Daniel Lund III | Phelps Dunbar
A performance bond surety for a defaulted general contractor principal found itself with a recalcitrant owner which refused to accept the tender of a replacement general contractor to complete a $3,000,000 construction project in Monmouth County, New Jersey.
Even before the original GC was off the job, the surety – having been notified of the contractor’s difficulties in performing the work – stepped in promptly, providing assistance in the form of an additional contractor. At the surety’s behest, that additional contractor remained on the project (focused principally at the time on roof repairs) after the initial GC was placed in default and terminated.
Eventually, the surety, by draft tender agreement issued to the owner, offered that the additional contractor serve as the completion contractor for the entire project (not simply the roof repairs), a proposal rejected by the owner – which had never cared for the additional contractor. Instead, the owner proposed its own completion contractor and, in connection with that offer, demanded a sum of money ($1.6 million) from the surety – a proposal the surety rejected: “[Owner] cannot choose whatever contractor it wants to complete the work and then charge the costs to [the surety].”
Ultimately, the owner completed the project on its own, rebidding the project, and demanded its losses from the surety.
The surety filed suit in federal court in New Jersey seeking a declaration that the surety had fulfilled its obligation when it offered to complete the work via its tender agreement. The surety urged that the owner had “breached the express terms of the Performance Bond by refusing to accept [surety’s] choice of completion contractor… pursuant to Section 5.2 of the [AIA-A312] Bond.” At issue was the interpretation of Section 5.2 (providing that the surety may undertake “to perform and complete the Construction Contract itself, through its agent or independent contractors…”), and the extent to which the surety “has the right to use its contractor of choice, even over an owner’s objection.”
Upon a thorough examination of the bond form, the court – noting that options afforded the surety under sections 5.1 and 5.3 of the bond both specifically call for the owner’s “consent” or “concurrence,” and that section 5.2 is no such requirement – held in favor of the surety: “As other courts considering similar contractor terms have found, Section 5.2… does not grant the [owner] the right to review and reject [the surety’s] selection of completion contractor; [owner’s] remedy for continued poor performance by [the tendered contractor] would be limited to a contractual claim against [the surety], not a veto of [the surety’s] choice of contractor.”
The surety was absolved of further liability on its performance bond.
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