Whiting-Turner Contracting Co. v Guar. Co. of N. Am. USA, 2019 BL 97923 (Colo. App. Mar. 21, 2019).

This construction dispute involved rights and obligations under a performance bond supplied for an office building construction project in Denver, Colorado.  Whiting-Turner Contracting Company was the general contractor, and it subcontracted Klempco Construction to construct an anchor system for the project’s underground parking garage.  Klempco provided performance and payment bonds for the project from Guarantee Company of North America USA (“GCNA”).  When Klempco fell behind schedule, it stopped paying its sub-subcontractors and directed Whiting-Turner to assume responsibility for its work and sub-subcontractors.

Continue Reading Colorado Court of Appeals Finds Contractor Satisfied Conditions Precedent Under Performance Bond

K-Con, Inc. v. Sec’y of the Army, 2018 U.S. App. LEXIS 31196 (Fed. Cir., November 5, 2018)

In September 2013 K-Con, Inc. (“K-Con”) entered into two contracts with the government to supply and construct pre-engineered metal buildings for a laundry facility and a communications equipment shelter.  The government issued both contracts using Standard Form 1449, entitled Solicitation/Contract/Order for Commercial Items.  The contracts’ terms did not contain any requirement to provide a performance or payment  bond.  Nor did they include FAR 52.228-15, which requires performance and payment bonds on construction contracts.

In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued.  K-Con initially refused but ultimately provided the bonds two years later.  The contracts were then adjusted to add the cost of the bonds.

K-Con submitted a claim under each contract for increases in costs for the two year delay, for a total value of $116,336.56.  The Contracting Officer denied the claim on the basis that the agreements were construction contracts, for which performance and payment bonds were mandatory pursuant to FAR 52.228-15, and that that provision was incorporated into the contracts pursuant to the Christian doctrine under which a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal regulations.  G.L. Christian & Associates v. Unites States, 312 F.2d 418 (Ct. Cl. 1963).  K-Con appealed to the Armed Services Board, which affirmed the denial of the claims.  K-Con then appealed to the United States Court of Appeals for the Federal Circuit.
Continue Reading Federal Circuit, Citing the Christian Doctrine, Holds That Performance and Payment Bonds Are Required for All Construction Contracts, Even When the Bonding Requirement Is Not Expressly Stated in the Contract

Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 111021 (D.S.C. July 18, 2017); Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 135948 (D. Kan. Aug. 24, 2017)

Two recent decisions from United States District Courts for the District of South Carolina and the District of Kansas, respectively, reached opposite conclusions when presented with the same issue:  Is a surety bound to arbitrate claims against it when the surety’s bond incorporates its principal’s contract by reference, and the principal’s contract contains an agreement to arbitrate disputes.  The District of South Carolina, applying South Carolina law, held that a surety is bound by the arbitration agreement in the incorporated contract, while the District of Kansas held that a surety is not so bound.

These cases both arise from an arbitration demand filed by the general contractor, Carothers Construction, Inc. (“Carothers”) against the surety, Developers Surety and Indemnity Company (“DSI”).  DSI issued performance and payment bonds on behalf of subcontractors Liberty Enterprises Specialty Contractor (“Liberty”) and Seven Hills Construction, LLC (“Seven Hills”) in favor of Carothers for their work on Projects located in South Carolina and Kansas, respectively.  Each subcontractor defaulted on its contractual obligations.  Carothers initiated arbitration against DSI regarding both Projects.  According to Carothers, the bonds incorporated by reference the subcontracts’ mandatory arbitration clauses and thus, DSI was subject to binding arbitration.  In declaratory judgment actions before Federal District Courts in South Carolina and Kansas, DSI asked the courts to declare that the arbitration clause did not bind it to arbitrate Carothers’ claims.  Each court reached the directly opposite conclusion.  This article discusses the decision reached by each court in turn.


