By James Germano, Esq., Manager and Counsel, AIA Contract Documents
In 2020, the AIA released its new A312-2020 Warranty Bond. Simply stated, the Bond covers “the Contractor’s warranty obligations set forth in the Construction Contract…” However, there are many unique aspects of this relatively short document that are worth discussing. Let’s review three of them.
1. The Term of the Bond
Unlike other bond forms, the Warranty Bond’s coverage begins at final completion and extends for a period of 2 years, unless the Parties agree to a different Term. This Term is important because it exists notwithstanding a longer warranty period set forth in the Construction Contract.
2. The Ability to Extend the Term of the Bond
The Warranty Bond’s Term can be extended. Specifically, in Section 8, the Owner can request an extension of the Term of the Bond, and the Surety may extend the Term by using a continuation certificate or a rider setting forth the new expiration date. If the Bond’s Term is extended, then it is important to remember that the Surety’s total liability is still limited to the “Amount of the Bond” indicated on the first page.
3. The Default Procedure
Typically, construction bonds require Owner to the terminate the Construction Contract before the Surety’s liability is triggered. The AIA’s A312-2010 Performance Bond, for example, contains this typical requirement. However, the new Warranty Bond does not require the Owner to terminate the Construction Contract. The reason for this difference is because a Warranty Bond’s coverage exists after the Project has been completed. In this scenario, the Contractor has already substantially met its contractual obligations – otherwise the Project would not have reached “final completion” and the Bond’s Term would not have begun. So, the Surety’s obligations under the Warranty Bond arise once (i) the Owner provides notice to the Contractor and Surety of its intent to declare the Contractor in default, (ii) the Contractor fails to remedy the issue within a reasonable amount of time, and (iii) the Owner declares a default and notify the Surety.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.