A bond surety on a construction project usually either guarantees its principal's performance, or guarantees payment to its principal's subcontractors and suppliers. In a typical court action involving either a breach of performance or failure to pay, the liability of both the contractor-principal and the bond surety are determined at the same time in the same proceeding.
But construction contracts frequently require disputes over performance and payment be resolved in arbitration. Since arbitration is a matter of contract, and the bond surety is not a party to the prime or sub contract, the surety cannot be made a party to arbitration proceeding. How then is the surety's bond liability determined? The quick answer is that in most cases the surety, even though not a party to the arbitration, is bound by the arbitrators' decision determining the liability of its principal. The exception is where the arbitration award is the result of collusion or fraud, circumstances that rarely occur.
To recover an arbitration award against the bond surety, however, the claimant must still prove in court that it met the conditions governing bond recovery. Typically these conditions involve some form of notice and/or filing suit on the bond within a short period of limitation. These bond conditions are defenses that are personal to the surety, and are not resolved by arbitration between the bond claimant and the bond principal. A bond claimant, bound by contract to arbitrate disputes, should proceed simultaneously in arbitration against the contractor-principal to determine underlying liability, and in court against the bond surety, accompanied by a request that court proceedings be stayed until arbitration is completed. Filing suit simultaneously places the claimant in a position to promptly enforce the arbitration award, and avoids the risk of losing bond rights where arbitration proceedings drag on beyond the bond limitation period.
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