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Subcontractor Bond Language

Subcontractor Bond Language – It’s at Least as Important as the Subcontract

By: Larry R. Leiby, Esq.

“Hey Boss!”, says the subcontractor estimator. “They want a bond on this job.” The Boss replies, “O.K., call our bonding agent and get the form if the GC doesn’t have a form.” What’s wrong with this picture?

Subcontractor bonds are not statutory bonds. In other words, there are not specific terms that are in a statute that will override the language in the bond. Thus, the wording of the bond is very significant. Is it more significant than the wording of the subcontract? That depends on whether your personal wealth is more important than your corporate wealth. In most instances the owners of the contracting firm and their spouses must agree to indemnify the surety. Thus, if there is exposure on the bond, there may be personal exposure as an indemnitor, rather than simply exposure to the subcontracting firm.

What kind of terms are important?

First, the extent of what is covered under the bond is very important in a payment bond. A payment bond may cover all sums that may be owed from the subcontractor to any sub-sub, material supplier, sub-sub-sub, etc. Or, the bond may only cover valid claims that could be made against the GC’s bond.

The bond may expressly include attorneys fees. If it does, then attorneys fees may be limited (along with other valid claims) to the penal sum of the bond, rather than being an “add-on” cost.

The bond may provide for a direct right of action by a claimant, i.e., any claimant can sue the sub and/or the sub’s surety. Or, the bond may say that it is only for the benefit of the named obligee, the GC.

The bond may provide for specific notices. Remember that the notices that we are most familiar with on statutory bonds (45 days from first work, 90 days from last work) do not apply to a subcontractor bond. The notices must be stated in the bond language to be enforceable.

The bond may provide for an inconvenient venue. Is it important to you that you may have to defend a lawsuit on the bond in Cook County, Illinois? Or in Liberty County, Florida?

The bond may address arbitration rights if alternate dispute resolution is important to you.

These are but a few of the key items that may be addressed in the language of a bond. A bond is a form of contract. Not knowing the language of a bond that you give, and perhaps indemnify, is not prudent. The language is not standard. Know what you are agreeing to before you sign it.