4.3.4.4.2 Limitations to Surety's Liability Under Its Bonds

• Jurisdiction: Arizona

(1) Principal’s Defenses

The surety is entitled to assert the defenses available to the principal under the contract because the liability of the surety for the defaults of the principal cannot be greater than the liability of the principal.^[49] The surety’s obligations can be no greater than its principal’s liability. The surety, however, may not rely on a defense the principal is barred from asserting.^[50]

Some defenses of the principal the surety might assert include illegality of the construction contract (as, for example, a contract with a public institution that was not put out for bid), impossibility of performing the construction contract, fraud or duress practiced by the obligee in obtaining the consent of the principal to the construction contract, prior breach by the obligee or owner in the performance of conditions precedent in the construction contract, and failure of consideration to support the construction contract.

(2) Surety’s Defenses

The surety also has its own unique defenses that arise because of the terms and conditions of the bond, the conduct of the obligee, or statutes. These defenses may include the failure of the obligee to bring the action within the time limits set forth in the bond,^[51] or the obligee’s failure to provide the principal or surety with proper notification.^[52]

Rule 17(f) of the Arizona Rules of Civil Procedure requires the principal obligor be a party to any lawsuit against a surety unless the principal obligor is dead, insolvent, cannot be located, or cannot be served. For example, the principal obligor need not be joined if it is protected from the court’s jurisdiction by its immunity from suit.^[53] Accordingly, if the principal is not joined in the suit, the surety can successfully have the case dismissed. This defense must be raised by the surety and failure to raise it at or prior to trial can result in its waiver.^[54]

A.R.S. §§ 12-1641 to 12-1646 also provide sureties with additional protections. Under the statutes, the surety can require that the issue of suretyship be tried first, and the creditor can be required to join the principal and further be required to execute upon the assets of the principal obligor before proceeding against the surety.

The conduct of the obligee also can be raised as a defense by the surety in certain instances. One of these defenses is the obligee’s fraud or misrepresentation in inducing the surety to execute the bond.^[55] However, fraud practiced on the surety by its principal to induce the execution of the bond is not a defense to the surety.^[56] This rule was stated by the...