Surety Case Law Note: Discharge of the Surety Under the AIA A312
August 2, 2022
In this Surety Today blog post we will provide a Case Law Note to consider the issue of compliance with the bond terms, the right to supplement and discharge of the surety. Read on to learn more about the interplay between the bond terms and the right to supplement in the underlying contract.
INTERNATIONAL FIDELITY INSURANCE COMPANY V. AMERICARIBE-MORIARITY, JV, 192 F. Supp.3d 1326 (S.D. Fla. 6/22/2016)
The case involves the discharge of the surety as a result of Americaribe-Moriarity’s (“obligee”) failure to comply with the AIA A312 Performance Bond conditions precedence. The case also addresses the interplay between the surety’s rights under the performance bond and the obligee’s right to supplement and perform the work for the defaulting principal. The surety instituted the action with a declaratory judgment suit seeking a ruling that it was discharged because the obligee failed to satisfy the conditions precedent in the bond. Of course, the obligee asserted a counterclaim contending that IFIC breached the bond by failing to cure the default or arrange for performance. Both parties later then moved for summary judgment.
The obligee was the general contractor and IFIC bonded the subcontractor – Certified Pool Mechanics or “CPM”. CPM was contracted to perform pool work on the project. The facts with respect to notice are as follows:
- July 15, 2015 – the obligee sent a letter to CPM notifying that it was in default and they gave them three days of cure.
- August 17, about a month later, the obligee sent a letter to IFIC and CPM advising of delays, poor workmanship and making a demand for an A312 conference.
- August 20, three days, later, IFIC responded advising that it was investigating, requesting additional documents and information and advising the obligee not to complete the work without IFIC’s prior consent.
- September 2, the parties held the A312 conference.
- September 15, IFIC sent another letter advising that it was continuing its investigation, noting some issues that it had discovered with respect to the schedule, asking for additional information and once again advising the obligee that any attempt to complete the work without IFIC’s consent would be a violation of the bond.
- September 16 (One day later), the obligee obtained a proposal from another subcontractor to complete CPM’s work.
- September 17, (Next day), the obligee and the new subcontractor set a tentative start date for work which was to be 9/21.
- September 21 the obligee sent a letter to CPM and IFIC declaring a default, terminating CPM and demanding that IFIC perform.
- September 22 the obligee sent a letter advising IFIC that it intended to subcontract with the new subcontractor and
- September 23, the subcontractor began performing the work.
The obligee made some later attempts to provide additional notices, but the Court held that under such facts the obligee failed to give proper and timely notice to IFIC as required by the Performance Bond, failed to allow IFIC reasonable time to select a performance option and failed to give IFIC the additional seven days notice required under the Performance Bond. The Court noted that coordinating with the replacement contractor before meeting the requirements of the bond was a clear breach of the bond. I think everyone would agree that IFIC was given the “bum’s rush” here, but the obligee argued that under the terms of the subcontract with CPM, which was incorporated into the bond by reference, the obligee was entitled to employ other contractors to complete the work upon the default of CPM and that its actions were in compliance with the Subcontract.
In addressing this argument, the Court held that the Performance Bond and the Subcontract must be read together “harmoniously” in order to give effect to all terms and provisions of both contracts. The Court noted that where the obligee was required to give notice under both the Performance Bond and the Subcontract before it could undertake completion efforts, the surety was entitled to reasonable notice and was entitled to exercise its rights under the Performance Bond. The Court observed that the bond and the subcontract were not inconsistent, one did not modify or overrule the other. In concluding, the Court stated “[a]lthough the [obligee] may have had a right under the subcontract to hire a replacement subcontractor to complete the subcontract, it did not have the right to do so without first allowing IFIC an opportunity to exercise its rights under the Performance Bond.”
To address the interplay between the subcontract provisions and the performance bond provisions, the Court essentially reverted to the time-honored rules of contract construction. Thus, it is a generally accepted rule that when provisions of a contract appear to be in conflict, the court should attempt to reconcile those provisions, if possible. An interpretation of a contract which gives a reasonable, lawful and effective meaning to all of the terms is preferred to an interpretation which leaves a part unreasonable, unlawful or with no effect. How this interpretation of the performance bond and subcontract will play out in a given jurisdiction will depend in part on how that jurisdiction applies the incorporation by reference. In some jurisdictions when a document is incorporated by reference the two documents become as one and it is as if the surety is a party to the subcontract. In other jurisdictions, the incorporation by reference is more limited. So, that’s going to be an issue when you’re looking at this question of how do you determine whether the obligee can just supplement and complete work or whether they’ve got to comply with the bond terms. In addition, the terms of the bond and the subcontract will also figure heavily in the Court’s analysis, in particular the existence of notice provisions in both the bond and subcontract must be present.
Finally, as a practice pointer, the IFIC folks really did a good job in their communication, reminding the obligee that you can’t just jump off here and start completing the work, we’ve got rights under the bond and to do that, you’re going to be in violation of the bond and they did that in several of the communications, and I think that was an important factor as well and something that everybody should try to emulate, particularly when you have the A312 bond form.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.