Generally, the surety will not become liable on a bid bond unless or until the contractor has the legal obligation to enter into the specified contract and subsequently fails to meet those obligations and requirements under the contract. In Jobco, Inc. v. Nassau County (1987), a contractor brought an action for rescission or reformation of a contract with Nassau County. In August 1985, Nassau County invited bids for the general construction of the proposed Mitchell Field Transit Facility. The plaintiff, a general contractor, submitted a bid accompanied by the requisite bond of 10% of the bid amount. After realizing the bid was submitted in error due to a clerical mistake, the plaintiff notified the County and requested rescission or reformation of the bid. The court held that a bid bond, which by its terms was required as assurance that the bid on the project was made in good faith, should not be forfeited by a contractor who is legally excused from entering into a contract due to clerical mistake in submission of the bid. The general rule is, if the contractor is awarded the contract based on its bid but refuses to execute the contract, the surety is liable to the owner. If a contractor makes an inexcusable error in its bid and refuses to perform, the surety becomes liable to the owner and the contractor may choose to forfeit its bond and become liable to the surety.
If a contractor is precluded from entering into a contract because of failure to meet a condition precedent, such as obtaining a performance bond, the surety may be held liable under the bid bond. In City of New York v. U.S. Fidelity and Guar. Co. (1983), the City of New York took action against a surety to recover on a bid bond after rescinding the acceptance of a bid for the lowest bidder’s failure to obtain the required performance bond. The court concluded that the city was entitled to the relief sought in the complaint and the interest thereon, and that a showing of actual damage to the City by the lowest bidder’s failure to comply was not necessary.
A surety’s liability is expressly limited to the amount set forth in the bond, also known as the penal sum, irrespective of the owner’s actual damages due to a failure to comply with the contract. Also, a surety that supplies a bid bond to a contractor is not obligated to provide performance or payment bonds on the same project, even if the surety’s failure to issue a performance or payment bond caused the contractor to lose its bid bond, as held in Travelers Indem. Co. v. Buffalo Motor & Generator Corp. (1977). Ultimately, the surety’s duties and liability are limited to the duties and liabilities set forth in the bid bond.