Rhode Island Superior Court Discharges Surety Due to Obligee’s Failure to Comply with Conditions Precedent in A312 Performance Bond

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By CharCretia V. Di Bartolo

Changes related to the COVID-19 crisis and the construction and surety industries are still occurring; some data in this article may have changed from the time of article submission and the publication date.

On June 30, 2020, the Rhode Island Superior Court issued a decision, Providence Builders, LLC v. Costa Brothers Masonry, Inc. and Travelers Casualty and Surety Co. of America, PC-2019-7689 (R.I. Super. June 30, 2020), in which it fully discharged an AIA A312 performance bond (Bond), declaring the bond to be null and void due to an obligee’s failure to comply fully with Sections 3.2 and 3.3 of the Bond. In doing so, the court followed the overwhelming precedent in other jurisdictions, which have held that the obligee’s obligations outlined in Section 3 of the Bond are conditions precedent that must occur before the surety is obligated to respond and that actions taken by the obligee that deprive the surety of its right to participate in and choose how the surety will satisfy its obligations under the bond discharge the surety “in toto.”

In Providence Builders, the plaintiff/obligee, Providence Builders LLC (PBLLC), was the construction manager for a project known as The Commons at PVD Station located in Providence, RI (Project). PBLLC subcontracted with the defendant/principal, Costa Brothers Masonry, Inc. (Costa), to perform certain masonry work on the Project. Travelers Casualty & Surety Company (Travelers) issued an A312 performance bond (2010 form) with Costa as principal and PBLLC as obligee. 

PBLLC notified Costa and Travelers of a potential default pursuant to paragraph 16.2 of the subcontract and requested a conference pursuant to Section 3.1 of the Bond. At the Section 3.1 meeting, both PBLLC and Costa complained about each other’s performance on the Project. Nevertheless, both PBLLC and Costa agreed to continue to work together to complete the Project. After the Section 3.1 meeting, conflicts continued between PBLLC and Costa. There were numerous communications between PBLLC and Costa regarding Project issues, on which the parties copied Travelers; and PBLLC issued several 24-hour notice letters to Costa. PBLLC, however, did not terminate Costa and instead hired a replacement subcontractor to complete Costa’s work. PBLCC finally defaulted and terminated Costa but only after the replacement mason had completed Costa’s work. PBLLC filed suit against both Costa and Travelers two days after terminating Costa. 

On cross motions for summary judgment, the court agreed with Travelers that the obligations stated in Sections 3.2 and 3.3 of the Bond, which require default, termination, notice of termination, and a pledge by the obligee to pay the contract balance to the surety, were clear and unambiguous conditions precedent to Travelers’ obligation to act. Although PBLLC complied with Section 3.1, the court held that it failed to comply with Sections 3.2 and 3.3, thus fully discharging Travelers. Although PBLLC did eventually terminate Costa, it did so only after Costa’s work was completed by a replacement contractor and, therefore, was “far too late” for Travelers to exercise its rights under the Bond. By failing to default and terminate Costa and “deciding to go it alone in hiring [the replacement contractor] to complete the masonry work, the plaintiff extinguished Travelers’ contract rights and eliminated its options to protect itself.” With respect to Section 3.3, the court noted that the obligee’s half-hearted attempt to offer to pay the contract balance for the first time in its objection to Travelers’ motion for summary judgment was “insufficient compliance” with this paragraph. The court went on to state that “the bond is, therefore, crystal clear that only when [PBLLC] has satisfied all of the conditions of Section 3 is the surety—that is Travelers—required to take action.” The court discharged the Bond “in toto.”

In rendering its decision, the court found PBLLC’s counterarguments “unavailing and unpersuasive.” First, the court dismissed PBLCC’s argument that it had merely hired the replacement mason to supplement Costa’s work, not to replace Costa. The court reviewed the various potential contract provisions in detail that would have allowed PBLLC to supplement Costa’s work and found that either those provisions did not apply or that Costa failed to invoke them. In the end the court held that it was clear, based on the facts, that PBLLC had in fact hired the replacement mason to complete Costa’s work and cited to a concession by PBLLC’s counsel during oral argument to that effect to support her conclusion.

The court also quickly disposed of PBLLC’s suggestion that Travelers was required to show prejudice resulting from its own failure to comply with Section 3.2. The court noted that the Bond itself, in Section 4, clearly states otherwise, finding again that the Bond was “crystal clear that no prejudice is required for a failure to comply with Section 3.2.”

Finally, the court noted that there was insufficient evidence that Travelers even knew that a replacement contractor had been hired, as PBLLC argued. More significantly, the court held that “even if Travelers had the knowledge that plaintiff claims, that would not excuse plaintiff’s strict compliance with Section 3 before Travelers’ obligations would ripen.” 

The court also denied plaintiff’s cross motion for summary judgment. In its motion, PBLLC argued that certain alleged conduct of Travelers breached the covenant of good faith and fair dealing. According to its motion, this conduct included recommending attorneys to Costa, providing advice to Costa on plaintiff’s breach of the subcontract, and discussing Costa’s plan to file a mechanics’ lien. PBLLC urged the court to find that Travelers had colluded with its principal to undermine its efforts to complete the work and that Travelers had never truly intended to comply with its obligations under the Bond. 

Citing to Travelers own brief and argument, the court held that it is “not improper for Travelers to communicate or even to coordinate with its principal–that is, Costa. Moreover, nothing overrides the clear and unambiguous terms of the contract. Intent is not an issue here. And this case rises and falls on the parties’ clear and unambiguous contract terms.” The court went on to hold that the plaintiff’s cross motion failed because the claim for breach of the covenant of good faith and fair dealing is not an independent cause of action and requires a breach of the underlying contract. Here, because PBLLC failed to comply with the conditions precedent, PBLLC, and not Travelers, breached the Bond.

The court’s decision in Providence Builders strongly affirms the clear and unambiguous language of the A312 performance bond that the surety’s obligations arise only after the obligee complies with the conditions precedent stated in Section 3. The decision also confirms that the obligee must strictly comply with these conditions before the surety is required to take any action. Obligees should take note that any actions that deprive the surety of its right to choose how it will respond under the Bond will result in a discharge of the surety. 

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CharCretia V. Di Bartolo

CharCretia V. Di Bartolo, a partner at Watt, Tieder, Hoffar & Fitzgerald, LLP, has represented sureties and their principals in construction disputes in New England for over 25 years. She has extensive experience with both commercial and contract bonds. She practices out of the firm’s Boston and Rhode Island offices. Di Bartolo can be reached at cdibartolo@watttieder.com or 857-504-1140.