Court Opinion

ID: 4713742
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:39:56.38741+00
Date Added: 2024-06-11T08:07:19.246359
License: Public Domain

¶83
Sanders, J.
(dissenting) — Colorado Structures, Inc. (Structures) subcontracted with Action Excavating and Paving, Inc. (Action) to help build the sewer system for a Wal-Mart store. Insurance Company of the West (West), acting as a surety, issued a performance bond guaranteeing Action’s work. Concerned about Action’s progress, Structures supplemented Action’s crews but did not terminate the subcontract with Action. Structures never declared Action to be in default under the subcontract. Majority at 592. Action subsequently failed to satisfactorily perform and breached the subcontract and Struc*633tures now seeks payment from West under the performance bond.
¶84 The majority holds Structure’s failure to declare default did not relieve West of its duty to pay on the bond. Majority at 586. But in my view, Structures’ failure to formally declare Action in default was fatal, and as a consequence West has no obligation to pay under the bond.
¶85 In L&A Contracting the Fifth Circuit Court of Appeals holds a clear, direct, and unequivocal declaration of default must be made before a surety’s obligations under a performance bond are triggered. L&A Contracting Co. v. S. Concrete Servs., Inc., 17 F.3d 106, 111 (5th Cir. 1994). The court clarifies, “[t]he declaration must inform the surety that the principal has committed a material breach or series of material breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of its bond.” Id. at 111. The Second Circuit Court of Appeals and the United States District Court for the District of Connecticut have both followed the Fifth Circuit’s reasoning. See Elm Haven Constr. Ltd. P’ship v. Neri Constr., LLC, 376 F.3d 96, 101 (2d Cir. 2004) (upholding requirement that obligee formally declare default); Balfour Beatty Constr., Inc. v. Colonial Ornamental Iron Works, Inc., 986 F. Supp. 82, 86 (D. Conn. 1997) (letters mentioning principal’s delay in performance did not provide sufficient notification to surety that principal was in default and relieved surety of liability under the performance bond). Other authorities on performance bonds agree the three preconditions to the surety’s liability under such a bond are “(1) the default by the principal; (2) the obligee’s declaration of default; and (3) last, that the obligee itself has not breached the contract.” 2 Robert F. Cushman & James J. Myers, Construction Law Handbook § 35.04[B], at 1281 (1999) (emphasis added).
¶86 The majority offers no compelling reason for rejecting such authority, and its interpretation of the performance bond contract is flatly at odds with the purpose of a *634performance bond. A “performance bond” is a “surety bond guaranteeing faithful performance of a contract.” Webster’s Third New International Dictionary 1678 (2002); see also U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 67 (2d Cir. 2004) (“[T]he very purpose of a performance bond is ‘to assure completion of the contract.’ ” (quoting Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962))). Surety bonds on construction projects shift the risk of the contractor’s nonperformance from the owner/obligee to the surety. 2 Cushman & Myers, supra, § 35.03, at 1278. Under a performance bond, the job of the surety (West) is to complete the subcontract (or assume risk of noncompletion) once the obligee has declared default, it is not the job of the surety to reimburse the obligee (Structures) for the faulty or poor performance of the principal (Action) once the work is complete.
¶87 The bond at issue reads as follows:
[A] Action Excavating & Paving, Inc. . . . , hereinafter called Principal, and Insurance Company of the West..., hereinafter called Surety, are held and firmly bound unto CSI Construction Co. . . . , hereinafter called Obligee, in the amount of . . . $472,290.00 ____
[B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . . , which subcontract is by reference made a part hereof, and is hereinafter referred to as the subcontract, NOW THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH THAT, if Principal shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.
[C] Whenever Principal shall be, and declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee’s obligations thereunder:
(1) Surety may promptly remedy the default, subject to the provisions of paragraph 3 herein, or;
(2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of *635Principal’s obligation under the subcontract subject to the provisions of paragraph 3 herein;
Colo. Structures, Inc. v. Ins. Co. of the W., 125 Wn. App. 907, 911-12, 106 P.3d 815 (2005) (emphasis added) (quoting 2 Clerk’s Papers (CP) at 82 (subcontract performance bond)). The majority states, “ ‘[b]y its plain terms, Paragraph A of the bond makes [West] immediately liable to [Structures]’ ” and “ £[b]y its plain terms, Paragraph B conditions the liability created by Paragraph A on one — and only one— express condition subsequent [that the principal promptly and faithfully perform].”’ Majority at 589 (some alterations in original) (quoting Colo. Structures, 125 Wn. App. at 917-18)). Therefore, reasons the majority,££ £[r]ead together, Paragraphs A and B state that the surety’s obligation commences when it executes the bond and continues until the principal promptly and faithfully performs.’ ” Id. at 590 (quoting Colo. Structures, 125 Wn. App. at 918).
