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Steve Ness - Surety Bonds Claims

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Project Management Conference

Yellowknife NWT

Surety Bond Claims

November 23, 2015


I – Performance Bonds
Surviving a Contractor Default
Performance Bonds
 Guarantees Contractor will perform contract in
accordance with its terms & conditions.
 Contractor must be in default and the default must
be declared
 Owner must perform their obligations
 4 options available to Surety:
Remedy the default
Complete the Contract
Arrange for new contractor to complete
Tender Payment
Two years to file suit
Before a Default is Declared
Surety has extensive experience with contracts
and solving construction problems.
Surety has intimate knowledge of contractor and
its operation
Can provide informal assistance to solve problems
that can lead to a default
Will convene meeting or teleconference among
the parties to address problems.
Assist in formalizing solutions.
Claims
When A Contractor Defaults:
Surety will promptly acknowledge notice of default
and being to gather information.
Surety will begin an investigation as soon as
possible.
Surety will conclude the investigation as soon as
possible.
If requested by owner, surety will provide periodic
written updates on investigation status and best
estimates as to completion date.
Claims
During and After the Investigation:
Surety will cooperate with the owner to protect
work from damage or deterioration.
Surety will work with the owner to:
Identify and implement a solution.
Minimize delays, keep the job going and
protect the rights of all parties.
Pay valid labour and material payment
bond claims as promptly as possible to
ensure continuity of subs and suppliers.
How can the Project Owner Help
Comply with bond & contract terms! (e.g.
proper notifications, payments and
certifications)

Communicate: keep surety appraised of


problems and provide default notice promptly.

Cooperate: Ensure surety has access to


knowledgeable staff and relevant documents.

Avoid the common pitfalls


Surety Bonds: Does & Doesn’t’s
A surety bond will provide:
Professional prequalification to weed out
unqualified contractors.
True performance security; i.e. provides owners
with a completed project in the event of default.
Payment protection to subs and suppliers.
A surety bond will not provide:
Cash-on-demand. There MUST be a default.
Dispute resolution.
A “magic lamp”.
Protection beyond the scope of the contract.
Surety Bonds: Does & Doesn’t’s
Also….
Owner must have fulfilled its contract obligations
L & M Claimants must comply with the terms of the
bond and be prepared to document claim
Problems or questions? Contact the Surety
Association of Canada
Phone: 905-677-1353
Fax: 905-677-3345
email: sness@surety-canada.com
Default & Other Considerations
What makes a default?
Default or Dispute?
Prequalification – Macro or Micro?
Keep expectations realistic.
 Delays Inevitable
Re-engage defaulting contractor: effective claim
management or recipe for disaster?
Liquidated Damages
II – Pitfalls to Avoid
When Declaring Default …
 A clear and unequivocal declaration of default
 State reasons for default
 Call for the Surety to act under the bond.
Hold up your end of the Bargain

 The Bond guarantees the contract.


 If you default; contract is breached
 No contract; no bond
Material Change
 When it’s no longer the same contract…
 More than just price
 Err on the side of caution
Over Payment/Certification

 Accelerated payment to assist distressed


contractors
 Depletes pool of unearned funds to surety’s
detriment
Commercial Responsibility
 Duty in law to act in a commercially
responsible manner.
 Liable for damages or losses caused by our
actions (or inactions)
 Unilateral action
 Replacement contractor
III – For Example…
Claim Example 1

