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Construction Performance Bond Surety Relieved of Liability Because Bond Owner Did Not Provide Timely Notice of Default

A recent decision from the D.C. Circuit Court of Appeals provides notice to construction performance bond owners and sureties that a bond owner may forfeit its rights under a bond if timely notice of default is not provided to the surety. See Western Surety Company v. U.S. Engineering Construction, LLC, — F.3d —, 2020 WL 1684040 (April 7, 2020)  In this case, the appellate court affirmed a district court’s summary judgment decision dismissing claims against a surety under a construction performance bond because the surety had not received timely notice of a default and therefore was prejudiced by its inability to have an opportunity to cure the default.  

Subcontractor U.S. Engineering Construction, LLC (“U.S. Engineering”) contracted with sub-subcontractor United Sheet Metal for sheet metal work relating to the construction of a new South African embassy in Washington, D.C.  U.S. Engineering paid the premiums for a construction performance bond from Western Surety Company to ensure completion of United Sheet Metal’s work.  The parties entered into an AIA A312-2010 contract for the performance bond, which included a requirement under Section 3 for U.S. Engineering to provide Western Surety with notice if it considered declaring United Sheet Metal in default.  The bond did not explicitly state the required timing for such notice.

United Sheet Metal failed to perform under its contract and U.S. Engineering terminated its subcontract with United Sheet Metal without any prior notice to Western Surety.  In fact, U.S. Engineering waited more than eight months after terminating United Sheet Metal before notifying Western Surety of the default, which notification only occurred when it filed a notice of claim against the bond.

The district court granted Western Surety’s motion for summary judgment on the basis that timely notice was not provided under the bond.  In affirming that decision, the appellate court determined that U.S. Engineer’s delay precluded a claim under the bond.  Western Surety was harmed by the delay because “[b]y unilaterally completing United Sheet Metal’s remaining contractual obligations before notifying Western Surety, U.S. Engineering deprived Western Surety of its contractually agreed-upon opportunity to participate in remedying United Sheet Metal’s default.”  The appellate court concluded that, “because the bond expressly provides the surety with the opportunity to participate in curing the subcontractor’s default, we hold that it is a condition precedent to the surety’s obligations under the bond that the owner must provide timely notice to the surety of any default and termination before it elects to remedy that default on its own terms.”

This case serves as a reminder for construction companies and sureties to review and follow the terms of a bond before taking any actions to enforce it, and that timely notice may be required in order to give the surety an opportunity to cure the default, even if not the bond does not explicitly state a deadline for such notice.