U.S. District Court in Puerto Rico, Applying Connecticut Law, Considers Application of Notice Requirements to Termination of Joint Subcontractors

Fed. Ins. Co. v. Empresas Sabaer, Inc.
2013 U.S. Dist. LEXIS 112930 (D.P.R. Aug. 9, 2013)

This action arose out of a surety’s claim for expenses incurred for correcting a subcontractor’s defective work. DTC Engineering and Constructors, LLC (“DTC”) and the U.S. Army Corps of Engineers (the “Corps”) entered into a contract for the design and construction of the Armed Forces Reserve Center at Fort Buchanan, located in Guaynabo, Puerto Rico. Federal Insurance Company (“Federal”) and DTC subscribed to a payment and performance bond as surety and principal, respectively, naming the government as obligee. DTC subsequently entered into a subcontract (the “Subcontract”) with Empresas Sabaer, Inc. (“Sabaer”) and BBS Developers, S.E. (“BBS”) (collectively the “Subcontractors”). The Subcontract provided that Sabaer was required to complete the work under Subcontract, while BBS was responsible for providing technical and economic support. United Surety and Indemnity Co. (“USIC”) and the Subcontractors, as surety and principal, respectively, subscribed to a payment and performance bond and named DTC as obligee. DTC assigned to Federal all of its rights emerging from the Subcontract and USIC’s bond.

Federal exercised its right to complete the Project and executed a takeover agreement with the Corps and DTC. On October 18, 2011, Federal notified Sabaer, USIC, and BBS of “deficiencies in the form of an incorrectly installed silt fence and concrete pads that were rejected by quality control.” On the same day, Federal informed Sabaer, USIC, and BBS that it “was considering declaring them in default of the Subcontract” and requested a conference with them to discuss completion of their contractual obligations. However, Federal sent the letter to Sabaer and BBS to their addresses listed on their performance bond, and not their addresses listed on the Subcontract.

On October 26, 2011, Federal sent Sabaer another letter expressing its desire to meet with representatives from Sabaer and USIC to discuss the allegedly uncured deficiencies. On November 10, 2011, Federal sent letters to USIC and Sabaer at their contractual addresses of record stating that Federal intended to formally terminate Sabaer for default pursuant to the Subcontract. On November 15, 2011, Federal formally declared Sabaer in default by letter addressed to USIC, providing Sabaer and BBS with carbon copies by mail. Federal then filed suit against the Subcontractors to recover $286,233.62 in expenses incurred to correct Sabaer’s deficient work. In defense, Sabaer contended that Federal never provided BBS with the contractually required notice prior to the termination for default because the correspondence was neither addressed to BBS nor sent to the address listed in the Subcontract. Both Federal and the Subcontractors moved for summary judgment.

To resolve whether Sabaer and BBS were properly notified, the Court first looked to the terms of the Subcontract. Under the “Subcontractor’s Failure to Perform” section, Federal could terminate for default the Subcontractors upon three days written notice of the Subcontractors’ failure to perform, unless the condition specified in such notice was eliminated within the three day period. Under the “Notice” section, the Subcontract stated that “[a]ll notices shall be addressed to the Parties at the addresses set out herein, and shall be considered as delivered when postmarked, if dispatched by registered mail, or when received in all other cases, including facsimiles.” “Parties” was a defined term in the Subcontract and included DTC, BBS and Sabaer. The address set out in the Subcontract for both BBS and Sabaer was 65 Infanteria Station, San Juan, Puerto Rico.

The Court then looked to the letters sent by Federal to determine whether they provided sufficient notice. The Court concluded that Sabaer received letters at the Infanteria Station address listed under the Subcontract, and thus had actual notice of Federal’s intent to terminate due to default. The Court, however, determined that no such notice was provided to BBS. The October 18th and November 15th letters were sent to BBS at the address of Calle Lepanto URB, El Alamein, San Juan, Puerto Rico. While this address was listed as BBS’s address on the performance bond, the Subcontract required that notice be sent to the Infanteria Station address.

Nonetheless, applying Connecticut law as was called for by the Subcontract’s choice of law provision, the Court held that Federal adequately notified BBS. The Court specified: “The contract plainly states that notice shall be provided to both BBS and Sabaer in writing at the Infanteria Station address on the Subcontract. Plaintiffs did not do this. Thus, the inquiry should cease, but Connecticut law holds otherwise.” The Court traced the history of Connecticut and Second Circuit jurisprudence on the matter, dating back to a 1914 Connecticut Supreme Court case holding that notice to one joint contractor sufficed as notice to a second joint contractor. The Court found that “BBS’s agreements with Sabaer and its actions during the life of the Subcontract reveal that it was inextricably intertwined with and reliant upon Sabaer” and that “Sabaer ostensibly performed all of the duties under the Subcontract.” Thus, consistent with Connecticut precedent, the Court held that notice to Sabaer conveyed notice to BBS with respect to matters affecting their joint obligation, irrespective of whether BBS actually received notice.

Further the Court found that Federal’s failure to send notice to BBS at the Infanteria Station address is overcome not only by Connecticut’s notice-to-one, notice-to-both rule, but also by the Subcontracts requirement that the Subcontractors subscribe to a performance bond in which the Subcontractor’s included a second address to which Federal sent notice. The Court found that in Connecticut, “[w]here the question whether proper notice was given depends on the construction of a written instrument or the circumstance are such as to lead to only one reasonable conclusion, it will be one of law, but where the conclusion involves the effect of various circumstances capable of diverse interpretation, it is necessarily one of fact for the trier.” Because the Subcontract contemplated submission of a performance bond, BBS provided its address at the Calle Lepanto location on the bond, and the bond was signed subsequent to the Subcontract, the Court concluded that notice was properly sent to that address. The Court reasoned that “no reasonable fact finder could conclude that notice was improper and the court must adhere to Connecticut’s interpretation of what constitutes proper notice.” Therefore, the Court determined notice was properly given and granted summary judgment in favor of Federal.

Jeffery R. Mullen

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