W. Sur. Co. v. U.S. Eng'g Constr., LLC

• Decision Date: 07 April 2020
• Docket Number: No. 19-7033,19-7033
• Citation: 955 F.3d 100
• Parties: WESTERN SURETY COMPANY, Appellee v. U.S. ENGINEERING CONSTRUCTION, LLC, Appellant
• Court: U.S. Court of Appeals — District of Columbia Circuit

955 F.3d 100

WESTERN SURETY COMPANY, Appellee

v.U.S. ENGINEERING CONSTRUCTION, LLC, Appellant

No. 19-7033

United States Court of Appeals, District of Columbia Circuit.

Argued January 9, 2020

Decided April 7, 2020

Stephen B. Sutton, pro hac vice, argued the cause for appellant. With him on the briefs were Adam S. Caldwell and Patrick J. Curran, Jr., Washington, DC.

Thomas J. Moran argued the cause and filed the brief for appellee.

Before: Pillard and Katsas, Circuit Judges, and Sentelle, Senior Circuit Judge.

Sentelle, Senior Circuit Judge:

Western Surety Company ("Western Surety") brought this action against U.S. Engineering Construction, LLC ("U.S. Engineering") in the district court seeking declaratory and injunctive relief regarding its potential liability under a construction performance bond. Western Surety moved for summary judgment asserting that its obligations under the bond were discharged because U.S. Engineering failed to comply with a condition precedent, thereby relieving Western Surety of any liability. The district court granted Western Surety’s motion. U.S. Engineering filed the instant appeal. For the following reasons, we affirm the district court’s grant of summary judgment.

I.

Turner Construction Company ("Turner"), not a party to this action, contracted with the Republic of South Africa to construct a new South African embassy in Washington, D.C. On January 25, 2012, Turner and U.S. Engineering, the appellant in this case, entered into a subcontract in which U.S. Engineering would complete a range of work on the embassy. On February 15, 2012, U.S. Engineering and United Sheet Metal, also not a party to this action, entered into a subcontract in which United Sheet Metal would complete work on the embassy related to the installation of sheet metal.

The contract price for the U.S. Engineering and United Sheet Metal subcontract was $585,000. U.S. Engineering also paid $7,940 in premiums to obtain a construction performance bond from Western Surety, the appellee in this case, in which Western Surety and United Sheet Metal jointly and severally bound themselves to ensure the work under the U.S. Engineering and United Sheet Metal subcontract was completed. This performance bond is the subject of the underlying dispute.

By agreement of the parties, the bond form used was the American Institute of Architects ("AIA") Document A312-2010 bond form, a standardized form commonly used in the construction industry. The bond refers to United Sheet Metal as the "Contractor," U.S. Engineering as the "Owner," and Western Surety as the "Surety." J.A. 144.

Section 3 of the bond outlines what must occur to trigger Western Surety’s obligations in the event that United Sheet Metal is in default and the subcontract is terminated. Under section 3.1, U.S. Engineering must first provide notice to United Sheet Metal and Western Surety that it is considering declaring United Sheet Metal in default. If U.S. Engineering fails to provide such notice, section 4 excuses that failure except to the extent that Western Surety demonstrates actual prejudice. Under section 3.2, if U.S. Engineering officially decides to end its contractual relationship with United Sheet Metal, it must

declare[ ] a Contractor Default, terminate[ ] the Construction Contract and notif[y] the Surety.

J.A. 145. Section 3.3 provides that U.S. Engineering must also agree to pay the balance of the contract price to Western Surety or to a contractor selected to perform the subcontract.

Under section 5,

[w]hen the Owner has satisfied the conditions of Section 3, the Surety shall promptly and at the Surety’s expense take one of the following actions:

§ 5.1 Arrange for the Contractor, with the consent of the Owner, to perform and complete the Construction Contract;

§ 5.2 Undertake to perform and complete the Construction Contract itself, through its agents or independent contractors;

§ 5.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract ... and pay to the Owner the amount of damages as described in Section 7 in excess of the Balance of the Contract Price incurred by the Owner as a result of the Contractor’s Default; or

§ 5.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, make payment to the Owner; or

.2 Deny liability in whole or in part and notify the Owner, citing the reasons for denial.

J.A. 145.

