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Too often, owners, contractors and subcontractors take action on a performance or payment bond without fully appreciating the differences between forms, or the significance of the “fine print” in various bond forms. This can have a material impact on one’s right to recover for a performance or payment bond default, which is occurring increasingly frequently during the current economic downturn.

Ohio requires specific performance and payment bond forms required by statute for most public entities in the state. However, bond forms utilized on private projects vary dramatically, but often feature the AIA forms.

A recent federal case has construed the AIA A311 performance bond form, and emphasized the importance of timely and proper action by the party seeking to collect on a bond. This case involved a hotel project in which the general contractor required a performance bond by the excavating subcontractor that fell behind with its work and threatened to delay the entire project. The general contractor hired another excavator to perform work, but did not notify the surety. Only months after the excavation work was done and after the original subcontractor defaulted did the general contractor formally declare the subcontractor in default and make a claim against the performance bond.

The U.S. Court of Appeals for the D.C. Circuit found that the failure of the general contractor to give timely notice to the surety barred any recovery under the bond. Hunt Construction Group, Inc. v. National Wrecking Corp., 2009 WL 4110379 (D.C. Cir. Nov. 27, 2009). The Court found that three (3) conditions needed to be satisfied to recover under the bond:

• the subcontractor was in default;
• the contractor gave notice of the default to the sub; and
• the contractor provided reasonable notice of the default to the surety.

This case reflects the current historical trend of strictly enforcing notice provisions. The lesson is a simple one. If you require a bond, make sure you use the right form. And if you need to make a claim against a bond, be sure to give proper and timely notice.