Western Surety Company v. U.S. Engineering Construction ( 2020 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 9, 2020 Decided April 7, 2020
No. 19-7033
WESTERN SURETY COMPANY,
APPELLEE
v.
U.S. ENGINEERING CONSTRUCTION, LLC,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:15-cv-00327)
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.
Thomas J. Moran argued the cause and filed the brief for
appellee.
Before: PILLARD and KATSAS, Circuit Judges, and
SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
SENTELLE.
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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
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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:
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§ 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.
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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.
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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
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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 the district court’s grant of summary judgment
de novo. Mayo v. Reynolds, 875 F.3d 11, 19 (D.C. Cir. 2017).
Summary judgment is appropriate if, viewing the facts in the
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light most favorable to the nonmoving party, there is no
genuine dispute as to any material fact. Fed. R. Civ. P. 56. The
parties agree that D.C. law applies.
A.
U.S. Engineering primarily argues that the plain language
of the bond simply requires notice of default and termination,
not notice sufficiently early to enable every potential option to
cure, to trigger Western Surety’s obligations under the bond.
In the alternative, it argues that if the bond’s language is
ambiguous as to whether timely notice is required, the court
should construe any ambiguous language with due regard for
the bond’s purpose to protect U.S. Engineering from United
Sheet Metal’s default and to avoid a forfeiture.
Like the district court, we conclude that Hunt is
controlling. Hunt involved AIA Document A311, which
expressly provides that, if the contractor is declared to be in
default, the surety has an opportunity to “promptly remedy”
that default. Hunt Constr. Grp., 587 F.3d at 1120. It also
allows the owner to remedy the default on its own terms “after
reasonable notice” to the surety. Id. The owner in that case
declared the contractor in default and terminated the
construction contract but did not notify the surety of the default
and termination until five months later. Id. In the meantime,
the owner employed another contractor to finish the remaining
work without consulting the surety. Id. Construing the A311
bond, we determined that timely notice was a condition
precedent to the surety’s obligations under the bond. Id. at
1120–22. As the district court noted in this case, we explained
that accepting Hunt’s contrary argument “would gut rights
specifically afforded the surety”—namely, the bond’s “explicit
grant to the surety of a right to remedy the default itself.” Id.at 1121–22.
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The A312 bond at issue in this case states that, in order to
trigger Western Surety’s obligations under the bond, U.S.
Engineering must declare a United Sheet Metal default,
terminate the subcontract, and notify Western Surety. Similar
to the A311 bond, the A312 bond provides four alternative
methods by which the surety can respond to the default. By
unilaterally completing United Sheet Metal’s remaining
contract obligations before notifying Western Surety, U.S.
Engineering deprived Western Surety of its contractually
agreed-upon opportunity to participate in remedying United
Sheet Metal’s default.
To be sure, under several provisions of the bond, Western
Surety could not have responded to the default without U.S.
Engineering’s consent. But even so, that limitation did not give
U.S. Engineering the right to address the situation without
consulting Western Surety and then recover under the bond
nine months later. In other words, despite the bond’s lack of
an explicit timely notice requirement, the performance bond is
properly read as requiring U.S. Engineering to notify Western
Surety of the default before engaging in self-help remedies.
Otherwise, “the explicit grant to the surety of a right to remedy
the default itself would be operative only if the obligee chose
to give it notice,” thereby rendering the options in section 5
“nearly meaningless.” Id. at 1121. Accordingly, because the
bond expressly provides the surety with the opportunity to
participate in curing the subcontractor’s default, we hold that it
is a condition precedent to the surety’s obligations under the
bond that the owner must provide timely notice to the surety of
any default and termination before it elects to remedy that
default on its own terms. In light of U.S. Engineering’s failure
to provide such timely notice, Western Surety was not
obligated to perform under the bond.
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We note separately that at least one other court construing
the A312 bond reached a similar conclusion. Although not
dealing with a failure of notice under section 3.2, the Eleventh
Circuit determined that if an obligee hires a new subcontractor
before the surety has an opportunity to respond to the
termination, the surety’s obligations under the bond are
discharged. Int’l Fid. Ins. Co. v. Americaribe-Moriarty JV, 681
F. App’x 771, 776–77 (11th Cir. 2017). The Eleventh Circuit
emphasized that such an action “thwart[s] [the surety’s] ability
to choose among the options it had for remedying [the
subcontractor’s] default under § 5 of the bond.” Id.