Highway Development Project


Provincial Government Declares
Default on Highway Project
Case Background:
 The Principal, a road building company, was working
on a provincial transportation project when it
experienced financial distress and could not complete
the project, valued at $5.8MM.
 The Obligee, a Provincial Government transportation
department held surety security for 50% of the project
amount to mitigate both contract performance risk
and labour & materials payment risk.
Claims Example 1
Highway Development Project
Surety’s Action:
 The Surety Company advised the Obligee it
would start preparing the tender package to
complete the work.
 The Obligee expressed interest to choose its
own completion contractor.
 The Surety Company and the Obligee settled
for financial payment; where the Surety paid
the Obligee the anticipated completion costs.
Claims Example 1
Highway Development Project
 At the same time, the Surety Company paid out
multiple subcontractor and supplier claims under
the labour and material payments bond.
 Total amount paid out by the surety on this
project were $3.3MM.
Claims Example 1
Highway Development Project
“[this] is certainly a good example of the value of
having a performance bond [and labour &
materials payment bond] and we were pleased
that the bonding company offered flexibility in
coming to a solution that met our needs. The
negotiated settlement provided advantages to us,
as the Owner, in that it gave us control of the
work, which enabled the completion to be
expedited in an efficient manner…”
Owner Testimonial
Claim Example 2

Underground Contractor Defaults on 13


Municipal Projects
Claim Example 2
Case Background:
 The Principal, a sewer, watermain, curb/gutter, and
roadwork contractor with approximately $10 million
annual sales was forced into receivership when bank
called its loan.
 A regional municipality was left with 12 unfinished
contracts. Another municipal owner was impacted
with 1 uncompleted contract as well. Total value of
the uncompleted work underway was $7.4 million.
 Project contracts were anywhere from $500 thousand
to $3 million range.
The surety: Claim Example 2
 worked with the owners to ascertain the status of
each contract and identified the remaining work to be
completed.
 obtained quotes for completion of outstanding work,
presented these to Obligees and arranged for
completion contracts to be executed.
 reviewed claims from unpaid 48 trades and suppliers.
All claims settled within 72 hours.
 total surety payout in excess of $6.7 million. All 13
Contracts completed with no loss to Obligee.
IV – Surety Bonds
Making a Claim Under
a Payment Bond
Labour &Material Payment Bonds
Guarantee that the contractor will pay all direct
subcontractors, suppliers for materials and services
provided to bonded project.
Obligee is trustee on behalf of the claimants
Claimant must have a direct contract with the
Principal
Claimants may only claim for goods and services
supplied to the bonded job
Claimant can claim directly against the surety (don’t
need to go through owner).
Labour &Material Payment Bonds
Claim must be filed within 120 days of the last day
worked or the date material shipped
Existence and quantum of claim must be fully
documented
Bond works in tandem with protection under the CLA
Does NOT require General Contractor to be in
default
ONLY form of security that is exclusively for the
benefit of trades and suppliers
One year to file suit
Claiming Under a Payment Bond
Protect Your Rights.
Read the Bond form and comply with its
terms:
 Notice Periods
Suit Period
Materials Supplied to Bonded Job
Direct Contract with the Bonded Contractor
Provide Sufficient Documentation.
Claiming Under a Payment Bond
What you Need:
 A complete copy of the contract with the Principal.
 Copies of all change orders to the contract.
 Copies of all invoices submitted to the Principal.
 Copies of all statements of accounts rendered to the
Principal.
 Summary of payments made including date and
amount.
 A Statutory Declaration with respect to your own
subcontractors.
Claiming Under a Payment Bond
What you Need (cont.):
 Evidence of the last date upon which labour and/or
material was supplied to the project (i.e. delivery
slips, time sheets, etc...)
 Evidence and documentation supporting other
amounts claimed which have not been agreed to or
authorized in writing.
 A copy of the Claim for Lien, if any.
 A workers’ Compensation Board clearance letter
(current).
SURETY ONLINE LEARNING CENTRE
 The Surety Online Learning Centre accessible
from SAC website; www.suretycanada.com.
 Five learning modules that
introduce the basics of surety
bonds and the suretyship process
 Learn at your own pace.
 Ideal for review or for colleagues
who can’t attend a “live”
information session.
 It’s FREE
Contact Us
Phone: 905-677-1353

Fax: 905-677-3345

email: surety@suretycanada.com

or visit our www.suretycanada.com


website:

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