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Contractor’s Failure to Declare Subcontractor in Default and Provide Surety with Notice Released Surety from Liability

Contractor’s Failure to Declare Subcontractor in Default and Provide Surety with Notice Released Surety from Liability

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In Hunt Construction Group, Inc. v. National Wrecking Corporation (2009), plaintiff Hunt Construction commenced an action against a subcontractor, National Wrecking, and against two sureties based on National Wrecking’s performance bond. Hunt Construction sought relief in this diversity action against the defendants, and the sureties argued that Hunt Construction failed to give a timely notice of default, depriving the sureties of any opportunity to exercise their right to cure National Wrecking’s defective performance. The district court agreed and granted summary judgment in which Hunt Construction appealed.

Hunt Construction subcontracted excavation work to National Wrecking and agreed that the work would be completed by February 12, 2004. Hunt Construction learned that the work would be delayed, and would incur additional expenses for expediting the work to other subcontractors to meet the deadline. Although Hunt Construction knew that the work would be delayed, it did not give notice to the sureties that delays would constitute default under the subcontract, and opted instead to use other subcontractors to complete the work. After the work had been completed, Hunt Construction notified the sureties of a potential claim when it declared National Wrecking in default on July 13, 2004.

Hunt urged the DC Court of Appeals to adopt the reasoning of Colorado Structures, Inc. v. Insurance Co. of the West (2007) which held that the American Institute of Architects bond document at issue did not require notice as a condition precedent to recovery. The Court of Appeals, however, relies on Elm Haven Construction Ltd. Partnership v. Neri Construction LLC (2004) which held that in order to trigger liability under a Performance Bond, the principal had to be in default and notice of default would have to be given in precise terms. According to the terms of the agreement, Hunt Construction would only be able proceed to remedy the default on its own after giving reasonable notice to the sureties.

In New York, generally, a statute authorizing a contractor to give a bond conditioned for the payment of any judgment recovered on claims for labor and materials requires a filing of notice of claim as a condition precedent to suit the bond. However, absent an express provision in the contract, an obligee is not required to give notice of the principal’s default, as held in Walter Concrete Const. Corp. v. Lederle Laboratories (2001). Furthermore, as it was held in State v. Insurance Co. of State of Pennsylvania (2003), unless notice of the principal’s default or a demand for payment on the surety or guarantor is expressly required as a condition precedent to liability, such notice is not a prerequisite to the institution of an action against a surety.

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