about surety and construction issues. (I have seen tenders of defense where the attorney most definitely did not have such knowledge.) If the Surety hires its own lawyer, you will have the obligation to indemnify the Surety for that lawyer’s fees. Since you have to have your own lawyer defend you, it makes sense for that lawyer to also represent the interests of the payment bond surety. So, be aware of the fact that sureties often will be agreeable to a tender of defense and bring it up with the Surety bond claims examiner early in the process, especially if he or she does not bring it up with you.
Section 23 – SEVERAL SUITS. ”Separate suits may be brought hereunder as causes of action accrue, and the bringing of suit or the recovery of judgment upon any cause of action shall not prejudice or bar the bringing of other suits upon other causes of action, whether heretofore or hereinafter arising.”
COMMENTS on Section 23 - SEVERAL SUITS. The surety can file more than one suit on the GIA. Presumably, this might be with regards to claims situations that arise at different times. This is not unusual. In part, the surety may have included this due to the fact that once parties to a litigation conclude that litigation and file a stipulation of dismissal or an agreement for judgment, under a variety of legal theories (i.e. collateral estoppel, waiver, res judicata), this should end the litigation between the parties. As the argument might go, since the GIA is a contract, a conclusion of litigation on that contract between the parties as to one situation should preclude further litigation on this contract. This clause is an attempt to preclude the application of such a legal theory. Whether this would be successful in all situations will probably depend heavily on what the facts are as to the two respective matters and what the terms are of whatever settlement agreements are executed which underlie the filing of the first stipulation of dismissal.
Section 24 – RIGHT TO EXECUTE RIGHTS. “The Surety, its officers, directors, agents, servants, employees and attorneys, shall not be liable to one or more of the Undersigned for any damages or injuries that may be sustained by them, whatever kind or nature such may be, caused by or arising out of any action taken or statements verbal, written or otherwise, made, in the reasonable belief by the Surety in exercising or attempting to exercise any of its rights or privileges under this agreement or under any other agreement between the Surety and any one or more of the Undersigned, or under law or in equity, or under or relating to any Bond executed by the Surety. All rights and remedies of the Surety under this Agreement shall be cumulative, and the exercise of or failure to exercise, any right or remedy at any time shall not be an election of remedy or a waiver of any other right or remedy. Failure of the Surety to purse any remedy against one or more of the Undersigned shall not release or waive any right against any other of the Undersigned. The Surety is not required to exhaust its rights or remedies against the Principal or to await receipt of any dividends from the legal representatives of the Principal before asserting its rights under this agreement against the Undersigned.”
COMMENTS on Section 24 - RIGHT TO EXERCISE RIGHTS. The first sentence, at first glance, seems almost unintelligible. This may be here to try to provide a defense against libel claims (of the principal) or to provide a defense against claims such as interference with business or contractual relationships, which claims might be made by the principal. Otherwise, this provides that a surety can elect against whom it will proceed – it doesn’t have to sue all indemnitors at the same time - and rights against the other parties (indemnitors) are not affected, as this is not considered to be a waiver. (A waiver is an intentional relinquishment of a known legal right.) The Surety is not required to proceed against the principal (ED: But, it almost always will!) before it can proceed against the individual indemnitors and it’s not required to proceed against all of the individual indemnitors, either at the same time or at all. The only time that a surety will usually proceed against individual indemnitors first is if the individual indemnitors are attempting to get rid of real property or other assets that would otherwise be available as potential sources to pay a judgment. Otherwise, typically, the surety sues all indemnitors, principal included, at the same time, assuming that none of the indemnitors has left the jurisdiction or is in parts unknown (familiar occurrences, particularly with larger losses.)
Section 25 – WAIVER OF DEFECTS. “In case any of the parties mentioned in this Agreement fail to execute the same, or in case the execution hereof by any of the parties be defective or invalid for any reason, such failure, defect or invalidity shall not in any manner affect the validity of this Agreement or the liability hereunder of any of the parties executing the same, but each and every party so executing shall be and remain fully bound and liable hereunder to the same extent as if such failure, defect or invalidity had not existed. It is understood and agreed by the Undersigned that the rights, powers and remedies given the Surety under this Agreement shall be and are in addition to, and not in lieu of, any and all other rights, powers and remedies which the Surety may have or acquire against the Undersigned or others whether by the terms of any other agreement or by operation of law or otherwise.”
