BONDS

V. BONDS

A. Bid Bonds

A bid bond or deposit is generally not required by statute.  However, bid bonds are a common feature of individual counties bid applications.  Generally, a bid bond is required from each bidder equivalent to five percent of the bid price on contracts eaceeding a certain dollar figure.

A certified check, bank letter of credit, or other negotiable instrument accompanying a bid may often be used rather than a bid bond.  The forms of deposit stated above assure that a bidder, upon acceptance of the bid, will execute contract documents in the time specified.  The deposit form, the percent of bid price, and the length of time the deposit will be retained will vary.

B. Other Bonds

Two statutes identify the circumstances under which county contracts are subject to a bond requirement:  Minn. Stat. § 375.21 and § 574.26.  These statutes set forth the types of contracts for which a bond must be given and establish the bond requirement necessary for a valid contract.  Minn. Stat. § 574.26 requires the bond to be in the amount of the contract.  Minn. Stat. 375.21 requires a "sufficient bond."  The type of bond required under either statute may be characterized as a performance bond in wich the surety agrees to complete or pay for the cost of completion of a contract if the contractor defaults.  In addition, the bond required by § 574.26 may also be characterized as a payment bond because it provides protection to subcontractors and those furnishing labor and materials.  Check special legislation for specific counties' bonding requirements.

The statutues identifying bonding requirements are:

1. Minn. Stat. § 375.21:

Under Minn. Stat. § 375.21, the person to whom a contract is awarded is required to give a sufficient bond to the county board for the faithful performance of the contract.  Thus, the type of bond required is a "performance bond" which protects the county against loss due to the inability or refusal of the contractor to perform the contract.  The type of county contracts for which a bond is required under §375.21 are contracts for "work or labor, or to purchase furniture fixtures or other property, or to construct or repair roads, bridges, or buildings." (See Laws of Minn. 1990, Ch. 389, deleting requirement of bonds for purchase of furniture and fixtures, effective August 1, 1990.) Every contract made without compliance of § 375.21 is void.

 

Section 375.21 applies to county contracts which meet the dollar threshold of required advertisement for bidding found in Minn. Stat. § 471.345.  Advertising for bids is required under  § 471.345 where the contract is estimated to exceed $15,000$50,000 or $60,000 for rental of equipment.  An exception exists under § 471.345 for contracts involving repairs and maintenance of ditches, in which bids are not required if the estimated amount of the contract does not exceed the amount specified in Minn. Stat. § 106A.705, subj. 4,5, and 6.

2. Minn. Stat. § 574.26:

a. Minn. Stat. § 574.26 requires the contractor to give bond to the state or other public body contracted with on contracts for the doing of any public work.  This statute does not apply to forestry development related contracts under Minn. Stat. § 574.263 or § 574.264 and those contracts not exceeding $10,000.

Under Minn. Stat. § 574.263 the Commissioner of Natural Resources may require a bid deposit in lieu of a performance bond in forestry development project contracts.  Such bid deposits may not be less than five percent of the contract.

The bond under § 574.26 must be conditioned to ensure: (1) the payment of claims of such work, skill, tools, machinery, materials, insurance premiums, equipment, taxes incurred under Minn. Stat. § 190.92 or Chapter 297A and supplies for the completion of the contract; (2) saving the obligee harmless from all costs and charges that may accrue on account of the doing of the work; (3) enforcing the terms of the bond; and (4) the compliance with the law appertaining thereto.

Thus, the bond under § 574.26 may be characterized as both a performance bond and a payment bond with three named classes of beneficiaries: the obligee or county; those laborers and materialmen furnishing work, labor, materials and other items; and the State for the purpose of payment of withholding taxes pursuant to § 190.92 and general sales tax pursuant to Chapter 297A.

b. Minnesota cases construing this provision note in dicta that this provision requires a bond for the benefit of the several named beneficiaries, thus distinguishing between the needs of the contracting governmental unit for its own protection and needs of subcontractors for surety in lieu of mechanic's lien rights.  Such dicta supports the conclusion that this provision requires one multi purpose bond and not separate performance or payment bonds.  Den Mar Construction Co. v. American Insurance Co., 290 N.W.2d 737, 741 (Minn. 1979); Healy Plumbing & Heating Co. v. Minneapolis-St. Paul San. Dist., 169 N.W. 2d 50 (Minn. 1969).

