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Three Popular Bond Forms Updated by AIA

The American Institute of Architects (AIA) recently updated three bond forms used frequently in the industry. Released in June 2010 these updated bonds highlight the AIA’s efforts to collaborate with industry stakeholders and practitioners in the development process.

“The AIA Contract Documents Committee is comprised of industry professionals representing a cross-section of project stakeholders. Members of the Documents Committee, in conjunction with experienced legal and insurance counsel and numerous industry liaisons, work together on a long-term basis to update existing AIA Contract Documents® as well as to create new documents to meet the ever-evolving needs of the industry,” said Ken Cobleigh, Managing Director and Counsel for the AIA Contract Documents® content team. “In particular, the AIA Contract Documents program continues to lead the industry toward greater collaboration among architects, owners, and contractors.”

The revised bond forms address important points identified by industry participants. In addition, archaic language was removed and replaced with modern terminology currently used in other AIA Contract Documents. The AIA, The Surety & Fidelity Association of America and the National Association of Surety Bond Producers and other important industry organizations addressed key issues identified by industry participants.

“It was important for us to update these key bond forms, making sure to take into account input from the industry leaders,” said Cobleigh. “These revised bond forms result from our ability to work collaboratively within the industry, and our desire to meet the changing needs of stakeholders.”

Following is the commentary released by AIA that details the key changes in the 2010 documents. This Section identifies all areas where changes are made and discusses those changes to the 2010 Bond Forms that impact the relationship of the parties, and beneficiaries, to the bonds. Part 2, Comparison and the entire document can be accessed at http://www.aia.org/bondcommentary. The commentary is reproduced with permission of The American Institute of Architects, 1735 New York Avenue, NW , Washington, DC 20006.

INTRODUCTION
Since the first publication of The Standard Form of Bond of the American Institute of Architects, First Standard Edition in 1911, The American Institute of Architects has recognized the importance of soliciting comments from industry participants, including owners and sureties, in creating or revising the bond forms published as part of the AIA’s Contract Documents program. In 2009, the AIA began the process of revising the long standing AIA Document A310™–1970, Bid Bond, and AIA Document A312™–1984, Performance Bond and Payment Bond, (the Bond Forms), and again solicited the support and feedback of members of the construction and surety industries. The process of revising the Bond Forms began in April, 2009 with a meeting held at the AIA’s offices in Washington, D.C. At that meeting, members of various industry groups were invited to provide comments about the existing bond forms and to make suggestions for changes to address developments that had occurred over the past 25 years. Among those in attendance were representatives of: the American Bar Association Forum Committee on the Construction Industry, the Associated Builders & Contractors, the American Subcontractors Association; the Associated General Contractors of America; the Associated Specialty Contractors; the Construction Owners Association of America; the National Association of Surety Bond Producers; The Surety & Fidelity Association of America; the National Society of Professional Engineers; the American Council of Engineering Companies; the American Insurance Association; the Engineers Joint Contract Documents Committee; and the American College of Construction Lawyers. After receiving these comments, the AIA began the process of revising the Bond Forms. A first draft was presented to industry participants in September of 2009, with a request for additional comments. In October of 2009, the same participants were again invited to the AIA’s offices to participate in a collaborative forum to discuss the proposed changes to the Bond Forms. Comments from each of the participants were carefully considered throughout the drafting process. Subsequent drafts were sent to industry representatives and, when necessary to discuss comments or questions, industry stakeholders participated in conference calls throughout the drafting process. It was only after completion of this collaborative process that the AIA finalized and released the 2010 Bond Forms. Due to this collaborative process, these bond forms are expected to continue as the industry standard, representing the fair and balanced interests of their users. The 2010 Bond Forms retain much of the language that has been interpreted by the courts and which has become familiar to owners, sureties, contractors and subcontractors over the years. However, some changes were made to clarify language, and to address concerns raised by various stakeholders. This Commentary and Comparison will identify and explain those changes.

NOTICES
This Commentary was prepared by the American Institute of Architects with the assistance of Edward G. Gallagher, Esq., General Counsel, The Surety & Fidelity Association of America, and Mark H. McCallum, Esq. Chief Executive Officer, National Association of Surety Bond Producers. This publication does not constitute and does not offer legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. This publication may be updated from time to time. To ensure that this is the latest release, check the version number in the lower right hand corner of the document. The American Institute of Architects, 1735 New York, Ave., N.W., Washington, D.C. 20006.

FORMAT
This Commentary and Comparison is presented in two parts. Part 1 includes a commentary that details the key changes in the 2010 documents. This Section identifies all areas where changes are made and discusses those changes to the 2010 Bond Forms that impact the relationship of the parties, and beneficiaries, to the bonds. Part 2 includes the full text of A310–1970 and A312–1984 presented side-by-side with the full text of the 2010 Bond Forms. This format allows for the easy comparison of the earlier edition documents with the 2010 Bond Forms. In addition, text related to concepts discussed in the commentary has been highlighted in bold for easy reference.

