Termination for Default, Preparing for the Worst Presented by Mark Nagata, PSP, Director/Shareholder, Trauner Consulting Services, Inc.
Meet Your Instructor, Mark Nagata, PSP Director/Shareholder Trauner Consulting Services, Inc. 17 years of experience Expert Witness, Author, Instructor, Analyst, Scheduler 1
Why are you probably unprepared? You ve probably never terminated a contractor for default. If you have, you ve probably never been involved in termination where the contractor contested the termination. You ve also probably never been involved in a termination where the surety refused to complete the project. The Deputy or Assistant Attorney General assigned to the case has probably never tried a termination case. The surety s attorney and the surety s consultant fight wrongful termination cases every day. 2
What is a Termination for Default? A contractually and legally defined process by which a party to a contract can end a contract before it is completed. 3
Contract Provisions 108.08 Unsatisfactory Progress and Default of Contractor The Director will notify the Contractor in writing of unsatisfactory progress for any of the following reasons. A. The Contractor has not commenced the Work by the dates established in the schedule. B. The Contractor does not proceed with the Work in a manner necessary for completion of the Project by the Completion Date. C. The Contractor is performing the Work improperly. D. The Contractor abandons, fails, or refuses to complete the Work. E. Any other reason the Director believes jeopardizes completion of the Work by the Completion Date. 4
Contract Provisions 108.08 Unsatisfactory Progress and Default of Contractor, cont. If the Contractor does not respond to the satisfaction of the Director, the Director may declare the Contractor in default and may notify the Contractor and Surety that the responsibility to complete the Work is transferred to the Surety. Upon receipt of this notification, the Contractor s right to control and supervise the Work will immediately cease. In such a case, the Director will proceed as specified in ORC 5525.17. The defaulted Contractor will not be compensated for costs resulting from the default and is not eligible to be retained by the Surety to complete the Work. If it is determined that the Department s default of the Contractor according to 108.08 is wrongful, then the default will revert to a termination of the Contract according to 108.09. 5
Contract Provisions Ohio Revised Code 5525.17 Failure of contractor or surety to complete work. If a contractor has not commenced his work within a reasonable time, or does not carry the same forward with reasonable progress, or is improperly performing his work, or has abandoned, or fails or refuses to complete a contract entered into under Chapters 5501., 5503., 5511., 5513., 5515., 5516., 5517., 5519., 5521., 5523., 5525., 5527., 5528., 5529., 5531., 5533., and 5535. of the Revised Code, the director of transportation shall make a finding to that effect and so notify the contractor in writing, and the rights of the contractor to control and supervise the work shall immediately cease. The director shall forthwith give written notice to the sureties on the bonds of such contractor of such action. If, within ten days after the receipt of such notice, such sureties on the contract performance bond or any one or more of them notify the director in writing of their intention to enter upon and complete the work covered by such contract, such sureties shall be permitted to do so and the director shall allow them thirty days, after the receipt of such notice in writing, within which to enter upon the work and resume construction, unless such time is extended by the director for good cause shown. 6
Contract Provisions Ohio Revised Code 5525.17 Failure of contractor or surety to complete work, cont. If such sureties do not carry the same forward with reasonable progress, or if they improperly perform, abandon, or fail to complete the work covered by any such contract, the director shall complete the same in the manner provided in this section. In the event the sureties on the contract performance bond, or any one or more of them, notify the director in writing of their intention to enter upon and complete the work covered by such contract, and then fail or refuse to so complete, any additional costs reasonably incurred by the director as a result of such failure or refusal shall be computed by the director and become the liability of such surety, which is not limited by the amount of the contract performance bond. If the surety fails to pay such amount, the director shall certify the facts to the attorney general, who shall proceed to collect such additional costs from the surety and the amount so collected shall be paid into the state treasury to the credit of the fund from which the excess cost was originally paid. 7
Contract Provisions Ohio Revised Code 5525.17 Failure of contractor or surety to complete work, cont. If, after receiving notice of the action of the director in terminating the control of the contractor over the work covered by his contract, the sureties on such contract performance bond do not within ten days give the director the written notice provided for in this section, the director shall cause that portion of the work which remains uncompleted to be re-estimated and relet in accordance with the requirements applicable to original bids; or in the event the director determines with the approval of the controlling board that an extraordinary emergency exists, he may contract for the completion of the work without advertising the bids, if he considers it to be in the best public interest. Before entering into a contract for the completion of any such improvement, the director shall require a contract performance bond and a payment bond with sufficient sureties each in an amount equal to one hundred per cent of the estimated cost of completing the work, and conditions relating to the bonds of original contractors shall apply to such bonds. 8
Contract Provisions 9 Ohio Revised Code 5525.17 Failure of contractor or surety to complete work, cont. If the cost of completing such work exceeds the amount set aside or apportioned therefor, the remainder of the cost shall be paid from the appropriations from the state highway operating fund available for the use of the department of transportation and against which no contractual obligations exist. If the cost of completing any such improvement exceeds the portion of the contract price remaining unpaid to the original contractor at the time of his default, such excess shall be computed by the director and becomes the liability of such contractor or surety or both. If either the contractor or surety fails to pay such amount, the director shall certify the facts to the attorney general, who shall proceed to collect such excess cost from the contractor and the sureties upon his contract performance bond, and the amount so collected shall be paid into the state treasury to the credit of the fund from which the excess cost was originally paid. Where the estimated cost of completing a defaulted contract does not exceed five thousand dollars, the director may complete the same by force account, or by a contract let without advertisement.
