DC District Court Finds Excavator’s Surety Not Liable Where Prime Contractor Delayed Notifying Surety of Excavator’s Default Until After Excavator’s Work Was Complete

Hunt Construction Group, Inc. v. National Wrecking Corp.
2008 U.S. LEXIS 27859 (D.D.C. Apr. 8, 2008)

The United States District Court for the District of Columbia discussed the split of authority on the issue of when a surety’s obligations are triggered under a performance bond, ultimately holding that a surety is liable only if timely notice is given of the obligee’s default, allowing the surety to exercise its options under the performance bond.

Hunt Construction Group (“Hunt”) was the prime contractor on a hotel construction project in Washington, D.C. National Wrecking Corporation (“NWC”) subcontracted with Hunt to perform excavation and other work on the hotel project. In April 2004, approximately five months after entering into the subcontract, NWC completed the work. Hunt alleged that NWC delayed in completing the excavation work, and as a result, Hunt was required to accelerate other parts of the work, so that it incurred costs in excess of $800,000 due to NWC’s delay.

In July 2004, more than three months after NWC completed the excavation work and was no longer on site, Hunt sent NWC a Notice, declaring it in default for its failure to perform the subcontract work diligently and for causing delays to the project. Hunt also wrote to NWC’s performance bond sureties, notifying them of NWC’s default and demanding that they arrange for performance of NWC’s obligations under the subcontract (which was not possible, because the work was complete). Consultants hired by the sureties to investigate Hunt’s demand attempted to contact Hunt on numerous occasions, but never information from Hunt regarding the status of NWC’s work.

At the end of January 2004, Hunt filed a suit against NWC in the United States District Court for the District of Columbia, eventually adding the Sureties as defendants, alleging breach of their bond obligations. The Sureties filed motions for summary judgment. In considering the summary judgment motions, the Court framed the issue as not whether NWC delayed the project, but whether Hunt timely notified the sureties of NWC’s default so as to require that they remedy the default.

First, the Court identified the widely adopted rule that a surety’s obligations are measured by the terms of the bond. Accordingly, the Court examined the terms of the parties’ performance bond to determine when the sureties’ obligations were triggered.
In its analysis of the issue, the Court discussed the conflicting authorities on the issue. First, the court recognized the line of cases cited as support by the Sureties for their interpretation that the bond triggered the Sureties obligations only after NWC was in default and Hunt had declared NWC in default. These cases cited hold that actions of an obligee, such as Hunt, which deprive the Surety of its options to protect itself under the performance bond, render the performance bond null and void.

The Court also recognized the opposing precedent, relied upon by Hunt, which holds that a sureties’ liability is immediately triggered upon default of the principal/obligor, such as NWC, and is not conditioned on a declaration of default by the obligee, such as Hunt. The Court, however, declined to adopt this holding, reasoning that it would essentially turn the surety into a commercial guarantor.

Accordingly, the issue came down to whether Hunt gave the Sureties reasonable notice of NWC’s default as required by the bond. The Court specifically pointed to Hunt’s failure to do anything for an extended period after it knew that NWC would not complete the work on time. The Court held that Hunt failed to give the Sureties reasonable notice of NWC’s default, and, therefore, the Sureties liability was never triggered.

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