Project update 1995: illustrative provisions of a general indemnity agreement taken in connection with contract surety bonds.

• Position: Fidelity and Surety Committee of the International Association of Defense Counsel

Introduction 260 Definitions 260 Illustrative Provisions and Annotations 261 I. Rights of Surety Prior to Payment of Any Loss 261

1. Right to Indemnity Against Liability 261

2. Right to Deposit of Collateral 261

3. Right to Have Indemnitors Obtain Release of Surety 262

4. Right to Have Access to Principal's and 263

   Indemnitors' Books and Records

5. Right to Financial Information from Third Parties 263

6. Right to Refuse Execution of Any Bond 263

   2. Rights of Surety to Indemnity Against Loss or Expense 264

1. Indemnity Against Loss 264

2. Indemnity Against Expenses, Including Counsel 264

   Fees Incurred by Reason of Execution of Bond

3. Indemnity Against Expenses Incurred to Enforce 265

   Provisions of Indemnity Agreement Itself III. Provisions to Minimize Surety's Loss 265

1. Assignment of Subcontracts 265

2. Assignment of Material and Equipment on Bonded

   Projects 266

3. Right of Surety to Take Over or Complete Performance 266

   of Bonded Contracts

4. Right of Surety to Finance Principal 266

5. Provision Making Principal Trustee of Contract Funds 267

6. Right to Compromise or Settle Claims 267

7. Principal's Obligation to Cooperate in Defense of

   Claims 268 IV. Provisions to Maximize Surety's Recovery 268

1. Assignment of Receivables on Bonded Contracts 268

2. Assignment of Receivables on Non-Bonded Contracts 268

3. Assignment of Claims and Right to Prosecute Them 269

4. Subordination of Other Debts to Surety's Claims 269

   5. Procedural Provisions to Aid Enforcement of Agreement 269

1. Voucher or Proof of Payment Prima Facie Evidence 269

   of Indemnitor's Liability

2. Right to Indemnity for Payments Made in Good Faith 270

3. Confessed Judgment 271

4. Power of Attorney 271

5. UCC Recording Provisions and Requirements 261

6. Waiver of Notice and Defenses 261

7. Waiver of Trial by Jury 272

8. Waiver of Homestead and Other Exemptions 272

   6. Provisions Related to Enforcement or Scope of Indemnity

   Agreement 272

1. Bonds Executed Prior to Agreement 272

2. Rights of Co-Sureties or Reinsurers 272

3. Severability 273

4. Validity of Execution by One or More Indemnitors 273

5. Release of One or More Indemnitors and Indemnitors' 273

   Right to Obtain Release as to Future Bonds

6. Events Which Constitute Default 274

7. Surety's Right to Bring Separate Suits 274

   INTRODUCTION

   IN 1963, the Fidelity and Surety Committee of the International Association of Defense Counsel (then known as the International Association of Insurance Counsel) prepared illustrative provisions for the General Indemnity Agreement used by sureties on contract performance and payment bonds to expand on the surety's common law rights of indemnity and subrogation. In 1975 and 1985, the committee updated the project and provided citations to cases decided under such indemnity agreements.(1) In effect, the project is an annotated Indemnity Agreement as well as a reflection of changes in the provisions of such agreements.

   In late 1994 and early 1995, the committee undertook to repeat the process for cases decided since the 1985 update. Some 30 committee members worked on the project, and the end result was substantially longer than the space available to publish it in the Defense Counsel Journal. The authors, therefore, are publishing this article containing only the updated illustrative provisions and case citations. The authors hope that the Defense Research Institute will make the entire project, including the model agreement and analyses of its provisions, available in pamphlet form to those who are interested in a longer treatment of the subject.

   DEFINITIONS

   As used in the following illustrative provisions of a General Indemnity Agreement, the following are defined terms which shall have the indicated meanings:

1. Bond or Bonds shall mean any undertaking or contract of suretyship executed by any of the Undersigned as Principal and by the Company, or by any other entity at the request of the Company, as Surety.

2. Company shall mean any one or more of the following: [insert names of Companies], and any other person or entity which becomes surety on a Bond at the request of one of the foregoing Companies.

3. Contract shall mean any agreement between the Contractor and an obligee, the performance of which is guaranteed by a Bond.

