“Tender is the Night”
March 8, 2022
A quick google search of the word “tender” reveals a wide range of responses including the 1983 song “Tender is the Night” from Jackson Browne on his album, appropriately titled, “Lawyers in Love.” Under the right conditions, the lawyers here at the Surety Today Blog love the tender completion option, at least when compared to a takeover, financing or letting the Obligee run amuck. In this post I will discuss Tender as completion option. At its essence, tendering a completion contractor is simply one of many methods for curing the principal’s default by providing a replacement contractor to the obligee and paying any cost differential above the remaining contract balance to complete the defaulted principal’s contract. This topic is too large to cover in a single post, so we will be providing additional follow up posts on tendering in the future.
A. The Surety’s Right/Ability To Tender.
There is no statutory authority in the Miller Act that gives a surety the “right” to tender a completion contractor and to my knowledge there is no such right in any of the Little Miller Acts across the county. Nevertheless, tendering a completion contractor has always been a recognized performance option for sureties, albeit perhaps one of the more, less understood options by many obligees. See Granite Computer Leasing Corp. v. Travelers Indem. Co., 894 F.2d 547, 551 (2d Cir. 1990); Aetna Cas. & Sur. Co. v. United States, 845 F.2d 971 (Fed. Cir. 1988); United States v. Seaboard Sur. Co., 817 F.2d 956, 959 (2d Cir. 1987).
In many instances, the surety’s “authority” for performing via a tender can be found in the language of the performance bond itself. For example, the AIA A312 (2010) performance bond provides at Section 5.3 that with the concurrence of the obligee, the surety may perform its obligations under the performance bond by obtaining bids or negotiated proposals from qualified contractors to complete the contract, arrange for a contract to be prepared for execution by the obligee and a contractor, to be secured with performance and payment bonds executed by a qualified surety, and pay to the obligee the amount of costs/damages caused by the default in excess of the contract balance. AIA A-312 (2010 ed.), §5.3. Similar provisions permitting the surety to tender as its performance can be found in the AIA A311 Performance Bond, Consensus Docs 260 (2011 ed.) Performance Bond at paragraph 2 (b); and EJCDC form C-610 (2013 ed.) Performance Bond at paragraph 5.3. Nat’l Fire Ins. Co. of Hartford v. Fortune Constr. Co., 320 F.3d 1260 (11th Cir. 2003) (holding that the language of an AIA A311-based subcontractor bond was broad enough to include a tender option). Courts have held that denying a surety its right under the AIA bond form generally to utilize the tender option or other options in the bond can discharge the surety. St. Paul Fire & Marine Ins. Co. v. City of Green River, 6 F. App’x 828, 829 (10th Cir. 2001)(the court held that the surety was discharged under its bond when the obligee prohibited the surety from exercising its contractual right to perform or to participate in the selection of the completion contractor); see also St. Paul Fire & Marine Ins. Co. v. VDE Corp., 603 F. 3d 119, 123–125 (1st Cir. 2010).
In Federal contracting, the Performance Bond, Standard Form 25 under the Miller Act, does not reference any surety performance options. However, the fact that the Miller Act and Standard Form 25 are silent about a tender option does not mean that a tender is prohibited. On the contrary, the Federal Acquisition Regulations (“FAR”), Section 49.4053, states that after the default of the contractor, and if the surety is not willing to takeover, the contracting officer may arrange for the completion of the project by any appropriate contracting method or procedure. This section clearly gives the contracting officer sufficient authority to agree to a tender as the surety’s performance. While there is not a lot of case law regarding tender in federal contracting, there are a handful of cases where the court has at least recognized the surety’s and the government’s tender arrangements. Hanover Ins. Co. v. U.S., 116 Fed. Ct. 303, 305 (2014); Wagner v. U.S., 71 Fed. Cl. 355, 358 (2006); Aptus Co. v. U.S., No. 05-106C, 2005 WL 6112638 at *1 (Fed. Ct. June 27, 2005); Appeals of L&M Thomas Concrete Co., Inc., ASBCA No. 49198, 98-1 B.C.A. (CCH) ¶29560 (Feb. 2, 1998); Exec. Const., Inc., GSBCA No. 15224, 00-2 B.C.A. (CCH) ¶30977 (June 9, 2000).
While the tender option may be specifically addressed in a bond form, the option in those forms also typically requires some form of obligee consent. This can make matters somewhat more challenging, because often, the obligee representatives are not familiar with the tender concept. This means that the surety will be required to do a good job of educating the obligee representatives on the merits and benefits of tendering. The authors of the Tender chapter in the Bond Default Manual 4th ed. have done a good job of laying out the benefits of choosing the tender option and you can refer to that discussion when you are trying to convince an obligee of the merits of a tender.
B. Specific Issues In The Tender Process
Once you have decided to go down the “tender road” with an obligee after a principal’s termination, there are several critical terms and conditions that must be investigated and established concerning the bonded contract, such as: the remaining scope of work, the status of the bonded contract funds, and the time of completion.
- Time of Completion. The time of completion can often be a point of contention and will need to be negotiated and addressed in any Tender Agreement. Typically, the completion contractor will provide an estimate of time that it believes it will take to complete the remaining scope of work and that will be used as the new completion date in the Tender Agreement. Usually, the new completion date will be further out than the original scheduled completion date. This delta can give rise to a potential claim for liquidated damages. In addition, in some cases, the principal may have been behind schedule at the time of the default and LD’s may have already been incurred when the surety gets on the scene. Many times, the obligee will readily agree to waive liquidated damages or other delay costs in exchange for the surety’s agreement to tender. Other times, LD’s can become a sticking point that must be negotiated. In some instances, the obligee will say things like they “don’t have the authority to waive LD’s” or they “will need to go to a higher authority to get LD’s waived.” The surety’s response that often works the best is to point out that LD’s don’t need to be waived; all the obligee needs to do is grant a non-compensatory time extension. A time extension will have the effect of erasing the “delay” and any LD’s associated with it. Most obligees have the authority at the project level to adjust the schedule and recognize “excusable” delay. If there needs to be a fight over LD’s, I recommend that you check out our prior Surety Today podcast episode on Liquidated Damages, which was presented on August 13, 2018, for a discussion of the various defenses that can be asserted to eliminate or mitigate LD’s.
