Issue #
August 2011

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Recent Jurisprudence – Surety Bonds. The Indivisibility of Guaranteed Obligations

August 8, 2011

Recently, the Third Collegiate Court on Administrative Law from the Sixth Circuit published decision numberVI.3o.A. J/80 under the title, “Surety Bond. When such is issued to guarantee performance of each and all of thecontractual obligations, and in an amount equivalent to 10% of the amount of the principal obligation, it isunderstood that the principal obligation is of an indivisible nature pursuant to agreement by the parties.” In suchdecision, the Third Collegiate Court determined that in those cases where the surety bond is issued to guaranteeeach and all of the obligations deriving from a contract, and in an amount equivalent to 10% of the principalobligation, it is understood that the parties agreed that the obligation was of an indivisible nature and, upon anydegree of non-compliance by the obligor, the bond is enforceable in full. The foregoing is a result of theimpossibility of partial performance of the obligation when the principal obligation is indivisible by nature,pursuant to agreement by the contracting parties, or because it is determined as such by the trier of fact, in theevent of a legal proceeding. Consequently, this Court decided that in such cases partial performance is not adefense of the obligor or the bonding institution, and, therefore, any failure to perform results in the ability toenforce the total amount of the bond. Accordingly, it is recommended that parties carefully review contractualclauses entered into in order to determine the true nature of surety bonds that have been issued.