¶88 But such an interpretation is inaccurate. Paragraph B simply states the duration of the bond-, it does not obligate the surety to perform any act or to make any payment. As Amicus Surety Association of America correctly stated:
The fact that the bond continued in effect did not mean that performance was immediately due from the surety. The day the bond was signed and delivered to CSI, ICW was “held and firmly bound” to CSI and the bond was in effect, but ICW was not indebted to CSI, and CSI could not have demanded payment of $472,290 or any other amount.
Br. of Amicus Curiae Surety Ass’n of Am. at 5.
¶89 The majority goes on to state, “ ‘Paragraph C . . . provides for certain remedies and measures of damage.’ ” Majority at 590 (quoting Colo. Structures, 125 Wn. App. at 918 (quoting 2 CP at 82 (subcontract performance bond))). But Paragraph C simply confirms West’s obligation to act on the bond is triggered only after Structures formally declares default. See L&A Contracting Co., 17 F.3d at 111 (“After a declaration of default, the relationship changes *636dramatically, and the surety owes immediate duties to the obligee.”). In other words, once Action materially breached the contract, Structures had an obligation to declare default, and after such declaration, one of three courses of actions would ensue: (1) West could promptly remedy the default, or (2) after reasonable notice to West, Structures could arrange for completion of the project, or (3) upon demand by Structures, West could arrange for completion of the project.
¶90 Instead of declaring Action in default, Structures notified West that Action was behind schedule and arranged for performance of the subcontract by supplementing Action’s crews.25 But under the plain language of the contract, supplementing Action’s crews was a viable course of action only after default was declared26 (“ ‘Whenever Principal shall be, and declared by Obligee to be in default ..., Obligee after reasonable notice to Surety may... arrange for the performance of Principal’s obligation under the subcontract ....’” (quoting Colo. Structures, 125 Wn. App. at 912 (quoting 2 CP at 82 (subcontract performance bond)))).
¶91 Further, holding West’s liability on the bond is not conditioned on a declaration of default, deprives the surety of its contractual right to either “complete the contract or, at least, to participate in the selection of a contractor to properly complete the work.” Lawrence R. Moelmann & John T. Harris, The Law of Performance Bonds 209 (1999); see also Balfour Beatty Constr., 986 F. Supp. at 86 (“[P]laintiff in the present case allowed [the principal] to complete the project, thereby denying the defendant the opportunity to exercise any of its options under the performance bond.”); Elm Haven Constr., 376 F.3d at 101 (obligee’s decision to hire a replacement contractor, which denied surety “the opportu*637nity to complete the project itself or hire others to do so,” discharged surety of its obligations).27
¶92 The majority, like the trial court, incorrectly emphasizes West’s lack of involvement in negotiations between Structures and Action. See majority at 583 (‘West refused to participate in discussions regarding Action’s performance or to comment on Structures’ chosen remedy.”); see also 2 CP at 661, 662-63 (Findings of Fact and Conclusions of Law 13,15) (“ICW had sufficient notice of problems with Action’s performance ... to cause a reasonable surety to investigate its potential liability” and “chose to take no action to investigate nor to protect its own interests.”). Sureties are not explicitly required to monitor the progress of their principals under performance bonds.28 In fact, prior to a declaration of default, a surety generally does not have a unilateral right to be involved in the project and may not interfere or meddle in the affairs of its principal. 2 Cushman & Myers, supra, § 34.04[B] & n.5, at 1279-80 (citing Granite Computer Leasing Corp. v. Travelers Indem. Co., 894 F.2d 547 (2d Cir. 1990)). And interfering with a principal’s business before a declaration of default may subject the surety to claims of tortious interference.29 Id. at 1280 (citing Gerstner Elec., Inc. v. Am. Ins. Co., 520 F.2d 790 (8th Cir. 1975)). Consequently, a surety becomes involved in a construction project only after the obligee issues a declaration of default. Id.
*638¶93 As to the second issue, I agree with the majority that Olympic Steamship30 applies to surety bonds and I would reward attorney fees to a prevailing contractor.
¶94 Accordingly, I dissent.
Reconsideration denied April 4, 2008.

 This case is difficult because Structures’ decision to assist Action, while seemingly cooperative and sensible, is nevertheless inconsistent with its role of obligee under the performance bond.

 Structures never declared Action to be in default under the subcontract. Majority at 592.

 If a declaration of default is not required and an obligee completes the work itself or hires a new subcontractor without consulting the surety, the surety is denied its right to control the cost of completion.

 “It may represent sound business practice for a surety to monitor its principal’s work. Sureties however, frequently do not have either the expertise or the resources to actively monitor each project of every principal.” 2 Cushman & Myers, supra, § 35.04[A], at 1279.

 “West explains that it did not contact Structures because it did not want to interfere with Structures’ subcontract with Action.” Majority at 584.

 Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991).