3. Several different sections of Minn. Stat. Ch. 574 allow security in lieu of bond in certain circumstances.  Under  § 574.261, a certified check or cashier's check in the same amount as would be required for a bond may be submitted as security for protection of

 

the State.  This provision requires the approval of the commissioner of Administration and only applies to contracts not exceeding $5,000.

a. Under § 574.264 a State contract for a forestry development project may have security submitted in lieu of bond including "a certified check, a cashier's check, a postal, bank or express money order, asignable bonds or notes of the United States, or an assignment of a bank savings account or investment certificate or an irrevocable bank letter of credit."

b. Minn. Stat. § 574.38 provides that whenever this chapter or other law or home rule charter requires a performance bond from a contractor doing a public work project of under $50,000 for a home rule charter or statutory city, county, town, school district or other local government authority, the contractor may be permitted to provide, in lieu of the bond, an irrevocable bank letter of credit in the same amount required for the bond and subject to the same conditions as the bond.

C. Bond Approval

1. Under Minn. Stat. § 574.20, county bonds are generally approved as to form and execution by the county attorney of the respective county.  The following items should be checked when approving a bond:

a. Name of the entity or "principal" providing the bond.

b. Name of the insurance company or "surety" providing the bond as insurance.

c. Name of the entity or county "obligee" to whom the bond is given.

d. Amount of the bond.

e. Duration of the bond.

 

2. The bond should then be checked for signatures.

a. The bond must be signed by the principal, which signature must be notarized under an Acknowledgement of Principal provision.  It should be noted that Acknowledgement of Principle is different for an individual or partners than it is for a corporate officer.

b. The bond must be signed by the insurance company or its representative.  A representative of an insurance company is called a resident agent and acts on behalf of the insurance company.

1) According to the principles of corporation law, only the president, the vice president, or in some cases the secretary of a corporation may create liability for the corporation.  Therefore, a bond, in order to be valid, must be signed by the insurance company's president, vice president, or secretary.

2) Since most corporate officers do not execute bonds, this responsibility is assigned to a resident agent of the corporation who acts through a Power of Attorney.  Most bonds are accompanied by a Power of Attorney indicating that the president of the company has declared some individual agent as having power to bind the company by signature on a bond.

3. It may be prudent to have a list of acceptable insurance companies, so that there is some assurance that the bond guarantor is legitimate and reliable and will not become insolvent.  See also Minn. Stat. § 574.30 for procedure when surety on bond become insolvent.

4. A bond sometimes indicates that it terminates on a certain date.  An insurance company may submit a Continuation Certificate in lieu of renewing an expired bond.  A Continuation Certificate must correctly state the name and number of the original bond and must have an appropriate signature from the insurance company upon which the county can rely.  It is generally held that a corporate seal, along with the signature of an executive officer, is sufficient to indicate legal validity of a document.  However, a Continuation Certificate accompanied by a Power of Attorney and the signature of the resident agent is also sufficient.

 

D. Action on a Bond

Pursuant to Minn. Stat. § 574.29, an action on a bond for the amount due may be maintained by any person entitled to protection of such bond.  In the event of a contractor/bidder's failure to perform, the following should occur:

1. The bonding company is put on notice of the county's demand under the bond for payment of monies owed by failure to perform on the part of the principal named on the bond.  The bonding company attempts to recover the monies from its principal, but when not possible, whould voluntarily forward the amount owing to the county.

2. Under Minn. Stat. § 574.31, no action on a bond shall be maintained by a claimant unless a written notice is filed within 90 days after completion of the contract and acceptance thereof by the public authority.  The notice must state the nature and amount of claim.  Notice is filed in the office of the Commissioner of Commerce for State contracts and in the county auditor's office for other municipal contracts.

3. An action on a bond may be brought in the county where the cause of action arose pursuant to Minn. Stat. § 542.12.

4. If the amount of a bond is insufficient to pay all claims, the amount is distributed pro rata.  Minn. Stat. § 574.29.