B. Performance and Payment Bonds

• Library: SC Construction Law Desk Book (SCBar) (2013 Ed.)

B. Performance and Payment Bonds

1. Performance Bonds

The purpose of a performance bond is to guarantee, for the benefit of the owner, the principal's financial responsibility and ability to perform the contract in question. Performance bonds are typically written in the amount of the contract and are always required on federal projects under the Miller Act.¹² Under South Carolina's adoption of various Little Miller Act statutes, performance bonds may be required, depending on the size, scope, and type of project.¹³ On private projects, contractors provide performance bonds at the owner's discretion.

2. Surety's Options on Principal's Default

The liability of the surety typically arises under a performance bond when the principal is in default, either by self-declaration or where the owner has notified the surety of a material breach and declared the principal in default under the terms of the contract in question. After default has occurred and proper demand has been made by the owner, the surety has the right to select its course of action in response. That process raises questions concerning the surety's obligations under the performance bond, and those questions are frequently a source of conflict among the owner, contractor, and surety.

Most bond forms list specific options from which the surety may select its course of action, but there are subtle differences in the categorization of the options and the extent to which the owner has a veto over the surety's selection. For example, the performance bond generally permits the surety to complete the work, but some bonds allow the surety to use the original contractor to complete the contract without the owner's consent.¹⁴ In contrast, other bond forms require the owner's consent to surety completion, effectively giving the owner the power to preclude surety completion unless the surety agrees not to utilize...