While surety bonds are set up to provide a form of insurance to all parties involved in contracts and large construction projects, they are not completely fail-proof under certain circumstances. A recent federal court case addressed the issue of surety bond culpability and provided a valuable lesson for anyone working with bonds.
Turner Construction was hired to make improvements to a New York City cruise terminal, and ended up subcontracting much of the work to Pile Foundation Construction. Pile was properly bonded by a surety company for the job at hand. After construction had already begun, Turner, Pile and New York City representatives met and renegotiated Pile’s subcontract, making Pile’s compensation contingent on several outside factors.
When Pile realized that things weren’t going to plan and they most likely were not going to receive any payment for the work they had done on the project, they defaulted and stopped work altogether. As expected, Turner sued Pile’s surety, looking to receive compensation for the default. Under most normal circumstances, the surety would have granted Turner funds to complete the project as originally planned or would have provided an alternate subcontractor to finish the job. However, because the contract had been renegotiated during construction, Turner lost their suit and didn’t receive any monetary compensation. The judge in the case ruled that the renegotiation had “fundamentally changed the nature of Pile’s obligation” and, therefore, the surety bond was invalid.
While this is a rare exception to the generally cut-and-dry process of surety bonds, it provides an essential lesson for contractors. During the course of a construction project, it is not uncommon for contracts to be edited or renegotiated along the way. To prevent a potentially crippling loss of capital and time, be sure to keep your surety company representative up-to-date with any contractual changes that are made. A construction bond expert will know if it is necessary to draw up a new surety bond to reflect contract changes or if existing surety coverage is sufficient.