Information Paper: Dual-Multiple Obligee Rider
Introduction
Construction contracts are usually in the form of a two-party agreement between an Obligee and a Principal, or between a Principal and a Subtrade. Periodically, a Surety may be presented with a request to add an additional Obligee(s) to the bond. The additional Obligee(s) is not a party to the contract and does not have the legal responsibility to perform the Primary Obligee's obligations under the contract. However, they do have a vested interest in the project being successfully completed and in these cases, it is common practice for a Surety to issue a Dual/Multiple Obligee Rider. The Rider is executed by all parties.
What is a Dual/Multiple Obligee Rider?
A Dual/Multiple Obligee Rider extends the benefits and guarantees of the bond to the additional Obligee(s).
The Rider provides the additional Obligee(s) with the same rights as the Primary Obligee (The project owner – the entity which has the contract with the Principal), provided that they agree to assume the Primary Obligee's obligations to the bonded Principal under the contract. It prevents each Obligee from being able to claim separately under the bond
Each additional Obligee is jointly and severally liable for the same obligations as the Primary Obligee under the contract.
Why is a Dual/Multiple Obligee Rider needed?
Whenever construction projects are heavily financed by lenders, especially if construction loans and subsequent long-term financing are granted on a non-recourse basis against the project, the lenders will seek to ensure that the project is completed in a timely and satisfactory manner and is ready for its intended purpose.
If the Primary Obligee were to default under the terms of the loan agreement, the lenders could be faced with a loss on their loan security, or the necessity of contributing significant sums of money to salvage the project. Therefore, lenders often require the Primary Obligee to assign its interest in the bonded contract and in the bond as security. The consent of the Principal and Surety may be required depending on the contract conditions. The assignment gives the lenders the ability to enforce the rights of the Primary Obligee against the Principal and Surety.
What other parties may have a vested interest in a construction contract?
Municipalities;
Crown Corporations; and
Land Developers.
How does a Dual/Multiple Obligee Rider work?
Contract bonds are issued in the names of those entities that are party to a written contract with the owner. The owner is the Primary Obligee and the contractor is the Principal. The Surety guarantees to the Obligee the due performance of the contract, by the Principal, in accordance with the conditions of the contract.
For a Dual/Multiple Obligee Rider to be issued, the risk is clearly defined and any potential new risks are mitigated by the rider. This ensure that the performance bond does not constitute a pure completion guarantee.
This rider makes performance of the Primary Obligee's obligations under the contract a necessary condition for any additional Obligees to be entitled to pursue a claim under the performance bond. In other words, any additional Obligees gain the benefit of the guarantee by the Surety under the performance bond. However, this benefit flows only with the strict condition that the obligations to the Principal under the contract like payment of monies for work performed have first been met by either the Primary Obligee, additional Obligees or both.
How is a Dual/Multiple Obligee Rider formatted?
The rider includes the following elements:
- The Surety's liability is limited to the penal sum of the bond and does not constitute an obligation to each Obligee.
- The rider restricts the Surety's obligation to the additional Obligees by affording them protection only if the Primary Obligee's contractual obligations to the Principal have been completely fulfilled.
- The Dual/Multiple Obligee Rider must be signed and sealed by the Surety, Principal, Primary Obligee and any additional Obligees for acknowledgment. It should then be attached to the bond making it an integral part of the Surety's obligation.
Summary
The Surety Association of Canada (SAC) recommends that if additional Obligees are to be added to a performance bond, the bond should be issued in a single Obligee format containing just the parties to the construction contract. The additional Obligees may then be added using the Surety Association of Canada standard Dual/Multiple Obligee Rider.