COMMENTS on Section 25 - WAIVER OF DEFECTS. Those are two really long sentences! This says essentially two things. First, if the document indicates that a person is supposed to sign it but doesn't sign it or isn't bound by the signature due to errors in the execution of the agreement, this doesn't affect the obligations of the other indemnitors who properly executed the document. Secondly, the Surety's rights are cumulative and not to the exclusion of other rights under other agreements (ED: Whatever they might be?) or available under the law. I don't often see the first thing happen but am not particularly bothered by it, as I think the common law would achieve the same result (but only as to the principal, not as to individual indemnitors), as it would for the second statement (that remedies are cumulative.)
Section 26 – INVALIDITY OF ONE PROVISION. “If any provision or provisions of this instrument be void or unenforceable under the laws of any place governing its construction or enforcement, this instrument shall not be void or vitiated thereby, but shall be construed and enforced with the same effect as though such provision or provisions were omitted.”
COMMENTS on Section 26 - INVALIDITY OF ONE PROVISION. If some part of the GIA for some reason is found to be invalid, the remaining valid provisions remain in effect. This is called a 'savings clause' and is a customary term in a variety of contracts, including construction contracts, releases and settlement agreements. The enforceability of the remaining parts of the contract might not remain if the provision(s) found to be unenforceable were absolutely key and material as to the validity of the contract. Practically speaking, I can’t see this last statement applying to GIA’s.
Section 27 - CONSTRUCTION. “This obligation shall be liberally construed so as to fully protect and indemnity the Surety. It shall be construed and interpreted in accordance with the laws of Bulgaria.”
COMMENTS on Section 27 - CONSTRUCTION. The document is to be liberally construed and interpreted in accordance with the laws of Bulgaria. This is a 'choice of law' provision common to contracts that have multi-state connections and most courts will give effect to these choices unless, for whatever reason, a key provision of that agreement under another state’s laws would violate some serious public policy of the state in which the action is taken. The first portion of this – that the agreement should be liberally construed - may be an attempt to defend against the doctrine of 'contra proferentem', which holds that when there is an ambiguity in a document drafted only by one party, the non-drafting party is entitled to have that ambiguity decided in its favor. As to a reference to the laws of Bulgaria, anyone who is anyone knows that its laws are often chosen in an international context due to the fact that few people may choose to go there and use its courts! (More on this in this issue of Scribbles ‘Coffee with the Counselor’!) Doubtlessly, however, this country is probably not without its charms. You might have to be, uh, Bulgarian to fully appreciate them, however. Since the (apparent) end of the Cold War, references to Bulgaria may not be as helpful as they once were!
Section 28 – MODIFICATION. “This Agreement may not be changed or modified orally. No change or modification shall be effective unless made by written endorsement executed to form a part hereof.”
COMMENTS on Section 28 - MODIFICATION. All modifications must be in writing and they will not be valid until there is a 'written endorsement' to form a part of the GIA. This is customary language. I point out that under Massachusetts contract law, such a provision is capable of being modified – and, orally! There are a variety of court cases so holding.
I can’t see that exception being of much use in the GIA context primarily because of the fact that a principal and individual indemnitors are not likely to have many (any?) contacts with the Surety before the event of going into claim.
Section 29 – TERMINATION. “Each of the Undersigned expressly recognizes and covenants that this Agreement is a continuing obligation applying to and indemnifying the Surety; however, one or more of the Undersigned may notify the Surety at its Administrative Offices above Lucky’s Bar in a really bad section of Newark, New Jersey of such Undersigned’s withdrawal from this Agreement. Such notice shall be sent by certified or registered mail and shall state when, not less than twenty days after receipt of such notice by the Surety, such withdrawal shall be effective. Such Undersigned will not be liable under this Agreement as to any Bond executed by the Surety after the effective date of such notice; provided, that as to any and all such Bonds executed or authorized by the Surety prior to the effective date of such notice and as to any and all renewals, continuations and extensions thereof or substitutions therefor and, if a proposal or Bid Bond has been executed or authorized prior to such effective date, as to any contract Bond executed pursuant thereto regardless of when the same are executed, such Undersigned shall be and remain fully liable hereunder, as if said notice had not been served. Such withdrawal by any Undersigned shall in no way affect the obligation of any other Undersigned who has given no such notice of termination.”
