Rhode Island Court Holds Notice of Default and Termination Prior to Completion a Condition to Claim on Subcontractor Performance Bond

Raito, Inc. v. Cardi Corp.
2010 R.I. Super. LEXIS 108 (RI Super. Ct. July 14, 2010)

The Superior Court of Rhode Island was recently asked to reconsider its earlier ruling in which it found that a condition precedent to recovery under a performance bond was not satisfied and, therefore, summary judgment in favor of the surety was warranted. The Court found no reason to disturb its prior ruling and denied the motion for reconsideration.

The Rhode Island Department of Transportation entered into a contract with defendant Cardi Corp. pursuant to which Cardi was to provide general contracting service in connection with the construction of a new arch-span bridge. Cardi retained the services of plaintiff Raito, Inc. to install certain concrete foundation shafts for the Project. Raito obtained from Western Surety Company a performance bond for the Project.

Cardi claimed that Raito failed to timely perform work in an acceptable manner and, as a result, Cardi back-charged Raito for delay costs during the four-year Project. Raito filed a lawsuit against Cardi for the unpaid subcontract balance. Cardi counterclaimed against Raito to recover delay costs and asserted a claim against the Surety under the Bond. The Surety filed a motion for summary judgment alleging that Cardi failed to put Raito and the Surety on notice that it was considering a default or to otherwise terminate Raito from the Project. The Court granted the motion based upon the failure of Cardi to satisfy a condition precedent. Following the Court’s ruling granting summary judgment in the Surety’s favor, Cardi filed a motion for reconsideration.

On reconsideration, the Superior Court concluded that its original ruling was appropriate. The Court opined that the clear language of the Bond provided that the Surety’s obligations under the bond did not come into effect unless and until Cardi terminated Raito from the Project. Because Cardi failed to terminate Raito, the Court determined that Cardi failed to satisfy a condition precedent to recovery.

The Court further noted that despite nearly four years of alleged poor performance by Raito, Cardi never issued notice to Raito that is was unhappy with its work or demanding that Raito take steps to cure its defective work. Citing the Bond and applicable case law, the Court rejected Cardi’s argument that the default notice issued after the Project was sufficient. The Court rejected the cases cited by Cardi because in those instances, the defects were not known until after the project was completed, therefore, default notice could not have been provided before completion. Because Cardi knew of the defects before the Project was completed and failed to provide notice of defects until after Project completion, the cited cases were distinguishable. By failing to provide notice, the Court concurred with the Surety that it was denied the opportunity to cure as provided by the Bond.

Cardi further argued that the Bond did not set forth a deadline for the notice of default. The Court, however, found that it had the power to impose “reasonable” deadlines in the absence of a specific deadline in the Bond. In setting a “reasonable” deadline, the Court looked at the length of the delay, reasons for the delay, and prejudice to the surety as a result of the delay. Taking these factors into account, the Court found that Cardi delayed notice for four years despite continually assessing backcharges during that time and as a result, the Surety was without the ability to limit its liability by curing the default. Therefore, the Court held that it was appropriate to deny Cardi recovery under the Bond because notice of default was untimely.

Finally, the Court rejected Cardi’s argument that the Court was imposing requirements on Cardi not provided for by the Bond. Citing language in both the subcontract and the Bond which required notice to be provided, the Court found that Cardi’s failure to provide notice deprived the Surety of its ability to limit liability and constituted a material breach of the Bond. Accordingly, by failing to adhere to the terms of the Bond, Cardi impaired the Surety’s options under the Bond.

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