Rhode Island Court Holds Incorporated Subcontract Terms Regarding Termination Did Not Vitiate Obligation of Notice to Surety Under AIA A312 Performance Bond

Raito, Inc. v. Cardi Corp.
2010 R.I. Super LEXIS 61 (R.I. Super. April 10, 2010)

Cardi contracted with the State of Rhode Island for the construction of a new bridge over the Providence River on Interstate I-95. Cardi subcontracted with Raito to install a series of concrete foundation shafts for the bridge. With regard to the subcontract, Raito, as principal, and Western Surety Company, as surety, executed a standard AIA A312 performance bond.

Cardi alleged that Raito failed to perform its work in a timely and acceptable manner, resulting in delays to the Project and costs and damages to Cardi. Despite the alleged delays, Cardi never gave notice that it was considering declaring a default, nor did it attempt to arrange a conference with Raito and Western, but instead “back-charged” delay costs against amounts due to Raito for its work. Raito filed an action against Cardi to recover monies allegedly due. Cardi counterclaimed against Raito and Western for damages caused by Raito’s alleged failure to timely and effectively perform the work. Western moved for summary judgment, arguing that Cardi failed to issue a notice of default and failed to terminate Raito’s subcontract prior to filing the action, both of which Western alleged were preconditions to filing an action against Western.

As an initial matter, the Court held that Paragraph 3 of an unmodified AIA Performance Bond does create preconditions to a surety’s liability (i.e. (1) the Owner must notify the Contractor and the Surety that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety to discuss methods of performing the contract; (2) the Owner has declared a Contractor Default and formally terminated the Contractor’s right to complete the contract; and (3) the Owner has agreed to pay the balance of the contract price to the Surety or to a contractor selected to perform the contract).

However, the court determined that the bond at issue was a “modified” AIA performance bond, because the bond incorporated the parties’ subcontract, which contained language regarding termination. Specifically, Article IX(a) of the subcontract stated that, if the subcontractor was refusing or failing to diligently perform its work, the Owner, after providing notice and an opportunity to cure, could terminate the Subcontractor. Further Article IX(b) stated that, if the Owner decides not to terminate, the Subcontractor must continue the work and he and his sureties will be liable for any resulting damage.

The Court held that Article IX did not conflict with or negate Cardi’s obligations under Paragraph 3 of the performance bond. The Court noted that, if Cardi decided to terminate Raito as provided in Article IX(a), it was required to follow the conditions outlined in Paragraph 3 of the bond in order for Western to be liable. Further, the Court held that, although Article IX(b) provided that Western would be liable even if Cardi did not terminate Raito, action under Paragraph 3 was still applicable. Specifically, before the declaration of a default or termination, Cardi was required to notify both Raito and Western that it was considering declaring a default, hold a conference with both parties, and allow Raito an opportunity to cure its deficiencies. Similarly, under Article IX(a), the Court held that termination was only proper after notification of the deficiencies and an opportunity to cure.

In sum, the Court held that Cardi had the option to terminate Raito under Article IX(a) and take over construction or not terminate under Article IX(b) and “backcharge” Raito for its alleged deficiencies. Although Cardi ultimately decided not to terminate Raito, Cardi was not excused from complying with Paragraph 3 of the Bond and notifying Western that it deemed Raito to be untimely and improperly performing and allowing Western an opportunity to mitigate its damages. As such, the Court held that Cardi did not comply with a condition precedent when it failed to notify Western and hold a conference in accordance with Paragraph 3. Accordingly, the Court granted Western’s motion for summary judgment.

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