COMMENTS on Section 29 - TERMINATION. An indemnitor can give notice to the Surety that it no longer will be an indemnitor. This is effective as to future bonds only. It will not apply to contract bonds executed after receipt of the notice if a bid bond was executed before the notice was received. Otherwise, the indemnitor who has terminated is liable for all bonds executed prior to the surety’s receipt of the notice. This is a fairly standard term. As a practical matter, I can’t recall, in my experience, having seen this done even once. However, this can be an important provision to follow in certain situations. If, as an individual indemnitor, you signed the GIA as essentially an accommodation to a former spouse, at such time as there is a divorce or separation, such a notice should be sent. Similarly, if an individual indemnitor signed the GIA because he or she was seriously involved with the Principal as an officer, director or shareholder, at such point in time that this is no longer the case – the person has been forced out of the company or retires – such a letter should be sent.
Lucky’s Bar in Newark, New Jersey? This makes sense for two reasons. First of all, if you go to Lucky’s Bar, you’re likely to meet a lot of surety underwriters. Not that we would know from our own experience – we being of a Baptist, kind of fundamentalist orientation - but some say that in such places, a lot of underwriting is done! And, that way, for the price of a couple (a few?) drinks, you might save the cost of certified or registered mail, exorbitant to say the least, to just hand over your termination to an underwriter. He’ll buy you a drink. You’ll buy him a drink. Within two or three drinks, these formal niceties will have lost all significance and, in all likelihood, you’ll be the best of friends, probably both cursing either or both your spouses and employers! You may, together, stumble to the curb and hope that whatever taxi might give you a ride, that it will take you somewhere that makes at least a little sense. And, secondly, executing a GIA (especially by a spouse not involved in the business) is like being involved in a potential shoot-out with Dirty Harry. As he was walking down the street towards the bank in the first of these movies, one of the putative bank robbers, already shot, was lying on the sidewalk, his hand only about one foot from a shotgun, as he watched Harry saunter up to him eating a hot dog. What did Dirty Harry say? He said. “Uh, uh! I know what you’re thinkin’. Did he fire six shots or only five? To tell you the truth, in all of this excitement, I kinda’ lost track myself. But, bein’ that this is a 44 caliber Magnum, capable of blowing your head clean off, you’ve got to ask yourself a question. Do I feel lucky? Well, do ya’, punk?” Entering into many contracts – such as a GIA or, for that matter, a contract of marriage – is an act of optimism, an act of faith. Contractors, almost by definition, are a bunch of optimists. Otherwise, why would one submit a firm bid on a public job that there is only a small percentage chance of winning?
A suggestion. Unless you see your marriage as being intact for a period of the next five or ten years, don’t execute general agreements of indemnity (GIA). The fact that you might have moved on with regard to your former spouse – divorced, or otherwise - has no meaning or significance as to agreements you, as an individual, have already entered into. You are still on the hook with regard to the Surety. And, for sureties, the fact that you are a current spouse or a former spouse is of absolutely no importance or significance. The Surety will pursue you if you appear to have assets sufficient enough to make the effort worthwhile. The fact that your settlement agreement with your spouse provides that your spouse will indemnify you as to potential liabilities/exposures with third parties (e.g. sureties) is usually of no significance or import as to that third party (surety), as discussed above elsewhere.
Uh oh! Not to spoil the moment but I just saw the title of the next section of this article. It appears that a storm is brewing.
3. SOMETHING UNSAVORY HAS HIT THE FAN AND YOU ARE ‘IN THE SOUP’. OR SOMEPLACE EVEN AESTHETICALLY WORSE AND LESS ATTRACTIVE.
