A recent ruling by a Tennessee bankruptcy court highlights a critical issue for sureties issuing bonds. Despite clear indications that bonds are intended to be statutory, this court case demonstrates that such designations might not always hold.

Case Overview

In this case, the surety had issued payment bonds for two public works projects on behalf of a bankrupt principal. The bonds included a provision (Paragraph 13) that aimed to ensure compliance with statutory requirements by stating that any conflicting bond provisions would be replaced by statutory terms. The provision intended to treat the bonds as statutory rather than common law bonds.

Court’s Analysis

The court used a three-factor analysis to determine if the bonds were statutory or common law:

  1. Explicit Reference: The bonds did not specifically reference the applicable statute.
  2. Extended Rights: The bonds provided claimants with more rights than the statutory minimum, including covering equipment costs and exempting first-tier claimants from the ninety-day notice requirement.
  3. Notice and Time Limitations: The bonds extended the statutory limitation period for claimants from six months to one year.

Due to these factors, the court concluded that the bonds were common law bonds, which generally offer more generous terms and lenient barriers compared to statutory bonds.

Interpretation of Paragraph 13

The core of the dispute was whether Paragraph 13 acted as a “savings” clause to ensure compliance with statutory requirements or a “deletion” clause that eliminated any terms exceeding statutory provisions. The court found no controlling Tennessee law on this issue and looked to other jurisdictions for guidance.

The court ultimately adopted a Michigan court’s interpretation, viewing Paragraph 13 as a savings clause intended to ensure that bond terms meet the statutory minimum, rather than eliminate terms that provide greater rights.

Implications for Sureties

This decision serves as a warning to sureties that relying on provisions like Paragraph 13 to classify a bond as statutory may not be effective if the bond terms extend beyond statutory requirements. Sureties must be cautious, as even an expressed intent may not suffice to convert a common law bond into a statutory one if the bond provides more than the statutory minimum.

Sureties should review and possibly revise bond language to align with statutory requirements clearly and ensure that bond provisions are enforceable as intended. This case underscores the importance of precise drafting to avoid unexpected legal interpretations. (Original blog referenced from  NASBP.org)

As a dedicated surety bond-only agency with decades of bonding experience, we strive to find bond solutions for all types of cases, from standard to challenging.

At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a dedicated surety-bond-only agency with decades of bonding experience, we strive to discover surety solutions for all types of cases, ranging from routine to challenging. Contact us online or call us at 248-349-6227 to learn more.

Written by the digital marketing team at Creative Programs & Systems: www.cpsmi.com

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