Sureties have many defenses that they like to assert to avoid paying under a performance bond. One of those defenses arises when the obligee (usually the owner or the general contractor terminating a subcontractor) precludes the surety from exercising one of its options under the bond.
While performance bond terms vary, a surety frequently has three options under the bond where a bonded contractor has been default terminated:
(1) the surety can step in and complete the defaulted contractor’s work;
(2) the surety can obtain bids from other contractors to complete the defaulted contractor’s work and tender a new contractor to complete the work; or
(3) the surety can simply pay the obligee (again, typically the owner or the general contractor that defaulted a subcontractor) the cost above the remaining contract balance to complete the defaulted contractor’s work.
If a surety perceives that it was not given a chance to exercise one of its options under the bond, you can rest assured that the surety will argue it is no longer liable for any of the excess completion costs.
The you-deprived-the-surety-of-its-completion-rights defense is playing out in real time right now in a pending lawsuit between a surety and a contractor in Western Surety Company v. PCL Construction Services, Inc.