As you can see, the GIA and other related surety issues are complex. Understanding what your rights and obligations are in a pre-claim and claim situation might have some real significance as to how you will fare in any dispute with your surety. While a GIA is, in fact, a contract, it is far different from most other contracts you will encounter because, for all practical purposes, it is a dictated contract which will not allow any input from you other than your decision to sign it or not to sign it. If you get into a situation where your principal is in claim and the individual indemnitors are facing exposure for indemnity, under a variety of circumstances, someone good at this work might be able to negotiate a deal for you at less than one hundred cents on the dollar some of the time and with some sureties but not, necessarily in every instance.
As to some indemnitors in certain situations, some sureties don’t proceed against them for indemnity. This would apply in situations where the Surety knows that the indemnitor doesn’t have any money (or doesn’t have any money that they think they can easily find). This also happens in circumstances where an individual indemnitor has been unusually cooperative and forthcoming in helping the surety settle claims and finish jobs, usually over an extended period of time. I’ve had numerous situations where a principal failed and an individual indemnitor would assume the role of a project manager and actually receive a week’s pay from the surety each week to work towards completing the job. I know of another situation where a good-sized general contractor failed almost twenty years ago and the head honcho received one hundred dollars per hour from the surety as a claims consultant while the principal (contractor) was in bankruptcy. Candidly, a principal and its individual indemnitors are in a unique (better) position than is the surety to settle payment bond claims on a basis of less than one hundred cents on the dollar, as discussed above. In such situations, a principal (and its individual indemnitors) can trade on a past business and personal history, on concerns the creditor may have for the principal and individual indemnitors and in anticipation of future business with that principal, whether under this name or under another. For a surety to try to take advantage of these circumstances in negotiating a settlement on a payment bond claim would, in all likelihood, be an unfair insurance claims practice as to which there could be serious consequences, both financially and possibly even as to its license if such conduct was egregious enough. I can’t recall, however, any situation where any of my clients negotiated a settlement of a smaller amount as to a payment bond claim and the Surety said, ‘No thanks! I think we’ll pay the whole thing!”
By my experience, one of the eternal truths of construction is that no one stays dead for very long. Forming a new corporation can be done on line and the filing fee is not significant.
Business failure is just one of the key events in a company’s (individual owner’s) history. Walt Disney – before he was the Walt Disney we know – had to file bankruptcy once. The key thing to realize is to man up (to yourself) and to the extent that the personal failure was in some measure your own fault – as it usually is – learn the lessons to be learned from the failure and move on in your business endeavors improved. As said by Winston Churchill: “Those that fail to learn from history, are doomed to repeat it." As a consigliere, we sometimes have to learn these lessons in Italian. Capisce?
Like many other risk/liability situations, a good attorney has a better possibility of being able to do something for you if you have them get involved with him or her as early as possible in the claims/indemnity situation. Getting an attorney in late in the game will be less productive in many situations. By this point, as a potential individual defendant indemnitor, there is less that you can offer the surety in terms of getting a better deal. For, by this time, the majority of the performance bond claims and payment bond claims will have been resolved, for better or worse. It is while those claims are pending that an individual indemnitor has the best chance of improving its position with the surety with regard to his/her indemnity obligation under the GIA. Also, by the time it is late in the game, peoples’ positions are more fixed. In other words, candidly, at some point in time you may have pissed off the surety to such an extent that indemnity negotiations may become difficult, at least with that bond claims examiner. And, if the Surety is now represented by counsel, opportunities for a settlement earlier in the litigation process to follow thereafter are less likely. This is not because most lawyers are bad negotiators (although some most definitely are). This is because the legal process – a lawsuit – is a lengthy procedure subject to numerous steps and events, all established by a great many rules and complicated procedures. And, traditionally, settlements tend to come very late in the process: often, just before trial. This is simply the way of lawsuits.
If, at some point in time, it appears likely that your company is going to fail, there are a few things to keep in mind in terms of options, according to those who have been through this experience. It is not my job to comment on any moral or ethical ramifications associated with these options. In such a situation, a lawyer is most concerned with what the legal ramifications are of whatever steps the lawyer will take once the matter is presented to him/her. Some of the options detailed below are necessarily things that you might do before you go to a lawyer. And, a lawyer will not necessarily completely know what his/her client is doing even when he is involved with a legal matter. I have as much as had one of my good, long-time clients tell me that they’ll tell me what they think I need to know in any given situation when I need to know it. This is something that any experienced lawyer understands. And, lawyers truly are ‘officers of the court’ and there are some things that they should not do or will not do. And, a lawyer is an advocate and both sides to a dispute or litigation are entitled to a lawyer’s best efforts to achieve a favorable result for his/her client. Does that mean that neither side is ‘right’, assuming there is such a thing? Hardly! But, this is the process and if you, as an individual, ever have to go through it, you’ll want as much help as is available to you to protect yourself and your family. For, in the final analysis, this is at the heart of any business venture: protect yourself and your family and further the family’s interests to the best of your ability. After all, this is why you leave the house so early in the morning each day you go to work.
