Who claims in the case of a performance bond?
The contractor must have defaulted, and the default must be declared by the client in order to file a claim under a performance bond. The client must promptly advise the bonding company. The nature of the default must be clearly stated in writing.
Upon receiving a notice of default, the surety will investigate the circumstances of the default and consult the contractor for his or her version of the facts.
If the contractor does not agree that he or she is in default and the arguments are valid, the surety will generally support the contractor. Efforts will be made to resolve the dispute between the client and the contractor.
If the parties cannot come to an agreement, the bonding company agrees that the contractor defend the bonding company in the event of judicial proceedings, but only if it is convinced of the merit of the contractor's position.
If the contractor's insolvency is specifically caused by a problem related to the bonded contract under which the client has failed to perform contractual obligations, the notice of default will be contested by the bonding company.
Situations may also arise in which the contractor is not insolvent, but is acting in bad faith by contesting the notice of default since he or she is in fact in default according to the contract. In this case, on the client's request, the surety will intervene to ensure that the contractor's obligations under the performance bond are met despite the contractor's opposition.
If the notice of default is not contested by the contractor but the latter is not able to promptly correct the default, the bonding company has several options.
Before deciding what type of action to pursue, the surety assesses the situation.
Assessing the situation
When there is a default in executing the contract and the contractor cannot remedy it because of insolvency, the contractor is considered to have defaulted on all contracts in progress, and the surety is faced with an overall problem with respect to all bonded contracts for this contractor.
Assessment of the situation then takes the form of a full financial analysis for each of the bonded contracts in order to determine the total amount that the surety must assume to fulfill the contracts guaranteed by its performance bonds and its labour and materials payment bonds. This exercise requires the full cooperation of the defaulting contractor, who must supply the bonding company with all of the information required under the circumstances.
Once the analysis is completed, the bonding company is in a position to decide what type of action to take.