COMMENTARY ON AIA BOND FORM 2010 EDITIONS
A310–2010, Bid Bond


Because AIA Document A310™–2010 does not include specific section references, changes are described in the order of the paragraphs in which they appear.

Naming the Parties. Traditionally, the parties to the bond have been termed the principal, obligee and surety in the form, as these are terms of art in the insurance industry. However, these terms may be somewhat confusing to the casual user of the bond. To alleviate this confusion, the principal has been identified as the “Contractor” and the obligee has been identified as the “Owner.” These new designations represent the typical parties or beneficiaries to the bid bond and are consistent with language used in other AIA Documents.

Description of the Project. Certain owners require that the bond form adequately identify the project to which the bond pertains. One key way of identifying the project is to list the project number issued by the owner in the description of the project. A310–2010 has been modified to include an instruction prompting the user to list the project number, if applicable.

Time for Acceptance of Bids. For various reasons, time limits for acceptance of bids are often extended. Language has been included to allow for up to a 60-day extension of the time for acceptance of the bid specified in the bid documents. This allows the owner and contractor to agree to an extension of the acceptance date, without notice to the surety. However, because the surety cannot remain liable on a bid bond indefinitely, the surety must be notified of, and consent to, any extension of the date for acceptance of the bid by more than 60 days in the aggregate.

Performance and Payment Bond Surety. A310–1970 required the Contractor, in satisfying its obligations under the bid bond, to enter into the construction contract and provide a bond or bonds as specified in the contract from a “good and sufficient” surety. However, A310–1970 does not make clear what constitutes a “good and sufficient” surety. A310–2010 has been modified to state that any bonds provided by the contractor in fulfilling its obligations under the bidding or contract documents will be issued by a surety admitted in the jurisdiction of the project and otherwise acceptable to the owner. The drafters understand that “admitted” is a term of art in the insurance industry meaning holding a certificate of authority from the insurance commissioner allowing the admitted entity to issue surety bonds in that state.

Subcontractor’s Bid Bond. Language has been included to allow for use of the A310–2010 in circumstances where a contractor is requiring a bid bond from its subcontractors. In such a case, the word “Owner” is read to mean “Contractor” and “Contractor” is read to mean “Subcontractor.”

Statutory Requirements. Some public owners may require a bid bond to meet certain statutory requirements. In order to enable use of the A310–2010 on such public projects, language has been included in A310–2010 stating that provisions of the bond that fail to meet statutory requirements will be read out of the bond and provisions meeting the statutory requirements will be read into the bond.

A312–2010 Performance Bond

New or changed language is referenced by section number as it appears in AIA Document A312™–2010, Performance Bond.

§ 3.1 In the 1984 document, this Section required that the owner request, and attempt to arrange, a conference among the owner, contractor and surety. That requirement of the owner, per Section 4 of the 1984 document, has been held by some courts to be a condition precedent to the surety’s obligation under the bond. In revising the 2010 bond forms, the drafters recognized that the owner may believe that a conference would be unsuccessful and might prefer to move forward with terminating the contractor and exercising its rights under the bond. Therefore, the owner may, but is no longer required to, request a conference as part of its notice of potential contractor default. However, if the owner does not request a conference, the surety is entitled to request a conference within five business days after receipt of the owner’s notice. If the surety requests a conference, the owner is required to attend.

§ 3.2 In drafting the 2010 Bond Forms, an effort was made to streamline the process for declaring a contractor default and to avoid what some stakeholders believed were unnecessary deadlines and waiting periods. One such instance is Section 3.2 of A312–1984, which required that the owner wait 20 days after providing notice that it is considering declaring a contractor default before actually terminating the construction contract. In some instances the owner may have already determined that the contractor has failed to perform to such a degree that terminating the contractor’s right to proceed is warranted. In these instances, the 20 day period constitutes an unnecessary additional delay. A312–2010 deletes this waiting period.

§ 3.3 Minor edits.

§ 4 Under A312–1984, the owner is required to provide notice that it is considering declaring a contractor default. After consideration of different viewpoints, AIA concluded that a failure to provide notice in accordance with Section 3.1 should not automatically extinguish the surety’s bond obligations. The new Section 4 states that a failure of the owner to comply with the notice requirements of Section 3.1 shall not constitute a failure to comply with a condition precedent to the surety’s obligations or release the surety from its obligations. However, to the extent the surety can demonstrate that it was actually prejudiced by the owner’s failure to provide notice under Section 3.1, the surety's obligations would be reduced.

