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The construction industry has recently boomed, with the industry adding 20,000 jobs nationally in August, and employing 6.1 million Americans, the highest number since May 2009.

Accordingly, with construction loans on the rise and performance and payment bonds securing most construction projects, it is important to understand the legal rights of all concerned.

Take, for example, the following scenario:

Suppose a contractor has been awarded a contract to build a hotel for $5 million. The owner required the contractor to post a bond in the amount of $5 million. The contractor purchased the required bond from the surety. In exchange for providing the bond, the surety requires the contractor to sign an indemnity agreement, which, among other things, requires the contractor to indemnify or reimburse the surety for any loss it might sustain under the bond. Additionally, the contractor procures a $4-million loan from the bank to complete the project, which is secured by a blanket lien on all of the contractor’s assets. It turns out that the contractor cannot complete the job due to cash flow and liquidity constraints. The owner paid $3 million to the contractor; the bank has been repaid $2 million, but there is a balance of $2 million due to it. The surety is required to complete the job at the cost of $2 million. Who is entitled to the $2 million that the owner still owes on the project?

Click here to read the full article "When a Contractor Defaults, Who Has Priority? Surety or Bank?," in the Turnaround Management Association's Turnaround Times September/October 2014 edition.

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