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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.

Fid. & Deposit Co. of Md. v. T

ravelers Cas. & Sur. Co. of Am., 2018 U.S. Dist. LEXIS 162265 (D. Nev., September 21, 2018)
Clark County School District (“CCSD”) hired Big Town Mechanical (“Big Town”) as general contractor to perform HVAC upgrades at five schools.  Big Town in turn hired F.A.S.T. Systems (“FAST”) to complete low-voltage work at the schools.  Big Town obtained performance bonds from Travelers Casualty and Surety Company of America (“Travelers”) and FAST obtained performance bonds from Fidelity & Deposit Company of Maryland (“F&D”).

Following FAST’s default on its subcontracts, F&D opted to complete FAST’s work and hired a substitute subcontractor, Perini.  In May 2012, Perini notified Big Town that it had “substantially completed” all of FAST’s work.  After Big Town refused payment, F&D filed suit against Big Town and Travelers in early 2013.  In May of 2013, CCSD rejected Big Town’s final payment application, stating that the project was incomplete and claiming there were significant defects in the work.  CCSD then sued Travelers seeking specific performance and liquidated damages for delay.  Travelers eventually settled CCSD’s suit but through its counterclaim sought reimbursement from F&D for its settlement plus costs expended to complete the project.

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.

Fed. Ins. Co. v. Empresas Sabaer, Inc.
2013 U.S. Dist. LEXIS 112930 (D.P.R. Aug. 9, 2013)

This action arose out of a surety’s claim for expenses incurred for correcting a subcontractor’s defective work. DTC Engineering and Constructors, LLC (“DTC”) and the U.S. Army Corps of Engineers (the “Corps”) entered into a contract for the design and construction of the Armed Forces Reserve Center at Fort Buchanan, located in Guaynabo, Puerto Rico. Federal Insurance Company (“Federal”) and DTC subscribed to a payment and performance bond as surety and principal, respectively, naming the government as obligee. DTC subsequently entered into a subcontract (the “Subcontract”) with Empresas Sabaer, Inc. (“Sabaer”) and BBS Developers, S.E. (“BBS”) (collectively the “Subcontractors”). The Subcontract provided that Sabaer was required to complete the work under Subcontract, while BBS was responsible for providing technical and economic support. United Surety and Indemnity Co. (“USIC”) and the Subcontractors, as surety and principal, respectively, subscribed to a payment and performance bond and named DTC as obligee. DTC assigned to Federal all of its rights emerging from the Subcontract and USIC’s bond.

Nova Crete, Inc. v. City of Elizabeth
2010 N.J. Super. Unpub. LEXIS 101 (N.J. Super. Ct. App. Div. Jan. 15, 2010)

The Court held that the consent of surety submitted by Nova Crete, Inc. (“Nova Crete”) did not comply with the bid specifications provided by the City of Elizabeth because its issuance was conditioned on an event other than the award of the contract to Nova Crete, and it therefore did not comply with the applicable New Jersey statute. Furthermore, this defect was material and could not be waived or cured. As a result, Elizabeth properly determined that Nova Crete was not the lowest responsible bidder on the project.