Opinion ID: 1427999
Heading Depth: 4
Heading Rank: 1

Heading: Adhesion and Unequal Bargaining Power

Text: Unlike the vast majority of insureds who must accept insurance on a take-it-or-leave-it basis, obligees decide the form of the bond which they will accept from the principal, thus they can require terms which provide an incentive to the surety to timely pay claims, such as attorneys' fees and interest. (Shattuck, Bad Faith: Does It Apply to Sureties in Alabama? (1996) 57 Ala. Law. 241, 246 (Shattuck); see Conners, supra, § 1.5, p. 8; Transamerica Premier v. Brighton School (Colo. 1997) 940 P.2d 348, 354 (dis. opn. of Kourlis, J.).) If the obligee does not agree with the terms of the bond secured by the principal, it may consent to a modification of the underlying contract or may end bargaining altogether and seek a different principal whose financial resources and qualifications enable it to procure a bond with acceptable terms. (See generally, Comment, Surety Contractors: Are Sureties Becoming General Liability Insurers? (1990) 22 Ariz. St. L.J. 469, 484.) Hence, obligees generally possess ample bargaining power to negotiate for favorable bond terms. Moreover, performance bonds typically incorporate the underlying construction contract, the terms and conditions of which have been negotiated by the principal and the obligee without any input from the surety. Because the nature and extent of a surety's obligations under a performance bond are determined with reference to such terms and conditions ( Ryan v. Shannahan, supra, 209 Cal. at p. 102, 285 P. 1045; Roberts v. Security T. & S. Bank, supra, 196 Cal. at p. 566, 238 P. 673), bonds do not reflect the adhesion and unequal bargaining power that are inherent in insurance policies. [16] Finally, many bonds, including the one at issue here, contain an express waiver of certain suretyship defenses, e.g., the right to notice of any alteration or extension of time made by the obligee. (See Civ.Code, § 2856; see Sobel, supra, 21 Cal. Western L.Rev. at p. 131 [In most bonds today sureties waive notice of alterations or extensions of time for performance given by the owner to the contractor.].) Such waivers may effectively deprive the surety of protection against potentially harmful contractual modifications by the obligee. (See Sobel, supra, 21 Cal. Western L.Rev. at p. 132.) Consideration of the foregoing factors leads us to conclude that, unlike an insurance policy, the typical performance bond bears no indicia of adhesion or disparate bargaining power that might support tort recovery by an obligee.