When a general contractor defaults on a bonded job, the performance bond surety usually steps in to complete the project. The surety typically seeks to work with the subcontractors on site and presents a ratification agreement to each one. At first glance, these agreements seem like little more than an accounting of payments previously made to the subcontractor and a promise by the subcontractor to continue working for an agreed-upon price. Lurking beneath the surface of these "simple" documents, however, are many complex provisions that can put the ratifying subcontractor in a much worse position than before the default, if the agreement is not carefully reviewed before signing.
A few common pitfalls are: 1. The ratification agreement may not provide the subcontractor with the same payment security it had prior to the default. If the agreement states that the surety will hire a new general contractor, the agreement should require that contractor to furnish a payment bond for the remainder of the project. If the surety does not intend to hire another general contractor, the agreement should affirm that the subcontractor has full rights under the existing payment bond. 2. The surety's calculation of amounts paid and to be paid may be incomplete. The calculation should include prior change orders and other extra work performed, as well as expenses incurred due to the default, such as stored material charges and remobilization costs. The agreement should also state that on signing, the surety will pay the amounts requisitioned before the default. Finally, the subcontractor should only release the surety from payments received as of the date of the agreement and should identify and leave open any pending claims. 3. The original completion date may be unreasonable in light of delays caused by the default. The agreement must provide a reasonable time, using a typical crew during regular business hours, to complete the remainder of the subcontract work. If overtime or additional forces are necessary, the subcontractor should preserve its right to pass those increased costs to the surety or its completing contractor. 4. The surety may seek to delay final payment by inserting a provision, for example, that final payment will be made ninety days after completion or conditioning it upon the owner making final payment to the surety or its completing contractor. The original subcontract may have payment terms that are less than ninety days and may not have a conditional payment clause. The ratifying subcontractor should therefore object to any terms that will allow the surety to stall or withhold making final payment and make sure, at minimum, that the original subcontract terms for payment prevail. And, at times, because of the delay due to the default, it is not unreasonable to request faster payment from the surety. Despite the potential perils, a subcontractor should consider ratifying if the parties can negotiate a fair agreement. Refusing to do so may lead to long delays in payment for work performed and legal fees to secure that payment. Worse, the surety may dispute some or all of the subcontractor's claim or may allege that it paid a replacement subcontractor to correct the original subcontractor's defective work. Since the original subcontractor will not have access to the site if it does not ratify, it cannot know what claims the new subcontractor may submit and may find it difficult to rebut these charges later. While ratifying can be the subcontractor's best choice in a difficult situation, the subcontractor must carefully scrutinize and negotiate the ratification agreement to protect its rights going forward.This
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