As MGT Construction 1 executives start pleading guilty to conspiracy to commit wire fraud and bank fraud, every construction company executive should reflect on the duties of disclosure owed to their bonding companies. Inadequate disclosures carry a range of legal risks.
The legal risk of securing a performance bond without disclosing material facts typically arises through a claim by the bonding company for concealment of material facts. In such claims, the bonding company could request that sufficient collateral be provided to cover the amount of the bond; the bonding company even could attempt to cancel the bond altogether. Failure to meet these requirements could give the bonding company a right to pursue the guarantors for the collateral or to cancel other bonds posted for the contractor, depending on the specific terms of the bonds.
The source of the duty to disclose is often the documents signed at the time the bond is obtained or during an annual certification submitted to the bonding company with representations and warranties about circumstances that could give rise to a claim on a bond by the property owner for a contractor’s non-performance. Even where no specific certification is requested, the common law doctrines of negligent representation and concealment create a duty on the construction company to disclose material facts to the bonding company at the time of requesting the bond.
To minimize these risks, a contractor could attempt to avoid the need for a performance bond altogether by offering to indemnify the owner for any performance failure. Still, it remains standard in the industry to require a third-party bond. Accordingly, best practices are to (1) maintain a good and open relationship with your bonding company, and (2) involve a smart lawyer experienced in bonding company relationships and disclosures to help avoid going sideways with your bonding partner.
1 United States v. Lindsey, Criminal No. 3:20-CR-22 (E.D. Va. Mar. 2, 2020).