First of all, at such point in time that you are insolvent – not able to pay your debts as they accrue in the ordinary course of business – it might be wise to consult with a bankruptcy attorney as to your options, the earlier the better. Your options are broader than just filing bankruptcy. For example, in certain circumstances, it might make more sense to make an ‘assignment for benefit of creditors’, which is a way of divesting property without participating in an expensive bankruptcy. Bankruptcies – other than Chapter 7’s (liquidation) – might take too long and be too expensive, as the trustee’s fees, the trustee’s counsel’s fees, the creditors’ committee’s counsel’s fees, accounting fees and your own counsel’s fees, all come out of the estate, making some wonder who benefitted the most from the bankruptcy.
But, caveat emptor! (Latin for ‘buyer beware’). My sense is that when one goes to a ‘family law’ lawyer, divorce may be heavily pushed as to the only solution to your problems. In a similar way, going to a bankruptcy lawyer may result in advice that bankruptcy is the best or only option. Rudyard Kipling said: ““If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it; what's more, you'll be a man, my son.” In other words, never avoid using your own common sense, which has carried you forward, so far, to this day. At the same time, however, heed the words of Abraham Lincoln: “A person who represents himself has a fool for a client." Two essentially mutually contradictory views? Who said that life is easy? (It certainly wasn’t for Abraham Lincoln.)
Secondly, some would say that efforts should be made that of the last available cash, the following should be paid - and, probably, in about this order: payroll taxes; wages; the line of credit should be paid off; and, all bonded obligations should be performed ahead of and even at the expense of unbonded jobs. The last two events are essentially interchangeable, assuming that the guarantors of the line of credit and the individual indemnitors are the same people. If you don’t have enough money to both finish the bonded job and pay your materialmen and subcontractors, finish the job first. This is because the surety will be more concerned with performance bond issues than with payment bond issues and, for a variety of reasons, you stand to lose more money in having the surety complete under the performance bond than you will if the surety has to pay payment bond claims, the reasons for which have been discussed above. Also, assisting a principal complete its work on a bonded project by paying the claims of materialmen and subcontractors is so prevalent in the surety industry as to have earned a title: ‘back door financing’.
While a principal can generally easily discharge (get rid of) its own obligations to the Surety in bankruptcy, generally speaking, this will have no impact whatsoever as to the personal indemnitors' liability. Owners of corporations and LLC's are not generally personally liable for corporate and LLC debts with the exception of certain statutory obligations - such as payroll taxes - and for voluntary obligations assumed by the owners in executing guaranties for lines of credit and the GIA. Sign neither unwisely.
Thirdly, most sureties I have dealt with are very open to repayment plans from indemnitors over a period of time with a lower than legal rate of interest (which in Massachusetts for contract actions could be 12%.) If you have four individual indemnitors and they all join in on the plan of repayment – or make separate offers at about the same time - you might be able to get the surety to accept less than one hundred percent liability as to any one indemnitor. That might be useful in situations where one or more of the other individual indemnitors is able to avoid its indemnity obligation for one reason or another (e.g. filed personal bankruptcy) down the road.
Indemnitors may choose to offer these plans for a number of reasons, I have learned through my experiences. They may actually intend on paying back the debt. (Remember the saying that ‘the road to h*** is paved with good intentions’?) Or, they might be looking to just get some additional time to maneuver. They might be planning on a bankruptcy in the future but are not presently as set up as they wish to be for when they file. I vividly recall one indemnitor tell me that he was ‘saving up’ to file bankruptcy! (And, when he did, four casinos were listed as creditors!) If there is a payment plan in effect, this saves the indemnitors the cost of his/her/their own attorney’s attorneys’ fees and also avoids the Surety’s incurring its own attorneys’ fees in suing for indemnity, which are owed under this agreement. If the payment plan is unsecured (i.e. no mortgage on real estate is given to support it), it is probably dischargeable in bankruptcy.
