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Shiri Klima
Richards, Watson & Gershon
February 28, 2013
THE SITUATION
• When times are good, no one thinks too much about bonds
• When the economy crashes:
• Developers disappear
• Contractors walk away from jobs
• Cities are left with half-built public improvements
• Some half-built improvements are safety hazards, others • Some half-built improvements are safety hazards, others cannot wait for years
• Cities are pressured to complete the improvements but…
With what money???
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THIS PRESENTATION
• Terminology
• The process and possible results
• Common surety responses to claims and tips as to how to deal with those responses
• Strategies for negotiating with sureties
• Sureties in liquidation• Sureties in liquidation
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TERMINOLOGY
• Bond
• Penal sum
• Principal
• Surety
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WHAT IS A BOND?
A guarantee provided by a surety to the City ensuring that the contractor or developer will pay all workers, complete the public project, and the work will be done well or maintained
Types:Types:
• Performance bonds
• Payment bonds, aka labor and materials bonds
• Warranty or maintenance bonds
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WHEN ARE BONDS REQUIRED
• The Subdivision Map Act (“SMA”) requires:
• Performance security: 50% -100% of total cost
• Payment security: 50% - 100% of total cost
• The California Civil Code requires:
• Payment bond for 100% of total contract amount for any public works contract in excess amount for any public works contract in excess of $25,000
• Any other time required by Municipal Code
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WHEN ARE BONDS NOT REQUIRED
Unless Municipal Code says otherwise, bonds are not required for:
• Development or improvements not under the SMA
• Warranty/maintenance bonds for SMA development
• Payment bonds for public works projects <$25,000
• Performance, warranty or maintenance bonds for • Performance, warranty or maintenance bonds for public works projects
But they are often a good idea!
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WHAT IS THE PENAL SUM?
The penal sum of the bonds is the maximum amount a surety company will pay under bond.
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WHO IS THE PRINCIPAL?
The contractor or developer who took out the bonds to the benefit of the City is called the principal
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WHAT IS A SURETY?
A company that collects a premium in exchange for a promise (in the form of a bond) to assume responsibility for the public improvements on behalf of improvements on behalf of the principal if that principal defaults
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SURETY IS NOT THE SAME AS INSURANCE
• Insurance is a copayment of a certain amount or portion
• Insurance is triggered whenever payment is triggered; it is a cost-sharing approach
• Surety is a guarantee in case the developer defaults; if the developer performs, the surety is never involved
• Surety is also exonerated when work is no longer • Surety is also exonerated when work is no longer needed
• Some companies are both insurance and sureties, but in the case of bonds, they are acting as sureties
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TENDERING TO A SURETY – THE PROCESS
• City contacts surety
• Exchange of written information
• Frequently a walk-through
• There may be some delay
• Hopefully, there’s a positive resolution• Hopefully, there’s a positive resolution
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POSSIBLE RESULTS
• Surety waffles, City lets time run, no resolution
• Principal or successor developer completes work
• Surety denies claim
• Surety accepts responsibility
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COMMON SURETY RESPONSES TO CLAIMS
1. The bond has “expired” because the statute of limitations has ended
2. Drag on time
3. The principal is still active or there is a successor developer
4. Reduce the amount of work or show there is no 4. Reduce the amount of work or show there is no palpable need
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SURETY RESPONSE #1: THE BOND HAS “EXPIRED” BECAUSE THE STATUTE OF LIMITATIONS HAS ENDED
• For most written documents, the statute of limitations is 4 years from breach or default
• Surety’s liability accrues at the same time as the principal
• “If the obligations under a surety bond are conditioned upon performance of the principal, the expiration of the statute of limitations with respect to the obligations of the principal . . . shall also bar an action against the principal or surety under the bond, unless the terms of the bond provide otherwise”
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TIPS
• Be clear when work is due
• Consider checking your standard bond language to expressly state that no statute of limitations shall apply
• Keep a calendar of when work is due, and check progress!progress!
• When the surety claims the statute of limitations has passed, do not always accept this argument
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SURETY RESPONSE #2: DRAG ON TIME
The surety doesn’t respond to correspondence quickly …
The surety keeps asking for more information…
What’s going on?
• The surety is trying to let the statute of limitations run without denying the claimwithout denying the claim
• Also, the surety is putting pressure on the principal to complete the work
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TIPS
• Be sure you know when the statute of limitations run
• Follow up
• Keep all paperwork
• Remind the surety of the statute of limitations
• File suit before the statute of limitations expires• File suit before the statute of limitations expires
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TIP: TOLLING AGREEMENT
A tolling agreement is an agreement to waive a right to claim that litigation should be dismissed due to the expiration of a statute of limitations.
