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Dealing with Contractor Termination

The owner of a troubled project has just terminated its general contractor and called upon the contractor's surety to complete the work. The surety responds affirmatively, but proposes that the owner and the surety enter into a takeover agreement. For the owner, entering into a takeover agreement with the surety will govern their relationship and provide a road map for the completion of the project.

The plain language of a performance bond requires the surety to take over a project and arrange for the completion of the work in the event of a contractor termination. The bond typically states that the surety's obligation under the bond arises when the owner notifies the contractor and the surety that the owner is considering declaring the contractor in default; the owner has actually declared the contractor in default and formally terminated the contractor, and the owner has agreed to pay the balance of the contract price to the surety.

There are a number of factors to consider before the owner enters into a takeover agreement. On the “pro” side, in the course of negotiating the takeover agreement, the owner can require the surety to confirm the contractor's default and affirm that the surety is bound by the contract documents. The agreement should include statements confirming that performance deficiencies existed and setting forth the specific reasons for the default and termination. Such provisions lay a good foundation for estopping the surety from being able to later claim that the contractor was improperly defaulted or terminated. 

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