Not one hundred percent analogous, but I have found in ‘payment plans’ between debtors and creditors (e.g. material suppliers and subcontractors) it is rare that even most of the payments are made. By my experience, the first payment might be on time; then again, it might not. Invariably, the second payment will be late. The third payment will be even later. And, at this point, we are quite often off to the races. One would think that any time a plan fails, there will be a suit to enforce it filed the very next week. This has not been my experience. For many creditors at that time, they are tired and disgusted, sick of the whole thing, a bit worn out and not necessarily interested in putting the pedal to the metal right away and spending even more money chasing the debtor. (This is probably more so as to debts owed to materialmen than it would be as to debts owed to sureties under a GIA.)
My wife, Sally, and I have extensive surety backgrounds. Sally was a bond claims examiner for five sureties over a period of more than ten years, including as a senior bond claims examiner for a very major surety for more than three years, handling payment and performance claims throughout the United States. I, myself, have represented over two dozen sureties during my career, handling payment and performance bond claims and indemnity matters in a number of states, including most of New England, New Jersey, Florida and Arkansas. I was even a witness in an indemnity action in Puerto Rico, which was an experience and one-half!
We think that we basically know whereof we speak when it comes to surety law and how sureties operate. Because we completely dedicate ourselves to construction law issues only, we are familiar with a goodly number of the attorneys who handle surety claims for insurance companies in Massachusetts, which is a relatively small bar. Having relationships with opposing attorneys often proves helpful in resolving disputes based upon trust and experience issues. And, while surety claims examiners might wince a bit as to the following, we use all of that knowledge and experience in aiding our clients in making payment bond claims. And, more to their liking, we use that experience in helping our client bond principals defend against performance bond and bid bond claims.
This article, as long as it is, only scratches the surface on a very complicated relationship and agreement between a surety and its principal and individual indemnitors. Not all statements and comments made herein may be applicable to a situation you are either in or might be in in the future. This is due to the fact that the specific provisions of any company’s GIA will be different from other GIA’s. Also, many factors in these matters heavily depend on the specific facts and construction contracts applicable to any claimed default, which will be different from a matter to another matter, a principal as to another principal. While different situations might appear to be similar, the specific applicable facts constituting a potential claim situation will be often unique to that particular job. Lastly, so much in these matters depends on the personalities of the owner or obligee, the bond principal, the claimants and the bond claims examiner (and, quite possibly, the bond claims manager.) Life is a process necessarily involved with humans, for better or worse, and they are generally a rather messy animal. Different peoples’ skill levels, demeanor, experience, the facts of a particular situation, personality traits and individual surety claims practices will tend to make each such claim unique to itself. A certain amount of folklore has arisen concerning surety issues, particularly about general indemnity agreements, some of which is mentioned in the current Scribblesissue in “Coffee with the Counselor”, which is a light-hearted approach to some of the issues.
It’s time to conclude this article. As I said when it began, I’m not supposed to reveal who my client is under most situations. I mean, in this case, it could be one client. Or, it might be two clients. It could even be more. I have this sudden need to depart the article, as it appears someone is kind of dropping a heavy safe onto my head from a great vertical distance! And, there is this idiotic bird sitting there with a crazed look upon its face watching this happen with approval. So, I’ll just end the article with two words: BEEP BEEP!
(Please note that these materials are not intended as being specific legal advice but only as background materials for general educational purposes. For any legal problem you have, consult with counsel of your own choosing At Sauer & Sauer, we are always looking for new clients, such as quality materialmen, subcontractors, general contractors, sureties and owners. We have some ‘flat fee’ schedules for new clients on certain first files and for certain services, such as a monthly review of receivables for the purposes of deciding what legal action, if any, is warranted. For new clients we begin working for in 2013, we will guarantee our rate in writing for five years providing the inflation rate for any year does not exceed five percent or twenty-five percent over the five year period, whichever last occurs. )
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