Failure to Use Replacement Contractor Lets Surety Off the Hook

Kegler Brown Construction Newsletter

Many performance bond forms, including the frequently utilized AIA A312 form, allow the surety to “perform and complete the construction contract itself, through its agents or through independent contractors” when its principal contractor is declared in default. An owner who is so displeased with his contractor that it has terminated him seldom is interested in allowing the terminated contractor to finish the work.

That was certainly the case with an owner who alleged that the contractor had acted in bad faith and then refused to allow the surety to hire the terminated contractor to finish the job. The federal court in the case of St. Paul Fire & Marine Ins. Co. v. VDE Corp., 603 F.3d 119 (1st Cir. 2010) found that the owner’s consent (to a completion contractor) was not required under the AIA A312 bond form and held that the surety could select any completion contractor it wanted – even the terminated contractor. This ruling let the surety off the hook from paying the excess completion costs and is a sharp warning to owners that they must not interfere with the surety’s choice of a completion contractor.