§ 5.4.1 Minor edits.

§ 5.4.2 Minor edits.

§ 6 As noted in Section 3.2, waiting periods in the bond have been eliminated or reduced. AIA felt that if the Surety did not act with reasonable promptness pursuant to Section 5 it was unnecessary to retain the A312–1984 requirement that the owner send an additional demand for the surety’s performance and wait 15 days before deeming the surety in default under the bond. To streamline this process, the 15 day waiting period has been reduced to 7 days, allowing the owner to take corrective action with less delay to the project while still giving the surety notice and an opportunity to cure any default in its performance.

§ 7 Under Section 6 of A312–1984, the surety’s obligations were limited to the amount of the bond. This language has been deleted in Section 7 of A312–2010 and replaced with a new Section 8, detailed below.

§ 8 As described under Section 7 above, the A312–1984 could be interpreted to mean that the surety’s obligation under the bond would be limited to the amount of the bond in all instances. In drafting A312–2010, it was recognized that in a situation where the surety elects, under Section 5.2, to undertake to perform and complete the construction contract itself, this limitation could leave the owner with an unfinished project once the surety has expended the amount of the bond. Under the new terms of A312–2010, in those instances the surety’s obligation is not limited by the bond. If the surety proposes to take over completion of the work pursuant to a subsequently drafted “takeover agreement”, the preservation or waiver of the limit of the amount of the bond is a matter of negotiation between the parties. The amount of the bond will limit the surety’s obligations in a takeover pursuant to Section 5.2 if the owner agrees to such a limit in connection with the surety’s takeover of the work.

§ 12 Minor edits.

§ 13 Minor edits.

§ 14.2 Minor edits.

§ 14.4 Minor edits.

§ 14.5 A312–1984 referenced the contract documents as a defined term in several sections. Recognizing that this bond form may be used with non-AIA documents, treating contract documents as a defined term without a corresponding definition may result in a point of confusion. The term “Contract Documents” has been defined in Section 14.5 consistent with industry use.

§ 15 Like A310–2010, language has been included to allow for use of A312–2010 in circumstances where a contractor is requiring a performance bond from its subcontractors. In this case, “Owner” is read to mean “Contractor” and “Contractor” is read to mean “Subcontractor.”

A312–2010 Payment Bond

New or changed language is referenced by Section number as it appears in AIA Document A312™–2010, Payment Bond.

§ 1 Case law, in one jurisdiction, recently interpreted Section 1 of a bond as an obligation independent of the additional terms of the bond. To confirm that this was not the intent of the drafters, language has been added stating that the conditions of Section 1 are subject to the remaining provisions of the payment bond.

§ 2 Section 2 of A312–1984 has been reorganized in A312–2010 to better reflect the parties’ obligations under the bond. Section 2 of A312–1984 has been separated into three separate sections, Sections 2 through 4, in the A312–2010. Section 2 of A312–2010 now states that the contractor and surety will not have any obligation under the bond if the contractor makes payment of all sums due claimants and indemnifies and holds harmless the owner from claims, demands, liens or suits by any person seeking payment for labor, materials or equipment furnished for use in the construction contract. This one paragraph eliminates the necessity to split the contractor’s obligations into two subparagraphs as was done in Section 2 of A312–1984.

§ 3 Under A312–1984 Section 2.2, the owner’s right to provide notice of claims, demands, liens or suits and tender defense of those actions to the contractor and surety was awkwardly placed in a section meant to outline the obligations of the contractor under the bond. The drafters of A312–2010 felt that it would be clearer to include these obligations in a separate, new Section 3.

§ 4 A312–1984 made it clear that the surety was jointly bound with the contractor to pay for all labor, materials and equipment furnished for use in the construction of the project. It also stated that the owner could provide notice to the contractor and surety of any claim, demand, lien or suit arising from the contractor’s and surety’s failure to meet these obligations. However, A312–1984 did not provide a clear trigger for the surety to correct this failure. Section 4 has been included in A312–2010 to clarify that the surety will defend, indemnify and hold harmless the owner against a duly tendered claim, demand, lien or suit upon the owner’s satisfaction of the conditions described in Section 3 (notice and tender of defense).

§ 5.1 The drafters of the A312–2010 Payment Bond were mindful of the differences between and different purposes of notices and claims. Section 4.2 of A312–1984 required a claimant that did not have a direct contract with the contractor to submit notice of nonpayment to the contractor. The claimant was then required to wait 30 days for a response before sending a notice to the surety, with a copy to the owner, stating that it had not been paid. This process has been streamlined. The 30 day waiting period has been eliminated. A claimant that does not have a direct contract with the contractor is now required only to provide a notice of non-payment to the contractor and then to submit a claim to the surety in accordance with Section 16.1. This streamlined process places the contractor on notice of the non-payment so that it can try to arrange, if appropriate, for the intervening subcontractor to pay the potential claimant. The claimant, however, need not wait and may send a “Claim” to the surety.

