Partial termination and proper notice is contested

Lawsuits are nothing new in construction insurance or surety, but some of them have novel twists.

Such as a partial termination of a subcontractor by a prime contractor. And a countersuit by a surety against a contractor. One recent project had both.

Hunt Construction Group, now known as AECOM Hunt, has tried unsuccessfully to tap a performance bond for a mechanical subcontractor that Hunt replaced in 2016 on the new, 37-story Fairmont Austin Hotel in Austin. Liberty Mutual refused the claim, Hunt sued in April 2017 in federal court in Austin and Liberty Mutual countersued.

However, Liberty Mutual’s countersuit failed to muster in court, with a federal judge in Texas ruling against the surety.

The countersuit ran afoul of Texas law, noted Justice Andrew Austin, because state laws prohibit a surety from bringing a breach-of-contract suit against the would-be bond beneficiary.

Austin ruled that Liberty Mutual’s argument that Hunt had breached the performance bond contract was a “logical impossibility.” As a beneficiary of the bond, Hunt had no obligation to Liberty Mutual, so there could be no breach of contract. In addition, language in the bond contract itself prohibited Liberty Mutual from suing Hunt, Austin noted in this decision.

“A party that takes on no affirmative obligations under an agreement obviously cannot be sued for breach of the agreement—it is logically impossible for a party to breach a contract that imposes no obligations on that party,” Austin wrote. “This conclusion makes even more sense here, where Liberty concedes that it has not paid one cent to anyone under the performance bond.”

However, the collapse of Liberty Mutual’s countersuit in federal court is just the latest chapter in a spirited, 18-month legal battle.

Austin’s largest hotel opened in March after a series of delays related to a dispute between Hunt and one of its key contractors, Cobb Mechanical Contractors.

Cobb was in charge of installing the plumbing and mechanical systems in the new luxury tower when Hunt pulled it from part of the job in Nov. 2016. Hunt argued the subcontractor had not been able to hire enough workers, causing delays, and that Cobb’s work was subpar.

Hunt hired a replacement sub and filed a $27-million lawsuit against Cobb seeking damages. The contractor has also named Liberty Mutual, which refused to pay out under the performance bond, as a defendant on the suit.

However, in a counterclaim filed in federal court, Liberty Mutual contended Hunt violated a number of conditions of the performance bond inked in August 2015, including unilaterally hiring a new subcontractor to complete Cobb’s work.

Liberty Mutual issued a subcontract performance bond agreement, naming Cobb Mechanical Contractors the principal and Hunt as the obligee, meaning it would receive the money in case of a default by Cobb on the nearly $31-million subcontract.

Under the bond agreement, Hunt was required to declare Cobb in default and give Liberty Mutual an opportunity to remedy the default, lawyers for the surety argued in a federal court filing. This included making available to Liberty Mutual the “balance of the subcontract price.”

Failing to Provide Proper Notice of Default

Instead, Liberty Mutual argued, Hunt improperly declared a “partial termination” – which took Cobb off one part of the project and kept it on another – and failed to provide a “proper notice of default and opportunity to cure to the subcontractor.”

“The Surety (Liberty) has suffered and continues to suffer substantial damages as a direct result of this material breach of Hunt’s obligations under the Bond,” attorneys for the Boston-based surety wrote.

In a statement, Cobb Mechanical dismissed Hunt’s allegations about its performance and said it “looks forward to pursuing its counterclaim to full recovery in federal court.”

“AECOM Hunt’s choice to partially terminate Cobb from the smaller portion of the project was entirely wrongful, wasteful and unproductive,” the company stated.

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