Performance Bonds: 12 Defenses to a Claim Against the Surety

When a surety receives a claim under a performance bond, and assuming the claim is valid, by contract law it can lessen or eliminate its exposure by asserting any of the defenses that are available to its principal. Those defenses include:

  1. The obligee’s (owner’s) failure to provide plans or specifications that are free from defects.
  2. The obligee’s (owner’s) failure to act.  Unreasonable delays by the obligee, as well as the obligee’s failure to act, may be a breach of the construction contract, which relieves the principal and, therefore, the surety from liability.
  3. Impossibility of performance. The work that the principal was supposed to perform was impossible to perform.
  4. Improper termination of the principal’s contract by the obligee (owner).
  5. Failure by the obligee to provide notice to the principal, and the failure to allow the principal the opportunity to remedy any incomplete or inadequate work.
  6. Set-offs or counterclaims available to the principal against the obligee (owner).
  7. Improper notice of default under the terms of the bond.
  8. Material alteration of the underlying contract.
  9. Overpayment by the obligee (owner).
  10. Termination of the contract for convenience. Since no default occurred, the surety’s obligation under the bond is not triggered.
  11. Failure to mitigate damages. Many times, when the obligee (owner) takes over completion of the project without giving the surety the opportunity to complete the project, that strips the surety of the opportunity to minimize its liability under the performance bond
  12. Statute of limitations. The claim is too old or was not brought in time based on the deadlines set out in the laws.
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