GC barred from recovering from the surety for damages allegedly incurred due to faulty work of subcontractor because it failed to meet the conditions precedent to the performance bond responsibility.  The surety bond expressly provided that obligations of the surety only arise after the subcontractor is declared to be in default and is, in fact, terminated.  In this case the GC failed to terminate its Sub but instead hired other subcontractors to complete the allegedly defective work and then sent the surety firm an invoice for the costs.  Federal District Court granted the declaratory judgment for the surety firm, holding that the bond was clear and unambiguous concerning the condition precedent and the surety owed no duty unless the subcontractor was terminated – which the GC chose not to do.  Arch Insurance  Co. v. Graphic Builders, LLC, 2001 WL534807 (U.S. D.C, Mass. 2021).

The subcontractor in this matter was R.C.M. Modular Inc. (“RCM”).  The GC was The Graphic Builders LLC (“TGB”), which had a prime contract to construct apartment buildings.  It subcontracted RCM to do certain modular construction work.  Arch Insurance provided a performance bond covering RCM’s work on the project.  That surety agreement bound Arch and RCM to perform the contract for TGB, and provides that the surety’s obligations arise on after (1) TGB “provides notice to [RCM] and the Surety that [TGB] is considering declaring a Contractor Default….” And (2) TGB “declares a Contractor Default, terminates the Construction Contract and notifies the Surety….”

Shortly after RCM fabricated and installed its modular units TGM complained that the exteriors of the modules were misaligned and 260 windows were leaking.  Despite those defects, however, TGB didn’t terminate RCM but instead unilaterally arranged for various third-party subcontractor’s to remediate RCM’s work at a cost of more than $2.8 million.  TGM subsequently sent the surety a demand to indemnify it for the remediation costs.   Only when the surety refused to pay did TGM months later send letters to the surety stating that TGM was considering declaring RCM in default.

A year after the remediation work had been performed by others, TGM still had never declared RCM to be in default, but TGM sent the surety a letter declaring RCM in default but at the same time stating that TGB was “not yet terminating is subcontract with RCM.”  The surety responded with a written letter to TGB refusing the request for indemnity payments, and this litigation was subsequently filed by the surety seeking declaratory judgment that it owed no duty to TGB.  The surety filed a summary judgment motion on the basis performance bond unambiguously provided conditions precedent to the obligation to perform under the bond agreement and TGB failed to meet those conditions.  TGB argued that the conditions did not apply in this matter.  The court granted the surety’s motion for the reasons explained herein.

The court cites other numerous court decisions in the state that considered analogous language in performance bonds and concluded that the bonds establish specific conditions that must be satisfied before the surety owes any duty.  Applying the identical surety bond language in another case, the court there stated “Compliance with the conditions precedent … is necessary in order to invoke the surety’s obligation under the performance bond and failure to do so is fatal to the obligee’s claim for coverage.”

Here, the court concluded that the bond clearly set forth the condition that TGB must terminate its subcontract with RCM to obligate the surety’s performance.  Since TGB indisputably failed to terminate the subcontract, the court finds it breached the Performance bond and that the surety must be discharged from any and all liability related to the bond.


About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 23, No. 3 (May 2021).

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