Construction Rules Regarding a Surety Bond Contract

What are the rules of construction when it comes to a surety bond contract?

A surety bond contract is similar to a regular contract in that the standard rules apply. However, the case law with regard to surety bond contracts have been around for years, which lead to a slew of different rules that apply only in the surety bond contract realm.

Hopefully, we can construct for you a basic understanding of these different rules.

Contract

 

Strict Construction According to the Terms of the Contract

The first theory of construction is the one known as Strict Construction.  In this scenario, the courts do not attempt to interpret the document, but instead give effect to the exact terms used in the contract that is in dispute.  In Swift & Co v Jones, 135 Fed 437, the Judge stated that “He who would charge a surety for his principal’s breach of contractual duty must travel without deviation the way pointed out in the contract, however iron-bound it may be, for there is for the surety, in the enforcement of his bond, no equity not latitude beyond its strict terms.”

Further, in Dwight v Germanife Life Ins Co., 103 NY 341, the courts found that the doctrine of strict construction was well settled as to the parties to a contract.  The court held that the parties have a right as a matter of contract law to insert any lawful statement and conditions that they mutually agree upon, and which may be considered necessary to protect the interests of the parties.  The Court decided that other courts should be not be arbitrarily disregarding those condition when they are the result of unmistakable and deliberate agreement by the parties.

contract law with pen

 

The Supreme Court

The Supreme Court of the United States has provided that “Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy embodying the agreement of the parties.  For a comparatively small consideration, the insurer undertakes to guaranty the insured against loss or damage, upon the terms and conditions agreed upon, and no other; the insurer therefore, may justly insist upon the fulfillment of these terms.  If the insured cannot bring himself within the conditions of the policy, he is not entitled to recover for the loss.”  Imperial Fire Ins. Co. v. Co’os Co., 151 US 462.

Unintended Consequences of the Doctrine

The doctrine of strict construction is appealing in a variety of ways.  First, it provides for clarity in the understanding of documents and reduces the need forlitigation. Second, it draws a bright line in the sand so that everyone can know what the end result of the disputes are. Unfortunately, that is not all.  The idea of clarity is somewhat illusory. That’s because there are assumptions that each of us use in our daily communications – including the nonverbal. These assumptions are not in the document – unless expressly added by the contract drafter.  Thus, any ambiguities will not be construed according to the terms of strict construction.  Instead, the exact terms are enforced. These exact terms can lead to some crazy outcomes as the assumptions underlying those terms are NOT utilized.

Conclusion

The doctrine of strict construction has been used for a number of years when it  comes to the interpretation of surety bond contracts. In these situations, the court will read the contract and enforce it according to the terms therein. There is no adding of language or assumptions of other terms and conditions. Instead, the contract is enforced exactly as it is written and each party will therefore live with the results that follow from that interpretation.

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