Most of the general contractors we represent have had to post performance bonds or payment bonds at one time or another. In addition to paying a premium, they have to agree that, if a claim or a lawsuit is filed against the bond, they will indemnify (i.e. reimburse) the surety/bonding company for everything the surety pays out, including legal fees. We have seen cases where the bonding company has made a decision to pay or perform, without fully considering the interests of the general contractor.
Subcontractors can also find themselves drawn into the fray, when the bond claim involves their work, and the subcontract they signed (as most do) requires them to, in turn, defend and indemnify the general contractor.
- As a contractor, you do not want the bonding company agreeing to pay off a claim, and then coming after you, if you feel that the claim is without merit.
- As a general contractor or a subcontractor drawn into a bond lawsuit, and ultimately responsible to the bonding company for attorneys’ fees and any judgment or settlement, you want to have control over the defense and avoid having to pay multiple attorneys for the same defense.
To some degree, the general contractor is protected by a duty of good faith that bonding companies are bound to. There is also an implied covenant of good faith and fair dealing that protects the parties to a construction contract. If the situation arises, a letter from an attorney stressing these obligations can help to avoid an unpleasant outcome.
However, it is always best to have these issues specified and clarified before any claim against your bond is made:
- When negotiating with a bonding company, ask to have language added to the indemnity agreement that makes the obligation to indemnify dependent on the surety company’s agreement to cooperate in the defense, and which will include allowing you to retain joint counsel in the case of any litigation.
- Insist on language stating that the surety has to consult with you before making any decision on whether to pay a claim or take over performance. This will not give you control over the decision, but it will let you to put the surety on notice that their actions are inappropriate and damaging to you, and allow you to create a record that will be useful when the surety seeks to enforce its right of indemnification.
- As a subcontractor, before executing a contract which requires you to defend and indemnify the general contractor for claims made by the owner or a third party, request that the duty to defend also includes the right to retain counsel and control the defense. This will only work so long as there are no claims between you and the general contractor. You may have to agree that the general contractor has to agree to the choice of counsel.
Surety and indemnification issues can be complex and confusing, and are often not in the forefront of a contractor’s mind when entering into a contract. Given the risks involved, though, you should make the effort and take the time to protect yourself up front.