Because we do not conclude that the bond is ambiguous,
we need not address U.S. Engineering’s arguments that surety
bonds should be construed liberally in favor of the beneficiary
and to avoid a forfeiture. See, e.g., St. Paul Fire & Marine Ins.
Co. v. VDE Corp., 603 F.3d 119, 123 (1st Cir. 2010)
(“Although ‘[t]he prevailing doctrine is that [a surety bond]
should be liberally interpreted in favor of its beneficiary,’ that
principle ‘is not a blank check to the judicial power to rule out
the pacts and agreements between the parties.’” (alterations in
original) (quoting Citibank v. Grupo Cupey, Inc., 382 F.3d 29,
31–32 (1st Cir. 2004))); Wash. Props., Inc. v. Chin, Inc., 760
A.2d 546, 549 (D.C. 2000) (“As a general rule of contract
interpretation, there is a presumption in favor of construing
doubtful language in a contract as language of promise rather
than as language of condition.” (emphasis added)).
B.
U.S. Engineering also contends that section 4 of the bond
requires Western Surety to demonstrate actual prejudice in
order to avoid liability under the bond if there is a failure to
provide notice under any section. It argues that section 4
expressly referenced a failure to give notice only under section
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3.1 because that was the only notice requirement the parties
intended to include in the bond. To the extent the court implies
a timely notice requirement under section 3.2, U.S.
Engineering asserts that the requirement to demonstrate actual
prejudice to avoid liability under the bond should equally apply
to any such implied condition.
Section 4 states, “Failure on the part of the Owner to
comply with the notice requirement in Section 3.1 shall not
constitute a failure to comply with a condition precedent to the
Surety’s obligations, or release the Surety from its obligations,
except to the extent the Surety demonstrates actual prejudice.”
J.A. 145 (emphasis added). By its plain language, the
requirement to demonstrate actual prejudice clearly applies to
a failure to give notice only under section 3.1. There is no
similar requirement when U.S. Engineering fails to give timely
notice of the default and termination under section 3.2. U.S.
Engineering’s assertion that the parties intended section 3.1 to
be the only notice requirement in the bond makes little, if any,
sense. By its express terms, section 3.2 clearly provides that
U.S. Engineering must “notify” Western Surety of the default
and termination in order to trigger Western Surety’s obligation
to act under section 5. J.A. 145. Accordingly, we conclude
that the plain language of the bond is unambiguous that the
surety is not required to demonstrate actual prejudice to avoid
liability under the bond if the obligee fails to provide notice of
default and termination under section 3.2.
Even assuming we agreed with U.S. Engineering that
Western Surety must demonstrate actual prejudice to avoid
liability in this situation, it would not change the outcome. By
failing to provide notice under section 3.2, U.S. Engineering
robbed Western Surety of its contractually agreed-upon
opportunity to participate in the mitigation process entirely.
Although not necessary to our opinion, it would seem that is
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inherently prejudicial. Thus, even if we required Western
Surety to demonstrate actual prejudice, it would not be liable
under the bond due to the inherent prejudice it suffered.
Again, another court interpreting the A312 bond agrees
with our interpretation. The Nevada district court determined
that “failure to comply with section 3.2 is a condition precedent
to [the surety’s] obligations arising under the bond, and the
parties contractually agreed that [the surety] need not show
prejudice from that failure to relive it of its obligations.”
United States ex rel. Agate Steel, Inc. v. Jaynes Corp., No.
2:13-CV-01907-APG-NJK, 2016 WL 8732302, at *7 (D. Nev.
June 17, 2016).
III.
Because U.S. Engineering failed to comply with the
condition precedent to provide timely notice of default and
termination under section 3.2, Western Surety was not
obligated to perform under the bond. Additionally, the bond is
clear that Western Surety is not required to demonstrate actual
prejudice to avoid liability under these circumstances. We thus
affirm the district court’s grant of summary judgment.