Surety Case Law Note: Declaration Of Default Must Be Clear – Obligee Whining And Complaining Is Not Enough
March 28, 2023
In this Surety Today Blog post we consider a Case Law Note addressing the issue of what is necessary to declare the principal in default. Spoiler alert: a whole bunch of whining and belly-aching is not enough. The case is:
DQSI, L.L.C. V. APC CONSTR., LLC, 2021-1256 (La. App. 1 Cir. 7/29/22), 347 So. 3d 928, 935–36, reh’g denied (Sept. 7, 2022), writ denied, 2022-01514, 351 So. 3d 364 (La. 12/6/22)
In this case, the bond provided the familiar requirement “Whenever Principal shall be, and be declared by Obligee to be in default under the subcontract, the Obligee having performed Obligees’s obligations thereunder . . . .” So, the bond required that there be a default and that the default be declared by the obligee. In this case, there were a lot of complaints and letters from the obligee, but not a clear declaration of default. So, let’s look at the facts. DQSI, the obligee, entered into a contract with the owner, Louisiana Coastal Protection and Restoration Authority (“Owner”), to build a rock dike. Obligee then entered into a subcontract with APC Construction (“APC”) to perform certain work. Aegis issued the bonds with APC. Eventually, the obligee filed suit against APC and Aegis alleging that APC failed to perform its work under the subcontract in a professional and workmanlike manner and did not timely complete the project. Aegis filed a motion for summary judgment and the trial court granted summary judgment and dismissed all claims against Aegis. The Obligee appealed.
The obligee offered hundreds of pages of documents including faxes and emails from the obligee to APC, with copies sent to Aegis or its representative, dated between December 13, 2016 and January 30, 2017, in which the obligee complained that APC was not performing in accordance with the contract documents. Fax correspondence to APC with a copy to Aegis, demanded that APC fully comply with the contractual specifications within the 20-day cure period set forth in Article 9 of the subcontract and demanded that APC comply with the subcontract terms. The obligee stated, “If the matter is not rectified[,] we will have no alternative but to seek all legal remedies including asserting a claim against the bond.”
A letter from Aegis’s agent to the obligee, dated January 25, 2017, acknowledged that in a phone call on January 23, 2017, the obligee stated that it “desired to assert a performance bond claim,” which Aegis considered its first notice of a claim by the obligee. The letter also stated “that DQSI was willing to ‘stand down’ on its claim, if [APC] provided DQSI with a sufficient plan to remedy the alleged default” which Aegis understood APC was prepared to do in a timely manner.
An email from APC’s attorney to the obligee showed that on January 25, 2017, APC submitted a revised work plan to the obligee. The next day, the obligee advised APC that even with the revised work plan, complained-of deficiencies and issues remained. According to the obligee, the revised work plan was likely to be rejected by the owner and, therefore, not satisfactory. The obligee stated, “Should APC fail to provide an acceptable plan to DQSI in a timely manner … APC will remain in default.” A copy of the email was sent to Aegis.
A few days later on January 30, 2017, the obligee sent a letter to APC, with a copy to Aegis, acknowledging that one of the complained-of deficiencies had been addressed but that the others had not. The obligee stated, “[T]his letter shall … serve as notice that APC continues to ignore the contract documents and improperly perform work and this is causing a situation that will require additional remedial work.” Making specific demands for APC’s performance, the obligee further elaborated, “If the matter is not rectified[,] we will have no alternative but to seek all legal remedies including asserting a claim against the bond.”
APC’s performances apparently improved because the next communication between the obligee and APC did not occur until months later after the filing of the certificate stating substantial completion on May 12, 2017. During the period between July 13, 2017 and July 26, 2017, the obligee and APC engaged in further acrimonious email correspondence in which APC requested payments from the obligee for APC’s performance under the subcontract, to which the obligee responded that nonconformity with the project specifications as well as APC’s failure to provide as-built surveys precluded processing of the payment requests. The as-built surveys were subsequently provided. In a July 25, 2017 letter from the obligee to APC, copies of which were provided to Aegis’s agent and attorney, the obligee issued a “Formal Notice” regarding failure to timely complete the punch-list items. The obligee stated, “If the matter isn’t rectified, DQSI will have no alternative but to complete the project [itself], at the expense of APC.” Correspondence regarding the punch list continued even after suit was filed.
The court noted that in the numerous communications from the obligee to APC for which Aegis and its agents received copies, every promise by the obligee indicating it intended to terminate or dismiss APC from the subcontract, or that the obligee intended to perform APC’s obligations, was conditional. Thus, the obligee failed to unequivocally express to either APC or Aegis that it regarded APC unable or unwilling to perform or that it was to be relieved from its obligations under the subcontract.
Additionally, the court noted that none of the communications advised Aegis that Aegis must immediately commence performing under the terms of the bond. While the January 25, 2017 letter from Aegis’s agent to the obligee showed that Aegis acknowledged that the obligee “desired to assert a performance bond claim,” it also conditioned its claim stating it was willing to “stand down” if APC undertook a remedial work plan, which the record established APC did. Additionally, the documents the obligee submitted showed that between January 30, 2017 and July 13, 2017, there were no complaints between the obligee and APC. Moreover, the nature of the obligee’s complaints relative to APC’s alleged material breaches after July 2017 changed. The obligee no longer had issues with APC’s failure to comply with the specifications, but instead complained that APC had failed to complete the punch-list items. This established that the nature of the alleged material breach was not the same as that made at the time of the January 25, 2017 letter. Thus, the January 25, 2017 letter from Aegis to the obligee could not support a finding that the obligee advised Aegis that Aegis must immediately commence performing under the terms of the bond.
Aegis asserted that it should be dismissed from this lawsuit because the obligee did not comply with the terms of the performance bond so as to support a claim against the surety. Pointing to the provisions of the bond, Aegis maintained that as a condition precedent to any obligation it may owe to the obligee under the performance bond: (1) APC must have been in default under its subcontract; (2) the obligee must have placed APC in default under the subcontract; and (3) the obligee must have performed its obligation under the subcontract.
The court noted that the bond did not define the terms “declare” or “default,” but it held that the term “declared in default” is unambiguous citing L & A Contracting Co. v. S. Concrete Servs., Inc., 17 F.3d 106, 111 (5th Cir. 1994). The court observed that “before a declaration of default, sureties face possible tort liability for meddling in the affairs of their principals. After a declaration of default, the relationship changes dramatically, and the surety owes immediate duties to the obligee.” The court held that “[a] declaration of default sufficient to invoke the surety’s obligations under the bond must be made in clear, direct, and unequivocal language. The declaration must inform the surety that the principal has committed a material breach or series of material breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of its bond.” Citing L & A Contracting Co., 17 F.3d at 111.
Accordingly, the court held that based on the evidence, it agreed with the trial court’s conclusion that summary judgment in favor of the surety was appropriate. The court believed that the obligee failed to clearly, directly, and unequivocally communicate to either APC or Aegis that the obligee regarded the subcontract with APC as terminated and failed to inform Aegis that Aegis must immediately commence performing under the terms of the bond.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321 or mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.