§ 5.2 Modifications to Section 4.1 of A312–1984 are minor but worth noting. This Section has been moved to Section 5.2. In addition, the requirement that a notice of claim state with substantial accuracy the amount of the claim has been replaced with the defined term “Claim.” The term “Claim” is defined in Section 16.1 and includes a list of items the claimant is required to provide to assist the surety in properly evaluating the claim.

§ 6 Section 5 of A312–1984 recognized that there may be situations where the owner becomes aware of a claim, demand, lien or suit and provides notice to the contractor or surety. Under A312–1984, this was sufficient to satisfy the requirements of Section 4. Under A312–2010, the definition of “Claim” provides a clear description of the information required from a claimant to trigger the surety’s evaluation and response period set forth in Section 7.1. Notice from the owner would be insufficient to meet these requirements. Therefore, Section 6 of A312–2010 recognizes that the owner can give the contractor a notice of non-payment pursuant to Section 5.1.1, but a claim under Section 5.1.2 or Section 5.2 must be submitted by the claimant to the surety.

§ 7 Minor edits.

§ 7.1 The 45 day period for the surety to respond to the claim included in Section 6.1 of A312–1984 was sometimes insufficient for the surety to compile adequate information related to the claim and to issue a response to the claimant. This period has been extended to 60 days under Section 7.1 of A312–2010.

§ 7.3 Some recent court decisions have held that a surety’s failure to strictly comply with its reply obligations under Section 6 of the A312–1984 Payment Bond would result in a waiver of the contractor’s and surety’s defenses under the bond. Section 7.3 has been added to address these decisions. A312–2010 expressly states that a failure of the surety to act under the bond is not a waiver of defenses, except for amounts upon which the surety and claimant have reached agreement. However, if the surety fails to send an answer and pay undisputed amounts within the times specified in the bond, the surety is required to indemnify a claimant for reasonable attorneys’ fees incurred in recovering any sums found to be due and owing to the claimant.

§ 8 While Section 8 of A312–2010 continues to recognize that the surety’s obligation is generally limited to the amount of the bond, attorneys’ fees to be paid under Section 7.3 do not reduce the amount of the bond available to pay claims. Language has been added stating that the surety’s obligation is limited to the amount of the bond plus the amount of reasonable attorneys’ fees payable under Section 7.3

§ 12 Language has been added to Section 12 clarifying that actions under the bond must be brought in a court of competent jurisdiction in the state in which the project that is the subject of the construction contract is located. This will allow suit in the federal, as well as state, court even if the federal court for that state is not located in the same local jurisdiction as the project.

§ 13 Minor edits.

§ 14 Minor edits.

§ 16.1 A312–1984 required claimants under the bond to provide notice of a claim. That notice, was sent to the surety to initiate a claim under the bond. The notice must only state with substantial accuracy the amount of the claim and, when a claimant did not have a direct contract with the contractor, the name of the party to whom the materials were furnished or supplied or for whom the labor was done or performed. A definition of “Claim” has been included in A312–2010 in order to provide the information necessary for the surety to begin evaluation of the merits of a claim. Additional information may be requested by the surety and furnished by the claimant to provide a fuller evaluation of the claim, but the submission to the surety by the claimant of the information included in the definition of a Claim is sufficient to trigger the 60 day evaluation and response period under Section 7.1.

§ 16.2 The definition of a “Claimant” under the bond has been broadened to include any individual or entity that has rightfully asserted a claim under an applicable mechanics’ lien or similar statute against the real property upon which the project is located. This was done because the previous definition only defined a claimant as a person or entity having a contract with the contractor or a subcontractor of the contractor. This language excluded any subcontractor below the third tier. Because one of the main intents of the payment bond is to protect the owner from liens, the definition of claimant has been expanded to include all rightful lien claimants.

§ 16.3 Minor edits.

§ 16.4 Minor edits.

§ 16.5 A312–1984 referenced the Contract Documents as a defined term in several sections. Recognizing that this bond form may be used with non-AIA documents, treating contract documents as a defined term without a corresponding definition may result in a point of confusion. The term “Contract Documents” has been defined in Section 14.5 consistent with industry use.

§ 17 Like A310–2010, language has been included to allow for use of the A312–2010 if a contractor is requiring a payment bond from its subcontractor. In this case, “Owner” is read to mean “Contractor” and “Contractor” is read to mean “Subcontractor.”

Reproduced with permission of The American Institute of Architects, 1735 New York Avenue, NW , Washington, DC 20006. 
 


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