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ENGR 413 Chapters 17-19 Test With Complete Solution
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ENGR 413 Chapters 17-19 TestWith Complete Solution
What is a bond? - ANSWER A bond is an agreement whereby the "surety"
guarantees that the "principal" will perform its obligations to the "obligee"
Do bonds follow contract law? - ANSWER Bonds are governed by the rules of
contract law, and are similar in some ways to contracts of insurance, though
they are not insurance.
What are the three popular bonds used in construction? - ANSWER bid
bonds, performance bonds, and payment bonds.
When may an owner require a bond? - ANSWER An owner may require a
construction contractor to provide a bond to provide certainty that the
contract will be performed.
What is the role of the surety? - ANSWER The role of the surety is to
guarantee performance for the benefit of the oblige. Often the surety is a
financial institution.
What are the separate contracts between the parties? - ANSWER Between the
principal (contractor) and the oblige (owner) primary obligations. Between
the surety (financial institution) and the principal (contractor) secondary
obligations; depend on the existence of primary obligations
What happens if the principal fails to perform? - ANSWER If the principal fails
to perform, the obligee will have contractual remedies against the surety and
against the principal.
,Does the principal pay a premium to a surety, T/F? - ANSWER True
What does the surety require of the shareholders of the principal? - ANSWER
The surety will typically require the shareholders of the principal to
indemnify the surety against any loss.
What is one attribute of the contracts of surety? - ANSWER Contracts of
surety must be in writing.
For the oblige to enforce the bond, what must they be in possession of? -
ANSWER To enforce the bond, the obligee must have the original bond
document in their possession.
Does the surety have the right of subrogation? If yes, can they subrogate
against the principle? - ANSWER The right of subrogation under surety
agreements exists at common law. If the surety is required to pay out under
the bond, it will have a right of subrogation against the principal. this is the
key distinction from insurance contracts, where subrogation cannot be
obtained against an insured
When is bond subrogation useful? - ANSWER The right of subrogation is only
useful if the principal, or its shareholders if guarantees were given, are
solvent.
What are bid bonds? - ANSWER Bid bonds provide the owner with an
immediate remedy if a bidder's bid is accepted and the bidder refuses to
enter into a contract, i.e., the surety will be required to pay the owner the
amount specified in the bond.
When are bid bonds provided in the project process? - ANSWER Calls for bids
often require that bid bonds be provided when bids are submitted.
, What happens if the contractor refuses the contract after winning the bid? -
ANSWER Depending on the terms of the call for tenders, and the terms of
the bid bond, the contractor's liability for refusing to contract with the owner
may be limited to the amount of the bid bond.
What position will the surety be in in relation to the other parties? - ANSWER
The surety will always be in at least as strong a position as the principal.
What defences can the surety rely on? - ANSWER the surety will be able to
rely on all defences the principal would have against the obligee, and may
have additional defences under the bid bond, e.g., shorter limitation periods
What happens under a performance bond? - ANSWER Under a performance
bond, the surety guarantees that the principal will perform its obligations
What is a performance bond used for? - ANSWER Often used to guarantee
performance under construction contracts.
What is the typical value of a performance bond? - ANSWER In the
construction industry, performance bonds are normally written in an amount
equal to 50 percent of the value of the contract.
How is the performance bond related to the contract? - ANSWER The
contract between the principal and the obligee is typically incorporated into
the performance bond by reference.
Who can provide performance bonds? - ANSWER Prime contractor to owner,
also, Subcontractors may provide performance bonds to prime contractors
When does the surety respond in performance bonds? - ANSWER As with bid
bonds, the surety for performance bonds only responds once the principal
has defaulted in its obligations to the oblige.
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