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Abstract
As all those in the surety industry know, the surety relationship arises from a tripartite contractual agreement whereby the surety agrees to answer for the obligations of another - the principal, in the form of a bond. Unlike insurance, a surety bond constitutes a guarantee of the principal's performance to a third party, the obligee. As such, the surety's bond is a guarantee of an underlying agreement between the principal and the obligee.
In the construction setting, the principal is the contractor (or subcontractor) who was the successful bidder or negotiator for a project. The obligee is the owner (or general contractor) of the project. By issuing its bond, the surety guarantees to the obligee that if the principal fails to perform the underlying construction contract according to its terms, or if the principal fails to pay its subcontractors or suppliers, the surety will discharge the principal's obligations, if the principal is in default.
As one can easily imagine, and as with any three-party relationship, the suretyship contract is fraught with potential (and actual) confficts, with the surety in the middle. The surety is pulled between the competing demands of the obligee and principal. The obligee, on the one hand, demands that the surety perform. On the other hand, the principal either threatens suit if the surety performs, or argues the surety will lose its indemnity rights by performing over the principal's objections.
One area in which the various competing demands and conflicts inherent in the obligee surety/principal relationship arise is that of dual representation of both the surety and the principal by a single attorney. A recent commentator points out "the most prevalent [ethical] problems for construction and surety lawyers [are] in the area of multiple representation."
TABLE OF CONTENTS
I. INTRODUCTION: THE FRAMEWORK OF THE SURETY-PRINCIPAL
RELATIONSHIP 1
II. THE ETHICAL STANDARDS 3
III THE TENDERED DEFENSE 4
IV POTENTIAL PROBLEMS WITH JOINT REPRESENTATION 5
A. Handling Performance Bond Claims 5
B. Handling Payment Bond Claims 6
C. Handling a Case in Litigation 6
1 .Separate surety defenses 6
(a) Language of bond 7
(b) Discharge of surety 7
(c) Action by obligee 8
2. Consequences of a failure to assert surety defenses 9
3. Settlement discussions 11
4. Cross-action by surety against indemnitors 12
5. Principal defended by insurer 12
D. Claims Against Surety for Breach of a Duty of Good Faith and Fair Dealing 13
V CONSIDERATIONS BEFORE UNDERTAKING JOINT REPRESENTATION 13
A. Competent and Diligent Counsel 14
B. Loyalty 14
C. Provide Reasonable Information 14
D. No Disclosure of Confidential Information 14
E. Avoid a Conflict of Interest 14
VI POTENTIAL PROBLEMS WITH RETAINING SEPARATE COUNSEL 15
A.Indemnification for Costs of Independent Counsel 15
VII CONCLUSION 18
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