DC Court of Appeals Holds Contractor’s Failure to Declare Subcontractor in Default and Provide Subcontractor’s Surety with Notice Before Taking Over Completion of Subcontractor’s Work Released Surety from Liability

Hunt Construction Group, Inc. v. National Wrecking Corporation
587 F.3d 1119; 2009 U.S. App. LEXIS 25909 (2009)

Plaintiff, Hunt Construction Group (“Hunt”), commenced an action against one of its subcontractors, National Wrecking Corporation (“National”) and against two sureties (the “Sureties”) on National’s performance bond. The Sureties argued that Hunt failed to give timely notice of default depriving the Sureties of a realistic opportunity to exercise their rights under the bond to cure National’s defective performance.

Hunt contracted with National to perform certain excavation work for construction of an Embassy Suites Hotel in Washington, D.C. National agreed to complete the work by February 12, 2004. At around the time the work was to be completed, Hunt learned that the work would be delayed because, Hunt alleged, National was understaffed and failed to keep pace with the construction schedule. Hunt incurred additional expenses in accelerating other trades to meet the overall project deadline. National completed its work, almost two months later, on April 6, 2004.

Hunt sued National for breach of contract and sued the Sureties for damages under the performance bond. Although Hunt knew that National’s work would be delayed in February 2004, it neither declared National in default nor notified the sureties that it believed National’s delays constituted a default under the subcontract. Instead, Hunt, without consulting the Sureties, chose to use other subcontractors to make up for National’s failed performance. Not until July 13, 2004, more than three months after National’s work was completed, did Hunt declare National in default and notify the Sureties of its potential claim.

The performance bond incorporates the AIA A311 language providing that: “Whenever Principal [National] shall be, and be declared by Obligee [Hunt] to be in default under the Subcontract, the Obligee [Hunt] having performed Obligee’s [Hunt’s] obligations thereunder: (1) Surety may promptly remedy the default…or (2) Obligee [Hunt] after reasonable notice to Surety may, or Surety upon demand of Obligee [Hunt], may arrange for the performance of Principal’s obligation under the subcontract.”

Hunt argued that the A311 language does not require notice as a condition precedent, such that lack of notice would bar recovery under the Bond, but rather that the obligation to give notice was a covenant such that the sureties would have to prove a breach and quantify their damages from the breach. The Court reasoned that the provisions of the performance bond that create the condition are “nonsensical without an understanding that the surety’s duties depend on the obligee’s declaring the principal to be in default and giving notice of the declaration to the principal and the surety.” The Court explained that should Hunt as obligee not be required to give notice to the surety, the explicit grant to the surety of the right to cure would become meaningless.

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