What Small and Emerging Contractors Need to Know - PowerPoint Presentation

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What Small and Emerging Contractors Need to Know

Understanding General Agreements of Indemnity

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General Agreements of Indemnity (GIAs)

A GIA is a contract between a surety company and a contractor (or subcontractor)/principal.

A GIA is a standard, typical document in the construction and surety industries.If a surety company determines it will extend surety credit to a contractor, the surety will require the contractor and others (called indemnitors), to sign a GIA before it will issue bonds on behalf of the contractor/principal.The GIA is a powerful contract that provides a surety issuing bonds with many enforceable legal rights against the indemnitors that signed the GIA.Therefore, it is critical that you understand the provisions of the GIA and have it reviewed by legal counsel before signing it.This presentation will focus on a general introduction to GIAs and a discussion of some selected key provisions in GIAs.

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Why do Sureties Require Contractors to Sign GIAs?

The GIA obligates the named

indemnitors to protect the surety from any loss or expense the surety sustains as a result of having issued bonds on behalf of the contractor.When a surety extends bonding credit on behalf of a contractor, the surety has evaluated the contractor’s financial capacity and ability to perform and does not expect to incur a loss as a result of having issued the bond.Therefore, if the contractor fails to fulfill its bonded obligation on a project and the surety suffers any loss, the indemnitors are legally bound to indemnify the surety for its losses.A surety that issues bonds on behalf of a contractor typcially requires that its principal, the individuals who control the company and their spouses, and often affiliated companies to execute the GIA.Typically, the owner of the company must sign the GIA on behalf of the company and in an individual capacity.

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Key Points to Remember About GIAs

A GIA is a

powerful legal instrument that gives substantial contractual rights to the surety issuing bonds, in addition to the common law rights of indemnification the surety has.It is a demonstration of commitment from the construction firm’s owner through corporate and personal indemnity.GIAs provide the surety extending credit to its principal with favorable rights and remedies in the event of loss.GIAs provide the principal for whom credit is extended and the indemnitors, including spouses, with responsibilities and obligations.

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Key Selected Provisions of the GIA

While specific terms of the GIA will vary among surety companies, most GIAs contain certain typical clauses.

Sometimes a GIA contains terms and conditions that are not typical and put the principal at risk of enterprise failure.As with any contract, it is better to understand the provisions of the GIA and seek legal assistance, if needed, before signing it than to get a possibly unpleasant surprise later when the surety seeks to enforce its contractual rights.Following is a discussion of some of the typical provisions in GIAs with which bond principals should become familiar.

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Indemnification

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rovisionKeystone language of any GIA and varies from form to formIn the typical indemnification provision, the indemnitors agree to indemnify the surety for “any and all liability, loss, costs, damages, fees of attorneys and consultants, and other expenses, including interest, which the Surety may sustain or incur by reason of the execution of such bonds . . . .”This broad indemnity language covers all types of anticipated costs.Indemnitors are generally obligated to indemnify the surety for all losses, regardless of the surety’s actual liability under the bond.

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Right to Enforce the GIA

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rovisionTypical GIA provides sureties with a contractual right to sue the principal and indemnitors for failure to comply with any obligations stated in the GIA.Such obligations that a principal and indemnitors might fail to perform include, among others, the duty to deliver collateral to the surety, duty to hold contract funds in trust, and duty to make books and records available to the surety.Upon the breach of these and other obligations in the GIA, sureties can recover their attorneys’ fees, expenses, and other losses arising from the breach.

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Right to Settle

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rovisionTypical GIAs provides that the surety has the sole and exclusive right to decide whether any claims against the bond should be paid, settled, or defended.Principal and indemnitors agree that the surety’s decision on such matters will be final and binding on them.The right-to-settle provision is included in GIAs so the surety can avoid an argument by the principal and indemnitors that the surety acted as a “volunteer” and forfeited its right to indemnification by settling a claim over the principal’s objections. Absent surety fraud or lack of good faith, courts hold that the surety’s decision to settle a claim is in the surety’s sole discretion and is binding on the principal and indemnitors.

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Prima Facie Evidence Provision

Typical GIAs provide that vouchers or other evidence of payments will be prima facie evidence of the amount of the

indemnitor’s liability to the surety.A typical provision states: “Vouchers or other evidence of payment or an itemized statement of payment sworn to by an officer of the Surety shall be prima facie evidence of the fact and extent of the liability of the Indemnitor to the Surety.”It imposes on the indemnitors the burden of proving the surety’s fraud or lack of good faith in settling claims and incurring expenses in order to avoid their indemnity obligations.

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Collateral Provision

This typical GIA clause provides the surety with the right to demand and obtain collateral from the principal or

indemnitors to cover potential liability.When a surety receives a demand on its bond, this provision requires the principal and/or indemnitors to deposit with the surety, upon demand, funds or other collateral sufficient to secure the surety against the claim.The failure of the principal and/or indemnitors to meet a surety’s collateral demand is a breach of the GIA.

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Assignment Provision

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typical assignment clause provides the surety with certain rights in the principal’s contract funds, accounts receivable, equipment, materials, and real property owned by an indemnitor upon receipt of a claim on the bond or default under the GIA.One purpose of the assignment provision is to assign to the surety the proceeds of all contracts, bonded or unbonded, in which the principal and any indemnitor has an interest.This provision can be triggered by notice of claims, failure of the principal to perform, or other events of default under the GIA.

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Right to Examine Books and Records Provision

GIAs typically contain a clause that provides the surety with the right to examine books and records of the principal and

indemnitors. This clause typically includes books, records, accounts, documents, computer software and other electronically stored information, as and when requested by the surety.This right to examine is intended to allow the surety to conduct a proper and timely investigation of bond claims.

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Duty to Cooperate Provision

Most GIAs contain a provision that requires the principal and

indemnitors to cooperate with the surety in the investigation, litigation, or arbitration of claims. A typical such clause states: “The Undersigned shall give the Surety prompt notice of any claims, demand, suit, arbitration proceeding or other action which purports to be instituted on any bond and shall cooperate with the Surety in the defense thereof.”

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Final Comments About GIAs

Contractors seeking to obtain bonds should always review and understand the provisions in a GIA and have it reviewed by an attorney, prior to signing it.

Do not rely on statements, whether oral or written, that are not incorporated into the signed GIA.Courts will readily enforce the unambiguous provisions in GIAs.Anyone who signs a GIA is required to reimburse the surety for any loss the surety sustains as a result of having issued the bonds and to comply with the other provisions in the GIA.

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