Be sure:
• The tolling agreement includes both the surety and the principal
• The tolling agreement waives all time limits regarding both the agreement(s) and the bond(s)
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SURETY RESPONSE #3: THE PRINCIPAL IS STILL ACTIVE OR THERE IS A SUCCESSOR DEVELOPER
• If the surety can argue that there has not yet been a default, it will do so.
• Also, “A surety may require the [City] . . . to proceed against the principal, or to pursue any other remedy in the [City’s] power which the surety cannot pursue, and which would lighten the surety's pursue, and which would lighten the surety's burden; and if the creditor neglects to do so, the surety is exonerated to the extent to which the surety is thereby prejudiced.”
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TIPS
• Be prepared to demonstrate that a default has occurred
• You should go after principal first
• Keep good records of all your efforts to get the principal to complete the work
• You may be able to get a successor developer to post bondsbonds
• Do not let the surety off the hook easily
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SURETY RESPONSE #4: REDUCE THE AMOUNT OF WORK OR SHOW THERE IS NO PALPABLE NEED
To recover on bonds, a city must establish:
• Some part of the public improvements has begun
• A “palpable need” exists for the completion of the improvementsimprovements
The surety will try to show that the work has not begun or there is no need for such improvements.
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STRATEGIES FOR NEGOTIATING WITH SURETIES
1. Calculate the tender amount correctly
2. Create a wish list
3. Negotiate with the successor developer
4. Offer time-tiered solutions
5. Consider the impacts
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STRATEGY #1: CALCULATE THE TENDER AMOUNT CORRECTLY
• When you tender, the surety will ask for the claim amount
• Calculate the work remaining carefully
• Be prepared for the question of whether you prefer a check or for the surety to complete the worka check or for the surety to complete the work
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STRATEGY #2: CREATE A WISH LIST
• Some improvements are urgent
• Other improvements are less urgent but still important
• Still other improvements may no longer make sense, or they may no longer be a priority
• Target the urgent and important concerns while • Target the urgent and important concerns while using the other improvements as negotiating chips
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STRATEGY #3: NEGOTIATE WITH SUCCESSOR DEVELOPER
Successor developer may refuse to furnish new bonds, but:
• It is always responsible for its property
• It has a business interest in a safe, functional and beautiful propertybeautiful property
Propose a three-party agreement
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STRATEGY #4: OFFER TIME-TIERED SOLUTIONS
• Even important improvements may be able to wait a few weeks or months
• Offer extra time to complete some of these improvements
• Successor developer may be in a better position after it has recovered some cash
• Surety will appreciate your reasonableness
• Be sure to retain mechanisms for City to ensure projects are completed
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STRATEGY #5: CONSIDER THE IMPACTS
• Make sure you have a cost-effective maintenance plan, which may be different than what was originally contemplated
• Propose or encourage creative alternatives that save all parties money
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AS TO NEW BONDS…
1. Don’t undercalculate bond amounts
2. Recover attorneys’ fees
3. Verify internal procedures
4. Replace bonds early on
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STRATEGY #1: DON’T UNDERCALCULATE BOND AMOUNTS
• Ensure bonds include all public improvements
• You will find frequently that bond amounts are insufficient because of inflation of costs and labor
• Also, if the surety decides to pay out and the City has to complete the improvements, prevailing wages and administrative costs may applyadministrative costs may apply
• Create contingencies in the bond amounts up front to account for these considerations
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STRATEGY #2: RECOVER ATTORNEYS’ FEES
• Most performance bonds already provide for a city to recover its attorneys’ fees and costs
• Under the Subdivision Map Act, there is mandatory language for the bonds that includes attorneys’ fees
• Do your bonds include this language?
• What about your other bonds?• What about your other bonds?
• Consider adding recovery for prejudgment or no judgment fees and costs
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STRATEGY #3: VERIFY INTERNAL PROCEDURES
• Has the City Attorney checked the bond and agreement language?
• Make sure there is clear communication between various City departments
• Is there a process to ensure all the bonds are in place before any permits are issued?
• Does the proper department or person know not to release the final payment to a contractor until the warranty or maintenance bond is in place?
• Who is keeping track of bond deadlines?
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STRATEGY #4: REPLACE BONDS EARLY ON
• Make sure successor developers obtain new bonds
• Require the bonds at the earliest point, even if not statutorily requiredstatutorily required
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SURETIES IN LIQUIDATION
• Check all the bonds the City has with that surety
• Try to get them all replaced
• Make sure someone learns all about the liquidation procedures
• File claims on all bonds, even those not in default
• Follow up aggressively• Follow up aggressively
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