Continue Reading When Surety Bond Incorporates the Subcontract by Reference, Is the Subcontract’s Arbitration Clause Also Incorporated? Federal Court in South Carolina Says Yes; Federal Court in Kansas Says No — In Two Matters Involving the Same Parties

King Cnty. v. Vinci Constr. Grands Projets/Parsons RCI/ Frontier-Kemper, JV, No. 92744-8, 2017 Wash. LEXIS 743 (July 6, 2017)

King County contracted with three construction firms (collectively, “VPFK”) to construct a tunnel.  The contract required substantial completion by November 14, 2010 (the “contract time”).  It also required VPFK to secure a performance bond from five surety companies, under which the sureties were to remedy any default in VPFK’s performance.

VPFK experienced difficulties with its tunnel-boring equipment and was unable to dig nearly as fast as estimated.  When it became clear that VPFK would not achieve substantial completion by the contract time, King County declared VPFK in default.  The sureties refused King County’s request for a cure, arguing that because the contract time had not passed, no default had yet occurred.

King County filed a breach of contract action against VPFK and the sureties, who denied coverage and adopted all of VPFK’s defenses.  A jury found in favor of King County and awarded nearly $130 million in damages.


Continue Reading Sharply-Divided Washington Supreme Court Holds That Sureties, Like Insurers, Must Pay Attorney Fees to Prevailing Parties When They Wrongfully Deny Coverage

Int’l Fidelity Ins. Co. v. Americaribe-Moriarty JV, 2017 U.S. App. LEXIS 3628 (11th Cir. Feb. 28, 2017)

Americaribe-Moriarty Joint Venture (“Americaribe”) entered into a subcontract with Certified Pool Mechanics I, Inc. (“CPM”) for construction of a pool in a mixed-use development that Americaribe was building in Miami, Florida. CPM provided a performance bond, issued by International Fidelity Insurance Company and Allegheny Casualty Company (collectively, “Fidelity”) as security for performance of the pool subcontract.  According to Americaribe, CPM failed to perform its obligations under the pool subcontract.  As a result, Americaribe terminated CPM, made a claim on the performance bond, and contemporaneously hired a replacement contractor (“Dillon”) to complete CPM’s scope of work.

In the event of default by CPM, the subcontract required three days’ written notice before undertaking completion of CPM’s work. The bond incorporated the subcontract by reference and also required a further, but undefined, period of time after CPM’s termination during which Fidelity could evaluate options for responding to CPM’s alleged default.  In the event that Fidelity did not conduct such an evaluation with reasonable promptness, Americaribe could declare a default by Fidelity upon seven days’ written notice.  Although Americaribe provided the written notices of default, it proceeded to complete CPM’s work with Dillon before the notice periods expired.


Continue Reading Eleventh Circuit Affirms Decision Under Florida Law Barring Contractor’s Performance Bond Claim for Failure to Comply With Notice Provisions in the Bond and in the Subcontract

Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company, 2015 U.S. Dist. LEXIS 57836 (W.D. Mo. May 4, 2015) 

In this opinion, the United States District Court for the Western District of Missouri (i) vacated its earlier order denying the surety’s motion for summary judgment (see earlier post) and (ii) held that the contractor’s failure to formally declare the sub-contractor in default precluded the contractor from recovering from the subcontractor’s performance bond surety.  The dispute involved the contractor, Curtiss-Manes-Shulte, Inc. (“CMS”) and Safeco Insurance Company of America (“Safeco”), who provided a performance bond to Balkenbush, CMS’s mechanical subcontractor.


Continue Reading Federal District Court in Missouri Holds Contractor’s Failure to Declare Subcontractor in Default Bars Recovery on Performance Bond (Earlier Decision Vacated)

Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company, 2015 U.S. Dist. LEXIS 10032 (W.D. Mo. 2015)

NOTE:  THIS DECISION WAS VACATED ON REHEARING AND THE DECISION ON REHEARING WILL BE THE SUBJECT OF A POST TO BE PRESENTED SHORTLY IN CONSTRUCTLAW.

This dispute between a general contractor and its subcontractor’s performance bond surety arose out of a renovation project at Fort Leonard Wood in Missouri.  On October 19, 2010, the general contractor, Curtiss-Manes-Schulte, Inc. (“CMS”), entered into a subcontract with Balkenbush Mechanical, Inc. to replace the air conditioning system on the project.  A week later, Balkenbush obtained the required performance bond from Safeco Insurance Company of American.