While working to complete the embassy, the parties began to encounter problems caused by United Sheet Metal. On February 6, 2013, Turner sent a formal notice to U.S. Engineering stating that any additional costs incurred from delays caused by U.S. Engineering and its subcontractors—namely, United Sheet Metal—would be back charged to U.S. Engineering. Turner highlighted that United Sheet Metal "lack[ed] materials, manpower, and completely ignore[d] direction given to them by U.S. Engineering Company or Turner." J.A. 201.

U.S. Engineering forwarded those concerns to United Sheet Metal in a "formal ‘notice to correct’ " letter, advising United Sheet Metal that it had "failed to comply with its obligations under the Subcontract" and that the company had "72 hours [to] demonstrate performance improvement." J.A. 202. Nevertheless, the problems persisted. Finally, on September 9, 2013, U.S. Engineering formally terminated its subcontract with United Sheet Metal.

The parties do not dispute that U.S. Engineering declared United Sheet Metal in default and terminated the subcontract. Nor do they dispute that U.S. Engineering failed to notify Western Surety that it was considering declaring United Sheet Metal in default and terminating the subcontract. In fact, the record is clear that U.S. Engineering did not notify Western Surety of the default and termination until June 9, 2014, when it sent a notice of claim against the bond, nearly nine months after the termination occurred. On June 13, 2014, Western Surety acknowledged receipt of the letter.

In the meantime, United Sheet Metal and U.S. Engineering began arbitration to settle various disputes related to the termination of the subcontract. On March 4, 2015, U.S. Engineering attempted to join Western Surety in that dispute. In response, Western Surety brought this action in the district court. In Count I, Western Surety sought declaratory relief that it was "not required to arbitrate any disputes or controversies regarding its rights, liabilities, or obligations under the Bond." Complaint at 11, W. Sur. Co. v. U.S. Eng’g Co. , No. 15-cv-0327-TSC (D.D.C. Mar. 6, 2015). In Count II, it sought injunctive relief "prohibiting U.S. Engineering from participating in any arbitration proceedings which purport to determine or affect Western Surety’s rights, liabilities, or obligations under the Bond." Id. Finally, in Count III, it sought declaratory relief that its obligations under the Bond had been discharged, "rendering the bond null and of no further force or effect." Id. On this third count, Western Surety specifically maintained that U.S. Engineering did not have a right to make a claim under the bond because of its "extreme delay in providing notice to Western Surety of United Sheet Metal’s alleged default and termination." Id. at 10.

Western Surety moved for summary judgment on the first two counts. The district court granted the motion, leaving only the question of whether Western Surety’s obligations under the bond had been discharged by U.S. Engineering’s failure timely to comply with the notice provision of section 3.2. U.S. Engineering then filed its answer, asserting that section 3.2 required it only to provide notice of the default and termination without any specific time limitation. U.S. Engineering thus argued that Western Surety was obligated to perform under section 5 of the bond.

On March 2, 2017, Western Surety filed a new motion for summary judgment on its remaining claim and U.S. Engineering’s counterclaims. The district court granted Western Surety’s motion on all claims. The court held that, "although Section 3.2 [of the bond] does not explicitly state that U.S. Engineering must notify Western Surety within a certain amount of time, the explicit grant to Western Surety of a right to remedy the default necessarily implies that timely notice is required to trigger Western Surety’s obligation under the Bond because Section 5 operates only if timely notice is given." W. Sur. Co. v. U.S. Eng’g Co. , 375 F. Supp. 3d 1, 6 (D.D.C. 2019) (emphasis added). Specifically, the district court relied on this court’s decision in Hunt Construction Group v. National Wrecking Corporation , 587 F.3d 1119 (D.C. Cir. 2009), in which we held that a party’s failure to provide notice to the surety of default and termination before completing the work through other subcontractors was a failure of a condition precedent and discharged the surety’s obligations under a similar AIA bond. See id. at 1121–22. As the district court noted in this case, "[we] reasoned that sureties’ options to remedy the default would be ‘nonsensical’ without the inference that the sureties should be given timely notice of the declaration of default." W. Sur. Co. , 375 F. Supp. 3d at 6 (quoting Hunt Constr. Grp. , 587 F.3d at 1121 ).

The district court also held that Western Surety only had to prove actual prejudice in the event of U.S. Engineering’s failure to provide notice to Western Surety that it was considering declaring United Sheet Metal in default under section 3.1, not in the event of U.S. Engineering’s failure to provide notice that it had actually declared United Sheet Metal in default and terminated the subcontract under section 3.2. U.S. Engineering filed the instant appeal challenging both holdings.

II.

We review...