U.S. District Court in Vermont Holds That Material Breach of Contract Required to Constitute Default Under Performance Bond So As to Trigger Surety Obligation and Commence Running of Statute of Limitations – Nonmaterial Breaches Preceding Abandonment Did Not Commence Running of Statute, So That Case Was Not Time Barred

John A. Russell Corp. v. Fine Line Drywall, Inc. and Acstar Insurance Co.
2008 U.S. Dist. LEXIS 13098 (D.Vt., February 21, 2008)

The United States District Court for the District of Vermont held that only a material breach of contract constitutes a default triggering the year-long period provided by 8 V.S.A. § 3663 for commencing an action.

In John Russell Corp., Subcontractor began work on the metal framing and gypsum drywall systems of a project in November 2003 and ceased work on November 10, 2004. Prior to beginning work, Subcontractor secured a performance and payment bond (the “Bond”) with Contractor as obligee. During the Fall of 2004, Subcontractor’s presence at the job site was sporadic. Daily work logs indicated that Subcontractor was absent from the job site on six occasions during September and October 2004, the periods of absence ranging from one to five days. After November 10, 2004, Subcontractor never returned to the work site. Contractor made repeated attempts to contact Subcontractor to determine whether it planned to complete performance of its obligations under the Subcontract. Subcontractor did not respond to any of those attempts and had no further communication with Contractor. By early December 2004, Contractor “suspected [that Subcontractor had] abandoned the project.”

The Bond provided for payment of up to $ 1,186,034 (the full amount payable to Subcontractor under the Subcontract) unless “the Principal [Subcontractor] shall well and truly perform all the work specified in said contract, and shall promptly make payments to all persons supplying the Principal with labor and materials in the prosecution of the work provided for in said contract.” The Bond also contained a time limitation provision: “[N]o suit or action shall be commenced hereunder after the expiration date of one year following the date on which Principal ceases work on said contract or the date on which final payment under the contract falls due, or the date on which goods and services were received by obligee, whichever occurs first.” Contractor filed a complaint on December 6, 2005, seeking payment from Surety under the Bond.
The District Court entered summary judgment against Surety on Contractor’s claim. Surety, in a Motion for Reconsideration, then challenged the District Court’s decision arguing that the Court erred when it held that only a material breach of the Subcontract constituted a default under the Bond, thus triggering the year-long period provided by 8 V.S.A. § 3663 for commencing an action – truncating the time within which Contractor had to file an action on the Bond.

Surety offered evidence of “Subcontract Change Order” documents submitted by Contractor. Based on these documents, Surety alleged that there were deficiencies in Subcontractor’s performance of its obligations under the Subcontract throughout 2004. Surety further contended that those documents demonstrated that Contractor was aware of and sought to correct Subcontractor’s deficient work “as early as March 2004” – and that these deficiencies, however minor, constituted a default under the Bond and triggered the year-long period provided by 8 V.S.A. § 3663. Surety itself never alleged deficiencies in Subcontractor’s performance before November 10, 2004, constituted a material breach of the Subcontract.

The District Court noted that the adoption of Surety’s interpretation would breed confusion, as based on its suggested expansive and unprecedented approach, the most inconsequential act or omission, if not in strict compliance with the contract, could trigger the year-long statutory period. Surety exemplified this point by arguing that a subcontractor’s failure to use enough fasteners on a segment of drywall could constitute a default. The Court found Surety’s suggested approach unreasonable, as it provided no minimum threshold, and would therefore cause parties to bicker endlessly about how many missing drywall screws or clips constituted a failure to “well and truly perform” – sending the suretyship relationship, already fraught with anxiety, into a state of near-existential uncertainty.

Holding that “a surety’s bond obligation is . . . triggered by the bonded contractor’s material default of its performance or payment obligations under the bonded contract,” the court found that Subcontractor neither materially breached nor repudiated its performance obligations under the Subcontract until after November 10, 2004. Accordingly, the time-limitation provisions in the Bond impermissibly truncated the year-long statutory period mandated by Vermont law. The District Court thus voided the offending provisions in the Bond, and upheld the grant of summary judgment to Contractor.

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