Performance Bond

The performance bond is usually a matter between the prime contractor and the public owner (in most states), and a subcontractor or supplier has no rights under it. A prime contractor, however, may require his subcontractors to provide subcontract performance bonds. A performance bond from a subcontractor to a prime contractor is intended to protect and benefit the prime contractor only, unless otherwise provided in the bond between the parties.

The extent to which a performance bond protects or benefits its obligee depends largely upon what the obligee does to avail himself of the bond’s protection.

A surety has various options when its principal defaults on its performance bond. These include:

(1) Allowing its defaulted principal to complete the work, and thereafter reimburse him for the reasonable cost of the work;
(2) Offer the obligee a new “qualified” contract or subcontract to complete the remaining work;
(3) Entry into a contract or subcontract with a new contractor or subcontractor to finish the work;
(4) Financing the defaulted principal; or
(5) Choose to do nothing.

Typically, the surety’s analysis of a performance bond claim revolves around two key questions:

(1) Has the surety’s principal actually defaulted on the contract?
(2) Will the penal sum (the face amount of the bond) be sufficient to complete the remaining work?

The key to adequate protection is timely and proper notice to the surety. Such notice will usually force the surety to take prompt action or be responsible to the obligee for all of the resulting damage, even though such damages may exceed the face amount of the bond if “bad faith” on the part of the surety can ultimately be proven.