- Remaining Contract Funds. Typically, the principal will have performed some portion of the underlying contract and will have been paid some portion of the contract funds prior to its termination. Accordingly, in the tender process the surety will need to determine the amount of the remaining contract funds on the project. The amount of remaining funds is critical, because that amount is ultimately used to determine the excess costs of completion and the amount the surety will have to pay as part of the tender. You would think that determining the remaining contract balance would be simple and straight forward, but sometimes, especially when dealing with a general contractor as the obligee, it can become an issue. For example, the obligee may claim deductions from the contract balance for backcharges, supplementation, the ubiquitous “clean up” charges, deductive or unilateral change orders, etc. On the other hand, the principal may be contending that it has extra work, unapproved change orders or claims that should be part of the contract balance. These issues will all need to be sorted out in the negotiation process to determine the amount of remaining funds.
I had a case recently, where we were getting ready to sign an agreement with an obligee when the obligee added a provision regarding some water damage sustained. No information had been provided on these alleged damages. Ultimately, the obligee provided information on $250,000 in alleged damages, which was more than the remaining contract funds. Obviously, that brought the process to a screeching halt while we investigated these alleged damages.
- Scope of Work. Determining the remaining scope of work is essential in the tender process. The obligee, the surety, the surety’s consultant and the eventual completion contractor may encounter the most disputes surrounding this issue. Because the surety will be seeking a release from the obligee of any further obligations under the Performance Bond as part of the tender process, the obligee will want to be sure that ALL of the remaining scope of work under the contract will be performed. From the obligee’s perspective this is where the risk in a tender arrangement resides. There are several areas of concern with respect to determining the remaining scope of work.
(a) First – The remaining unperformed work. In its investigation, the surety should attempt to have the obligee affirm that the work performed to date has met the contract requirements, or if there are any known issues to specifically identify those issues. I had a project recently where the principal had been on the job for over a year and over half of the contract funds had been paid out. The consultant assembled a bunch of potential completion contractors and went to the project site with a representative of the obligee to view the site. When one of the prospective bidders asked what percentage of the work had been approved, the obligee representative said “none.” After that, many of the bidders refused to bid and others inflated their bids. That necessitated a lengthy letter from me to the obligee advising among other things that if over half of the contract funds had been paid out and none of the work was approved, the obligee had seriously overpaid and impaired the surety’s rights. Subsequently, the obligee approved the majority of the work and we got new bids.
(b) Second – Patently defective work of the principal that must be corrected by any completion contractor. This work will be part of the remaining work to be performed, regardless of whether the obligee has already paid for that poorly performed work. The completion contractor’s bid must price the remediation work into its bid.
(c) Third – Latent defective work performed by the principal – unknown at the time of the principal’s termination and during the negotiations between the obligee and the surety. Because by definition latent defects are “unknown” this category can provide the most concern to an obligee, particularly in light of the release to be given to the surety as part of the Tender Agreement. There are a number of ways to address this issue. First, it can be handled through agreement with the completion contractor. Second, the surety and obligee can negotiate a set price for the risk to be paid as part of the tender. Third, the surety and obligee can carve the latent defects out of the release in the Tender Agreement and add provisions to the Agreement to address latent defects as they arise post Tender.
(d) Fourth – Warranty work that may subsequently have to be performed within the bonded contract’s warranty periods. This relates to work performed by the defaulted principal. The same approach to dealing with latent defects can be used to address potential warranty claims.
The scope of work issues can be a complicating factor in any tender and is one of the reasons why many “experts” contend that the tender option is not suited for projects where the work has progressed too far and there are many unknowns.
C. Potential Obligee Impediment To A Tender
One of the more common potential “obligee impediments” that sureties may encounter when tendering to a governmental obligee is the misbelief that the obligee must comply with public competitive bidding requirements before it can execute a direct contract with the completion contractor tendered to it by the surety. The surety’s response to this impediment is that the contract was already publicly bid out once and awarded to the surety’s now terminated principal; the surety is paying the price increase difference due to the completion contractor’s price, and the public owner does not shell out any additional public funds. Further, under general suretyship law sureties are afforded the opportunity to perform under the performance bond and tendering constitutes that performance, and it is therefore not a new procurement and not subject to the competitive bidding requirements. Finally, even public owners have an obligation to mitigate damages and accepting the tender in most circumstances would be considered mitigation of damages.
Arguments such as these lead to one of the fundamental requirements when considering a tender option – always be upfront with the obligee right from the beginning that the surety is considering a tender of a completion contractor. This includes explaining exactly what a tender is, the documents involved, and what the surety is looking for in a tender, including a release of its Performance Bond. Be sure that the decision makers, not just the obligee’s field people, understand what a tender is and how it works, and confirm this in writing. Getting the issues out in the open up front can help to avoid a lot of lost time and lost expenditures. It can also serve to flush out a lot of other issues in a timely fashion that will give the parties more time to address them and find solutions.
Remember to look for our follow-up articles regarding Tender as the surety’s completion option to be posted in the future. If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321 / mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.