4. Contractor shall mean each person or entity signing this Agreement as a Contractor.

5. Indemnitor shall mean each person or entity signing this Agreement as an Indemnitor.

6. Undersigned shall mean each Contractor and each Indemnitor, jointly and severally.

   ILLUSTRATIVE PROVISIONS AND ANNOTATIONS

   1. Rights of Surety Prior to Payment of Any

   Loss

1. Right to Indemnity Against Liability(2)

   The Undersigned shall indemnify and keep indemnified the Company against any and all liability, loss and expense of whatsoever kind or nature, including, but not limited to, court costs, attorneys' fees, and interest, which the Company may sustain or incur (i) by reason of having executed or procured execution of any Bond or Bonds as surety for any of the Undersigned, (ii) by reason of the failure of the Undersigned to perform or comply with this Agreement, or (iii) to enforce any of the covenants and conditions of this Agreement.

   The illustrative provision quoted above is based on the recommended revision in the 1964 edition of the Illustrative Provisions Pamphlet, which was recommended without revision in 1975 and 1985. Identical or similar language is now incorporated in indemnity agreements by a number of surety companies. The language has been amended to include a right to indemnification for interest. Cases under this section include:

   American Motorists Ins. Co. v. United Furnace Co. Inc., 876 F.2d 293 (2d Cir. 1989); Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30 (2d Cir. 1991); Fireman's Fund Ins. Co. v. Nizdil, 709 F. Supp. 975 (D. Or. 1989); Int'l Fidelity Ins. Co. v. Spadafina, 596 N.Y.S.2d 453 (App. Div. 1993).

2. Right to Deposit of Collateral(3)

   The Undersigned will deposit with the Company as collateral security, immediately upon demand, a sum of money, at the option of the Company, equal to (1) the liability of the Company, if established; (2) the liability asserted against the Company; or (3) the reserve established by the Company, or any increase thereof, to cover any liability, loss, expense or possible liability for any loss or expense for which the Undersigned may be obligated to indemnify the Company under the terms of this Agreement.

   The Company shall have the right to use the deposit, or any part thereof, in payment or settlement of any liability, loss or expense for which the Undersigned is or would be obligated to indemnify the Company under the terms of this Agreement. The Company shall have no obligation to invest, or to provide a return on, the deposit. The Undersigned shall be entitled to the refund of any unused portion of the deposit upon termination of the liability of the Company on all Bonds and the performance by the Undersigned of all obligations to the Company under the terms of this Agreement. The Company's demand shall be sufficient if sent by registered or certified mail, by facsimile transmission, or by personal service to the Undersigned at the addresses stated herein, or at the addresses of the Undersigned last known to the Company, regardless of whether actually received.

   The Undersigned acknowledge that the failure of the Undersigned to deposit with the Company, immediately upon demand, the sum demanded by the Company as collateral security shall cause irreparable harm to the Company for which the Company has no adequate remedy at law. The Undersigned agree that the Company shall be entitled to injunctive relief for specific performance of the obligation of Undersigned to deposit with the Company the sum demanded as collateral security and hereby waive any claims or defenses to the contrary.

   The illustrative provision quoted above is a substantial revision of Section 32 contained in the 1964 edition of the Illustrative Provisions Pamphlet, which was recommended without revision in the 1975 and 1985 articles.

   The prior illustrative provision, Section 32, required the Undersigned to deposit funds equal to the reserve established by the Company. The illustrative provision quoted above requires the Undersigned to deposit a sum of money, at the option of the Company, equal to the established liability of the Company or the asserted liability of the Company or the reserve established by the Company. Thus, the new illustrative provision is more flexible than its predecessor.

   The prior illustrative provision was silent as to the Company's obligation to invest deposited funds. The illustrative provision quoted above states that the Company shall have no obligation to provide an investment return on deposited funds. At the conclusion of all obligations to the Company, the Undersigned is only entitled to a refund of the unused portion of deposited funds.

   The illustrative provision quoted above makes clear that the Company's demand may be sent by registered or certified mail, by facsimile transmission or by personal service to the Undersigned. The demand need not be actually received by the Undersigned, as it is sufficient for the Company to direct its demand to the Undersigned's last known address.

   The last paragraph of the illustrative provision quoted above is in response to cases from the Second Circuit, Abish v. Northwestern Nat'l Ins. Co., 924 F.2d 448 (2d Cir. 1991); Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30 (2d Cir. 1991); and Northwestern Nat'l Ins. v. Alberts, 937 F.2d 77 (2d Cir. 1991). In each of these cases, the surety was denied preliminary injunctive relief to enforce collateral deposit obligations of indemnitors, owing to an allegedly inadequate showing of irreparable injury.

   The Second Circuit cases are contrary to prior decisions which held that irreparable injury may be presumed from an indemnitor's failure to deposit collateral security. See, e.g., Safeco Ins. Co. of America v. Schwab, 739 F.2d 431 (9th Cir. 1984)...