"THIS LETTER SHALL SERVE AS FORMAL NOTICE OF CONTRACT TERMINATION"
The Rights and Obligations of Sureties and Obligees in Addressing Termination of the Bonded Contract

1. Introduction
2. In Order for Performance Bond to be Applicable, Obligee must Comply with Contract Termination Provision
1. Causes for Termination for Default - AIA General Conditions A201 Section 14.2
1. Failure to Supply Labor or Materials (Section 14.2.1.1)
2. Failure to make Payment to Subcontractors and Suppliers (Section 14.2.1.2)
3. Violations of Laws, Ordinances, and Building Codes (Section 14.2.1.3)
4. Failure to fix Substandard Work (Section 14.2.1.4)
2. Procedural Requirements for Termination for Default
1. Architect's Certification
2. Notification in Writing
3. Principal Given an Opportunity to Cure
4. Pre-Termination Meeting
5. Obligee Must Act In Good Faith
6. Analysis of the Obligee's Termination of the Bonded Contract
3. Surety's Independent Determination Concerning Propriety of the Termination
1. The Surety's Investigation
2. Analysis of the Surety's Bond Defenses
1. Changes and Alterations to the Contract
2. Proper Administration of Contract Funds
3. Obligee's Failure to Comply with Contract Termination Provisions Discharges Bond
1. Wrongful Termination
2. No Cure Notice or Inadequate Cure Notice
3. Termination Limited to Reasons Listed in Cure Notice
4. Surety's Options in Performing under the Bond
1. The A312 Performance Bond
2. Surety's Obligation to Perform under the Performance Bond
1. Surety's Obligation in the Event of Default
2. Performance Options
1. Financing
2. Buy Back
3. Completion by the Obligee
4. Tender
5. Takeover
5. The Major Surety Options - Takeover/Completion and Tender Agreements
1. Major Issues to be Considered in Takeover/Completion Agreements
2. Major Issues to be Considered in Takeover/Completion Agreement
1. General Provisions for Takeover and Completion Agreements
2. Surety's Decision to Choose the Takeover and Completion Option
3. Major Issues to be Considered in a Tender Agreement
1. General Provisions for the Tender Option
2. Surety's Decision to Choose the Tender Option
6. Conclusion

APPENDIX A - "Takeover Agreement" A-1
APPENDIX B - "Completion Agreement" B-1
APPENDIX C - "Tender Agreement" C-1

Abstract

Contract termination is the ultimate sanction for failed performance. It can also be the first step down a treacherous path of competing allegations, claims, and litigation. When a surety's performance bond is added to the equation the practical and procedural issues to be considered become magnified. One wrong step in the termination process may invoke contract damages for wrongful termination or render the surety's performance bond void.

This paper will first address the obligee's duty to comply with the contract termination provisions. Second, this paper will examine the surety's independent determination concerning the propriety of the termination and its duties in response to the notice of contract termination. Third, this paper will explore the surety's options in performing under the bond. Finally, this paper will take an in-depth look at two commonly employed surety options: the takeover/completion agreement and the tender agreement. Termination of either a prime or subcontract mid-course can be difficult for both the obligee and the surety. Nevertheless, where a defaulting contractor's performance cannot be salvaged, with careful attention to contract terms by the obligee and recognition of the surety's duties and rights under its bonds, both the obligee and the surety can negotiate the path to successful contract completion.

Contract termination bears heavy consequences and risks for all parties concerned, such that the obligee, principal, and surety should each act with all requisite care and deliberation. There are multiple requirements that the obligee must meticulously follow in order to terminate its principal. Thereafter, the surety must respond and, upon investigation, decide whether termination was properly exercised and its bond obligations properly triggered. The full, open and honest exchange of information between the obligee and surety hastens the post-termination investigation required of the surety and enhances the opportunity for the successful disposition of the bonded obligations. The surety and obligee should work to accomplish a common goal - the completion of the terminated contract without undue expense or delay. The successful negotiations of the path to contract completion is dependent on both obligee and surety sharing that goal.

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