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A Texas Surety Bond is a three-party agreement between a principal, an obligee and a surety bond company. The principal is the party who is responsible for the bond obligation. This is typically a Texas individual or company who needs a license, permit, or other guarantee running to the state. The party receiving the benefit of the bond is the Obligee. For many Texas surety bonds, this is the state of Texas or one of their departments. The Surety is a third-party bond company that is providing a financial guarantee of the principal's obligation on the bond. Should the principal default on their obligation, a party can make a claim against the bond.
Should a claim be made on a Texas surety bond, the Surety will investigate the claim. If they are required to pay the claim, they may seek reimbursement from the principal under the indemnity agreement. Texas surety bonds provide a lot of value by allowing a damaged party to collect from a Surety without having to go through what could be a costly procedure of collecting from the principal. As a principal, Texas surety bond claims should be avoided at all costs.
Below is a list of some of the important laws pertaining to surety bonds in the state of Texas.
In Texas, a written indemnity agreement is not necessary for indemnification as Texas recognizes the common law of indemnity. However, a surety will prefer a written indemnity agreement to spending costs trying to prove oral agreements.
Texas provides a very broad Homestead Exemption from creditors. In fact, it is one of the most generous in the nation. Texas does not provide a limit on the value of the homestead protected from creditors. An urban homestead and up 10 acres of land can be excluded while a rural homestead and up to 200 acres of land can be excluded under Texas law. There are some exceptions to the Homestead Exemption such as mortgage holders, taxing authorities and home improvement companies. However, in most circumstances, they will be protected from surety bond companies. More details can be found under the Texas code Title 5.
Contingent payment clauses pose a significant risk to contractors and their surety bond companies. Texas does not treat Pay-if-Paid and Pay-When-Paid clauses the same.
Texas allows Pay When Paid clauses and assumes the clause is a timing mechanism. This means the contractor can be expected to be paid within a “reasonable” period of time. What is reasonable is always a matter of debate but the clause will not excuse a contractor from paying a subcontractor.
Texas allows Pay if Paid contract clauses. They are governed by Chapter 56 of the Texas Business Commerce Code. It is important to note that this code cannot be waived by contract. Any waiver is considered void. There are notable exceptions to pay if paid clauses in Texas which include:
The contingent payment code specifically excludes the following contracts:
(1) design services;
(2) the construction or maintenance of a road, highway, street, bridge, utility, water supply project, water plant, wastewater plant, water and wastewater distribution or conveyance facility, wharf, dock, airport runway or taxiway, drainage project, or related type of project associated with civil engineering construction; or
(3) improvements to or the construction of a structure that is a:
(A) detached single-family residence;
(B) duplex;
(C) triplex; or
(D) quadruplex.
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