Issue: Compliance with procedural requirements of performance bond, by Hugh Anderson

Issue: Compliance with procedural requirements of performance bond. Curtiss-­‐ Manes-­‐Schulte, Inc. v. Safeco Insurance Company of America. U.S. District Court for the Western District of Missouri (2015).

Summary: Curtiss-­‐Manes-­‐Schulte (CMS) was the general contractor on a building project. It subcontracted HVAC work to Balkenbush Mechanical, and required Balkenbush to furnish a subcontract performance bond. Balkenbush fell behind schedule, and CMS informed the surety of the deteriorating situation. Ultimately, Balkenbush walked off the job, and its owner filed for bankruptcy. CMS proceeded to complete the HVAC work by retaining replacement mechanical contractors. Later, CMS submitted a claim on the bond, seeking reimbursement of its completion costs.

In court, the surety filed for summary judgment, contending that the terms of the bond required CMS to formally declare Balkenbush in default and give notice to the surety, at which point the surety would have had several options, including completing the work itself; retaining new contractors; financing Balkenbush; making a settlement payment to CMS; or denying liability. Because there was no declaration of default, the surety never had an opportunity to mitigate its damages by selecting a preferred strategy for responding to Balkenbush’s troubles.

Decision: The federal court granted the surety’s motion for summary judgment, holding that the declaration of default of the subcontractor was a condition precedent to a bond claim. It was essential to give the surety the opportunity to handle the completion of the HVAC work under one of its several express options under the bond.

Comment: The standard performance bonds in the industry (EJCDC’s version is EJCDC C-­‐610, Performance Bond) set out clear procedures for recovering under the bond. As in the bond in this case, a declaration of default is an essential “condition precedent.” The EJCDC bond also enumerates the surety’s options in response to a procedurally sufficient claim. Sureties often have resources that allow them to complete the work at a reasonable cost.

Interestingly (at least to legal counsel) the judge in this case initially held against the surety. The surety filed for reconsideration, apparently furnishing the judge with ample precedent for a favorable decision, and to the court’s credit it acknowledged its initial error and reversed its decision. Motions for reconsideration are often futile, but in this case persistence paid off.

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