By October 2011, CMS knew that Balkenbush was behind schedule.  In July 2012, CMS responded to a Contract Bond Status Inquiry and informed Safeco that the contract was not complete, that Balkenbush’s work was not progressing satisfactorily, that the project was nine months late, and that liquidated damages would be assessed.  Around the same time, Safeco hired consultants and a law firm to investigate, defend and resolve claims made against four performance bonds Safeco issued to Balkenbush on other projects.  In December 2012, Safeco filed a lawsuit against Balkenbush to recover its losses resulting from the claims on the four other performance bonds.  One month later, in January 2013, Balkenbush filed a bankruptcy petition and Safeco’s counsel entered their appearance in that proceeding.


Continue Reading Federal District Court Holds that General Contractor’s Failure to Provide Notice of Default Does Not Preclude Recovery on Performance Bond

Milton Reg’l Sewer Auth. v. Travelers Casualty & Surety Co., 2014 U.S. Dist. LEXIS 155419 (M.D. Pa. Nov. 3, 2014)

The United States District Court for the Middle District of Pennsylvania ruled that multiple instances of incomplete and/or defective performance by a contractor did not amount to a material breach so as to excuse the owner from providing notice and an opportunity to cure prior to termination.


Continue Reading U.S. District Court in Pennsylvania Dismisses Owner’s Claim Against Performance Bond Surety – Repeated Instances of Poor Performance By Contractor Were Not So Material As to Allow Owner to Terminate Without Providing Cure Notice

Dooley & Mack Constructors, Inc., v. Developers Surety & Indemnity Company
2007 Fla. App. LEXIS 17769 (Fla. Ct. App. Nov. 7, 2007)
Dooley & Mack Constructors, Inc. (“Contractor”), the general contractor on a Miami-Dade Community College project, was the obligee on a performance bond issued by Developers Surety and Indemnity Company (“Surety”), on behalf of Buildtec Construction Group, Inc., the masonry subcontractor (“Subcontractor”). After Subcontractor defaulted by abandoning the job, Contractor completed the masonry work itself and sued the Surety for the resulting damages.

Continue Reading Florida Court Holds Notice of Default to Surety Not Required Where Subcontract Provision as to Rights on Default Was Incorporated in Bond

National American Insurance Company v. United States
No. 2007-5016, 2007 U.S. App. LEXIS 20058 (Fed. Cir. August 23, 2007)
The US Court of Appeals for the Federal Circuit upheld the lower court’s grant of a motion for summary judgment. The Court held that a payment bond surety is equitably subrogated to the rights of the contractor whose debt it discharges, and thus can pursue a claim directly against the government.
The case arose out of a contract between Innovative PBX Services, Inc. (“Contractor”) and the United States Small Business Administration (the “government”) for the replacement of a telephone system at the Department of Veterans Affairs Medical Center. The Contractor subcontracted part of the work to Nortel Communications Systems, Inc. (“Subcontractor”). As required by the Miller Act, the Contractor executed payment and performance bonds in favor of the government with National American Insurance Company (“Surety”) as the surety. After completion of the contract work, the Subcontractor notified the Surety that it was owed approximately $675,000 for labor and materials that the Contractor had failed to pay for. The Subcontractor then instituted a Miller Act claim under the payment bond against the Surety, which the Surety settled. The Surety also notified the government that no addition payments should be made to the Contractor in light of the Miller Act claim and requested that all remaining contract funds be held for the Surety’s benefit. The government, however, did not follow the Surety’s request and made its final contract payment to the Contractor. As a result, the Surety filed a complaint against he government seeking damages of $280,000.
Continue Reading Federal Circuit Court of Appeals Holds that a Payment Bond Surety that Discharges a Contractor’s Obligation to Pay a Subcontractor is Equitably Subrogated to the Rights of Both the Contractor and Subcontractor and May Bring Suit Directly Against the United States