Legislation

Most readers are familiar with the concept that performance bond sureties expect to recoup, from their principals, every dollar of cost incurred in responding to demands on the bond. And most readers are aware that the typical general indemnity agreement (GIA) gives the surety extensive rights, against the persons and companies signing on as indemnitors, to recover every dollar spent. But one surety was stopped short when it sought to recover costs of an arbitration from its principal, after the surety signed a three-party arbitration agreement, post-project, providing that all parties would be responsible for their own costs. A dispute arose between subcontractor and prime contractor, and the prime contractor also made demands against the sub’s surety. The prime and sub commenced arbitration. Then, prime, sub and surety entered into what the decision refers to as an amended arbitration panel agreement, and the surety joined the arbitration. This later agreement included the following: “Each party shall be responsible for and bear the costs of its own attorney’s fees and expenses and an equal portion of the panel’s costs and expenses.” The arbitration ended with an award in favor of the sub and surety and against the prime. The surety turned around and demanded that the sub reimburse the surety for $748,843.85 in arbitration costs, citing the terms of the GIA calling for that result. But the sub argued in response that the amended arbitration panel agreement had superseded the GIA, and the surety was thus not entitled to recover any such costs from the sub. A US District Court judge agreed with the sub, at least denying the surety’s request for summary judgment based on the terms of the GIA. The court noted: “It is a well-settled tenet of contract law that a latter-signed contract between parties on the same subject modifies a pre-existing contract.” And it stated that if the surety had wanted to preserve its rights under the GIA, when entering into the amended arbitration panel agreement, the surety “should have executed contractual amendments or other documents clarifying the status of [the sub’s] duty to indemnify [the surety].” This is basic contract law. The surety will undoubtedly remember should this scenario arise again. The case is Western Surety Co. v. S3H, Inc., 2016 U.S. Dist. LEXIS 101769 (D. Nev., Aug. 3, 2016), available here (LEXIS subscription required). Commonsense Construction Law LLC – Stan Martin http://www.lexology.com/library/detail.aspx?g=fe318f4e-7fd4-49ac-8acd-0e589b03be01

On September 12, 2016, the Nationwide Multistate Licensing System (“NMLS” or “the System”) will begin receiving and tracking Electronic Surety Bonds (“ESB”). In an unprecedented departure from the traditional uploading of a copy of a surety bond document to the applicant’s or licensee’s record followed by the delivery of the paper bond to the state, regulators in Idaho, Indiana, Iowa, Massachusetts, Texas, Vermont, Washington, and Wisconsin have publicly announced the adoption of ESB in 2016 for several license types. This is the first group of states to “bond on line,” but all states are expected to have a common bond process through the NMLS. Many states require licensed financial services businesses to get a surety bond so that state regulators or consumers may file claims against the bond to cover fines or penalties assessed, or provide restitution to consumers if the licensee fails to comply with licensing or regulatory requirements. The NMLS reports that 177 license authorities currently managed on the system require a licensed company to maintain a surety bond as a condition of licensure. States have even imposed bond requirements on individual mortgage loan originators (“MLOs”), in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”), but allow for MLOs to be covered under a company bond. NMLS was created to serve as a comprehensive system of record for licensing information. However, as it relates to surety bonds, the System’s current functionality is antiquated, limited, and does not allow for the tracking of bond requirements, or the maintenance of bond information validated by authorized surety companies and/or bond producers. State regulators have also cited the tracking of surety bond compliance as a reason for processing delays in license applications, amendment filings, and renewal approvals. For those reasons, the State Regulatory Registry LLC, which administers the NMLS, believed a fully electronic surety bond process would provide efficiencies for both industry and regulators. The first phase of this ESB process entailed the creation of an account by each participating surety company and association with those accounts by surety bond producers. The second phase, which will begin September 2016, entails implementation of bond issuance, tracking, and maintenance. If you have not already done so, and especially if you are licensed or intend to become licensed in one of the eight states listed above that will be implementing this new functionality in September, you should ensure that your surety bond company has created an account in the system and be aware of the new application and conversion deadlines that are listed on the NMLS ESB Adoption Map and Table. http://www.lexology.com/library/detail.aspx?g=6c836cd3-60de-4fa2-bb0d-1c64a4447e3c