Performance Bond Surety Not Liable if Underlying Contract Was Not Terminated

A modular construction subcontractor provided a performance bond to the prime contractor in the AIA form A312-2010. The GC later claimed that the modular sub failed to properly perform its work, including “that more than 260 windows were leaking and the exterior of the modules were misaligned.”

The GC issued several notices of default to the sub and its surety, and eventually claimed that it had incurred more than $2.8 million in costs to other subs to correct the modular sub’s work. The the modular sub’s contract was never terminated, but the GC made a demand on the sub’s performance bond.

The performance bond surety, Arch Insurance Co., sought a court order that it had no obligation under the performance bond, since the bond principal’s subcontract had not been terminated.

A Massachusetts Federal District Court judge has agreed with Arch. Even if there were valid reasons not to terminate the subcontract, the bond clearly stated that the surety’s obligations would only arise after certain steps, including termination of the bonded subcontract.

The GC argued that the condition of termination only applied if the surety was being called upon to complete the work, and would not apply where the GC sought recovery of costs instead of completion. The court did not agree:

Here, this Court concludes that the Performance Bond clearly and unambiguously imposes conditions precedent which must occur before Arch is required to perform any of its obligations thereunder. Several other courts interpreting analogous language, including another Session of this Court, have concluded likewise.

The judge was following the prevailing line of cases interpreting and applying the performance bond language. Regardless of the modular sub’s performance, or failure to perform, its performance bond surety was off the hook since the GC did not terminate the subcontract prior to making demand on the surety.

The case is Arch Ins. Co. v. Graphic Builders LLC, 2021 U.S. Dist. LEXIS 27017 (D. Mass., Feb. 12, 2021) (paywall).