If an Obligee Makes a Claim on a Performance Bond, What is “Reasonable Notice”?

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If an Obligee Makes a Claim on a Performance Bond, What is “Reasonable Notice”?

Unfortunately, in the past few years, we have heard of several cases where a General Contractor has made claim on a subcontractor bond after the sub defaults, and the surety is very slow to respond. As the GC sits and waits for the surety to respond, the job needs to be completed. If the GC completes the job, he is afraid that he may lose the protections under the bond because the surety might claim they were not given reasonable notice. So, what is “reasonable notice?”

In most bond forms, the owner/obligee needs to notify the surety if the principal defaults. There are some very sneaky subcontractor bond forms put out by some general contractors where they try to say no notice is required. Trust us, those bond forms are rarely written. Indeed, most performance bond forms require something called “reasonable notice”. This is often one of the Obligee’s obligations under the bond when the principal defaults. A common term used in the bond form reads as follows: “Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal’s obligation under the subcontract subject to the provisions of paragraph 3 herein.”

Is anyone surprised to know that the courts in the state of Florida have not clearly defined “reasonable notice?” A need for a clear definition would seem reasonable, wouldn’t it? In other court rulings, reasonable notice has generally meant “notice conveying the requisite information and permitting time for response.” In Siegfried Construction, Inc. v. Gulf Ins. Co., 2000 U.S. App., the Fifth District Court of Appeals ruled that the notice given by the general contractor was reasonable. The General Contractor had sent default letters to the surety that stated the subcontractor’s “failure to perform has necessitated that the obligee supplement the principal’s work resources to correct unacceptable work and to assist in completing the Principal’s work so as to mitigate delays.” Because the surety acknowledged this claim, had time to respond, and did not object in a timely fashion to the General Contractor, the court ruled that the default letter to eh surety “conveyed the requisite information under the bond” and was reasonable notice. This all might have gone differently if the surety immediately objected and offered a different solution in a timely basis. We learned this information in an interesting article by Shane Smith, Esquire, of Gurley & Associates, Attorneys and Counselors at Law. We wanted to share this information in case you are every involved in a default situation, you need to be aware of the obligations of the owner/obligee if they wish to make a claim on the performance bond. One of those important items to understand is “reasonable notice” and we would recommend you contact your attorney for their counsel on this subject to avoid a big contest in court with a surety.

By | 2012-10-06T15:33:27+00:00 October 6th, 2012|Surety Blog|Comments Off on If an Obligee Makes a Claim on a Performance Bond, What is “Reasonable Notice”?

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