The Surety s Performance Bond KNOW ALL MEN BY THE PRESENTS: THAT WE (1) as principal, and (2) as sureties, are held and firmly bound unto the State of Ohio in the penal sum of ($ ) for the payment of which, well and truly to be made, we hereby jointly and severally bind ourselves, our heirs, executors, administrators, successors and assigns. 10
The Surety s Performance Bond Now, if the said principal shall well, truly and faithfully comply with and perform each and all of the terms, covenants and conditions of such contract on his (its) part to be kept and performed, according to the tenor thereof, and within the time prescribed and will perform the work embraced therein upon the terms proposed and within the time prescribed and in accordance with the plans, specifications and estimates furnished therefor, to which reference is here made, the same being a part hereof, as if fully incorporated herein, and will indemnify the State, County, Municipality and Township against any damage that may result from any failure of the contractor to so perform, and in case of a railroad grade separation, the railroad company (or companies) involved against any damage that may result by reason of the negligence of the contractor in making said improvement or doing said work, then this obligation shall be void, otherwise the same shall remain in full force and effect; it being expressly understood and agreed that the liability of the surety for any or all claims hereunder shall in no event exceed the penal amount of this obligation as herein stated. It is further expressly understood and agreed that the liability of the surety for any or all claims hereunder is governed by Ohio Revised Code section 5525.16, and nothing stated herein shall operate as a limitation upon the obligations of the surety under that statute. 11
The Surety s Performance Bond The said sureties hereby stipulate and agree that any failure to complete work at the time named in the contract, or extensions of time for completion, or modifications, omissions or additions in or to the terms of said contract, or in or to the plans, specifications and estimates, shall not in any wise affect the obligation of said sureties on their bond. 12
The Surety s Performance Bond 104.01 Intent of the Contract Documents. The intent of the Contract Documents is to provide for the construction and completion of the Work. Perform the Work according to the Contract Documents. 104.02 Revisions to the Contract Documents. A. General. The Department reserves the right to revise the Contract Documents at any time. Such revisions do not invalidate the Contract or release the Surety, and the Contractor agrees to perform the Work as revised. The provisions of this section are subject to the limitation of ORC 5525.14. 13
Three things to consider when preparing 1. Overpayment 2. Waiver 3. Interference 14
1. Overpayment The Owner has a legal obligation to the surety not to overpay the contractor for the work performed. 15
1. Overpayment - How could this happen? You pay too much for the work performed You don t withhold payment for defective work You don t assess liquidated damages 16
2. Waiver 108.07 Failure to Complete on Time. Permitting the Contractor to continue and complete the Work or any part of the Work after the Completion Date, or after extensions to the Completion Date, will in no way operate as a waiver on the part of the Department of any of its rights under the Contract. 17
3. Interference Do not interfere with the contractor s performance during the cure period. 18
3. Interference 5525.17 Failure of contractor or surety to complete work. If a contractor has not commenced his work within a reasonable time, or does not carry the same forward with reasonable progress, or is improperly performing his work, or has abandoned, or fails or refuses to complete a contract entered into under Chapters 5501., 5503., 5511., 5513., 5515., 5516., 5517., 5519., 5521., 5523., 5525., 5527., 5528., 5529., 5531., 5533., and 5535. of the Revised Code, the director of transportation shall make a finding to that effect and so notify the contractor in writing, and the rights of the contractor to control and supervise the work shall immediately cease. The director shall forthwith give written notice to the sureties on the bonds of such contractor of such action. If, within ten days after the receipt of such notice, such sureties on the contract performance bond or any one or more of them notify the director in writing of their intention to enter upon and complete the work covered by such contract, such sureties shall be permitted to do so and the director shall allow them thirty days, after the receipt of such notice in writing, within which to enter upon the work and resume construction, unless such time is extended by the director for good cause shown. If such sureties do not carry the same forward with reasonable progress, or if they improperly perform, abandon, or fail to complete the work covered by any such contract, the director shall complete the same in the manner provided in this section. 19
For More Information, contact Mark at: E-mail : mark.nagata@traunerconsulting.com Phone: 215-814-6400 Or write him: Trauner Consulting Services, Inc. 1617 JFK Blvd., Ste. 475 Philadelphia, PA 19103 20