As our further remarks, it is useful to cite the case of Ulico Casualty Co. v. Atlantic Contracting & Material Co.[1] Atlantic Contracting & Material Co., v. Ulico Casualty Co.[2]. In this case, the Court examines the scope of the good faith clause in an indemnity agreement, and a principal’s ob ligation to indemnify a surety for payment of a claim that may not be covered by a surety bond. The Court concludes, on the facts of this case, that the surety’s payment of the obligee’s claim was a reasonable, good faith settlement based on the information made available to it at the time. Finally the court holds that the good faith standard allows the surety a discretion limited by the bounds of reasonableness, rather than by the bounds of fraud. It was further hold that the principal is bound by a reciprocal obligation of good faith and fair dealing, embedded within which is a duty to cooperate, and may not ignore, without peril, the surety’s pre-payment requests for information. Although a surety’s payment may not be included entirely in ‘labor and materials’ as covered by a payment bond where the repairs made by the obligee to the principal’s equipment add materially to the value o f that particular equipment, in this case the principal failed to inform the surety of the bond coverage issue and, after a diligent investigation and a considerable amount of time had passed, the surety reasonably and in good faith paid the obligee based on information in a Proof of Claim form indicating liability.

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[1] 822 A.2d 1267 (Md. App. 2003) (Special Court of Appeal Maryland, USA).

[2] No. 51 , Sept. Term, 2003 (US)

The above is part of an article...

ISSUES OF INDEMNITY IN ISSUING PERFORMANCE BOND:

Aziz Abdul Hussin, Universiti Sains Malaysia, Penang

Abstract

The exixtence of peformance bond in the construction contact is a must. But, before issuing the said bond, the issuing party (the bank or insurance company) need to be indemnified. There are several issues on this type of indemnity that needs to be highlighted, clarified and resolved. This article discusses the said matters in Malaysian legal perspective and practises.

Suggested Citation

Aziz Abdul Hussin. 2009. "ISSUES OF INDEMNITY IN ISSUING PERFORMANCE BOND:" ExpressO
Available at: http://works.bepress.com/aziz_hussin/1