In an excellent result for the surety, the court in Schuff Steel Co. v. Bosworth Steel Erectors, 2022 U.S. Dist. LEXIS 176417 (D.D.C. Sep. 28, 2022) found that the obligee’s actions deprived the surety of its right to elect a remedial option under its performance bond following its principal’s default, thus discharging the surety’s obligations under the bond. This case involved a project of high visibility: Audi Field, a 20,000 seat stadium for Major League Soccer’s D.C. United. The obligee was hired by the general contractor to detail, fabricate, and erect the stadium’s steel framing and precast concrete sections. The obligee in turn sub-subcontracted its erection and installation scope of work to the surety’s principal, for whom the surety issued payment and performance bonds. The performance bond provided that in the event of default by its principal, the surety was to have a “‘reasonable period of time’ to either (1) take over the [s]ubcontract, (2) obtain bids from qualified contractors to complete the [s]ubcontract, or (3) waive its right to perform or complete the [s]ubcontract and determine, ‘with reasonable promptness under the circumstances,’ whether to pay or deny [the principal’s] remaining liability under the [s]ubcontract.” Following a dispute over breached safety protocols on the project, the obligee terminated the principal’s contract in September 2017 and submitted a claim against the principal’s performance bond. In its notice to the surety, the obligee stated that it was “forced to continue with the work while [the surety] is investigating this matter in order to mitigate damages and avoid impacts to the general contract.” The surety responded to the obligee by letter in early October. In its letter, the surety acknowledged that the principal had defaulted per the terms of the bond and requested correspondence, plans, specifications, and other documents related to the subcontract and the scoreboard lift. The surety further noted that it could not verify that the obligee had “acted in accordance with the bonded contract … in retaining an outside subcontractor to complete and supplement the work.” The letter also made clear that the surety’s response was not to be construed as “consent or authorization” for the obligee to elect to self-perform the remainder of the subcontract, and the obligee’s “continuing to complete [the principal’s] scope of work ‘may operate to prejudice [the surety’s] rights under [the bond].’” Two weeks later, the obligee responded that “in order to mitigate potential damages for all involved, [the obligee] is self-performing the erection.” The obligee provided only the subcontract and an October letter it sent to the principal in response to the surety’s request for documents. Despite several follow-up attempts by the surety to obtain the requested information from the obligee, the obligee did not provide any documentation to the surety until February 22, 2022. The obligee then sued the principal and surety four days later. The surety moved for summary judgment, arguing that the obligee’s decision to self-perform the subcontract without providing the surety the “reasonable period of time” provided under the bond to elect a performance option breached the bond’s terms and discharged the surety’s obligations. The obligee argued that it provided notice to the surety immediately after terminating the principal and that it had no further duty to the surety from that point “other than to mitigate damages by forging ahead on construction as opening day approached.” Further, the obligee asserted that the surety could have elected any of its three options at any point after receiving notice and that its failure to do so “was its own fault.” The court found that the obligee’s actions discharged the surety’s obligations under the bond. The court noted that the obligee’s argument “undermines the fundamental basis for notice provisions in surety contracts…which is to ensure that a surety’s bargained-for ‘right to remedy the default itself’ is protected. Just as the surety must have reasonable notice so as to investigate a claim, so too must it have a reasonable period of time to elect which remedial option to pursue.” Here, by immediately electing to self-perform, the court noted, the obligee presented the surety “with a choice between something or nothing, which is no true choice at all.” Next, the court flatly rejected the obligee’s contention that it was simply following its duty to mitigate damages and that the project could not afford even the slightest delay. If that were true, the court noted, the obligee could have promptly responded to the surety’s request for documents rather than waiting nearly five months to provide a response. The court noted that the obligee “did not just reduce [the surety’s] reasonable period of time in which to elect a remedial option, it foreclosed it.”
