AIA A312-2010 Performance Bond Requires Contractors to Terminate a Subcontract Before the Surety’s Obligations Are Triggered

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["i"],["a",["href","https:\/\/www.aiacontracts.org\/contract-documents\/183786-performance-bond"]],["sup"],["a",["href","#_ftn1","name","_ftnref1"]],["a",["href","#_ftn2","name","_ftnref2"]],["strong"],["a",["href","#_ftn3","name","_ftnref3"]],["a",["href","#_ftn4","name","_ftnref4"]],["a",["href","#_ftn5","name","_ftnref5"]],["a",["href","#_ftn6","name","_ftnref6"]],["a",["href","#_ftn7","name","_ftnref7"]],["a",["href","#_ftnref1","name","_ftn1"]],["a",["href","#_ftnref2","name","_ftn2"]],["a",["href","#_ftnref3","name","_ftn3"]],["a",["href","#_ftnref4","name","_ftn4"]],["a",["href","#_ftnref5","name","_ftn5"]],["a",["href","#_ftnref6","name","_ftn6"]],["a",["href","#_ftnref7","name","_ftn7"]]],"sections":[[1,"p",[[0,[],0,"July 11, 2022"]]],[1,"p",[[0,[],0,"For performance bonds, a\nclaimant\u2019s strict compliance with the bond\u2019s terms is often required by the\nsurety and ultimately, the court. This was found to be true in a recent case\nthat was decided by the United States Court of Appeals for the First Circuit. In\n"],[0,[0],1,"Arch Insurance Company v. Graphic Builders LLC"],[0,[],0,", the Court, while ruling in favor of the surety, held that under\nMassachusetts law, the surety\u2019s obligation to perform certain subcontract warranty\nwork under the AIA Contract Documents "],[0,[1],0,"A312"],[0,[2],1,"\u00ae"],[0,[],1,"-2010 Performance\nBond"],[0,[],0," is conditioned upon the general\ncontractor\u2019s compliance with the terms of the bond."],[0,[3],1,"[1]"],[0,[],0," "]]],[1,"p",[[0,[],0,"This case arose out of\na construction project in Charlestown, Massachusetts. Graphic Builders, LLC was\nhired to perform work on a project, which included converting a commercial\nbuilding into apartments and construction of an apartment structure. Graphic\nsubcontracted with RCM Modular, Inc. to fabricate and assemble portions of the\nwork. An A312 Performance Bond was issued as part of the subcontract documents.\n"]]],[1,"p",[[0,[],0,"During the project, Graphic complained that\nportions of RCM\u2019s work were defective. As a result, Graphic sent a letter to\nthe surety, Arch Insurance Company, stating that RCM had defaulted under the\nsubcontract. Graphic reported that it had not received a meaningful response\nfrom RCM concerning the defective work, and therefore, Graphic \u201cengaged in\nremedial efforts to correct\u201d the defective work."],[0,[4],1,"[2]"],[0,[],0," Graphic made a claim for $3.18"],[0,[5],1," "],[0,[],0,"million\nin remedial costs, as well as a demand under the performance bond that Arch\ndeliver a window warranty in accordance with RCM\u2019s scope of work. Arch denied liability on the grounds that Graphic had not\ncomplied with the bond \u2013 Graphic had not terminated RCM before undertaking the\nperformance of RCM\u2019s work \u2013 and therefore, Arch\u2019s bonded obligations were not\ntriggered. "]]],[1,"p",[[0,[],0,"Arch filed an action for declaratory judgment\nthat Graphic had materially breached the performance bond, thereby discharging Arch\nfrom liability. Graphic counterclaimed that the bond\u2019s preconditions for\nperformance do not apply to Arch\u2019s obligation to provide a window warranty. On\nappeal, the Court considered whether Section 3 of the bond, which sets forth\ncertain preconditions for the surety\u2019s obligation to perform, apply to\nGraphic\u2019s window warranty claim. Section 3 provides, generally, that if Graphic\nis not in default under the subcontract, Arch\u2019s obligations under the bond\narise after: "]]],[1,"p",[[0,[],0,"\n1. Graphic first provides notice to RCM and Arch that Graphic is\nconsidering declaring RCM in default, and whether Graphic is requesting a\nconference among these parties to discuss RCM\u2019s performance; "]]],[1,"p",[[0,[],0,"\n 2. Graphic declares RCM in default, terminates the subcontract and\nnotifies Arch; and "]]],[1,"p",[[0,[],0,"\n 3. Graphic agrees to pay the subcontract balance to Arch or to a\ncontractor selected to perform the subcontract work. "]]],[1,"p",[[0,[],0,"When the conditions of Section 3 have been met, the\nbond requires Arch to perform its duties, which may include arranging for the\noriginal subcontractor to complete the job; taking over the work; arranging for\na new subcontractor to complete the work; or determining the amount it may be\nliable and making that payment to the contractor."],[0,[6],1,"[3]"]]],[1,"p",[[0,[],0,"It was undisputed that Graphic did not comply\nwith sections 3.2 and 3.3 of the A312. Graphic argued that its demand that Arch\nprovide a window warranty does not require compliance with section 3 of the\nbond because a \u201cpost-completion\u201d warranty obligation is not subject to this\nsection\u2019s termination requirement."],[0,[7],1,"[4]"],[0,[],0," The Court, however, found\nthat no such distinction between a subcontractor\u2019s hands-on construction work\nand its warranty obligations exist under the bond or related case law."],[0,[8],1,"[5]"],[0,[],0," Rather, RCM\u2019s warranty\nobligations are part of its subcontract work, all of which is subject to the\nrequirements of Section 3. The Court noted that \u201csection 3 and 5 of the A312\nbond protect the surety by clearly signaling when the surety must take over for\na defaulting principal and by giving the surety the choice on how to remediate\nthe default.\u201d"],[0,[9],1,"[6]"],[0,[],0,"\nAs such, the Court found that Arch\u2019s obligation to perform and provide the\nwindow warranty under the performance bond was conditioned upon Graphic\u2019s\ntermination of RCM."],[0,[10],1,"[7]"],[0,[],0,"\nSince Graphic did not comply with the terms of the bond, the Court affirmed\nsummary judgment in favor of Arch."]]],[1,"p",[[0,[],0,"This case demonstrates the importance of adhering\nto the plain provisions of surety bonds. In other words, if Graphic wanted Arch\nto take action under its performance bond claim, Graphic should have strictly\ncomplied with the preconditions listed in the A312. Failure to comply with the\nterms of the bond can have drastic consequences, and ultimately lead to the\ndenial of a payment or performance bond claim."]]],[1,"p",[[0,[0,5],2,"AIA\nContract Documents has provided this article for general informational purposes\nonly. The information provided is not legal opinion or legal advice and does\nnot create an attorney-client relationship of any kind. This article is also\nnot intended to provide guidance as to how project parties should interpret\ntheir specific contracts or resolve contract disputes, as those decisions will\nneed to be made in consultation with legal counsel, insurance counsel, and\nother professionals, and based upon a multitude of factors. "]]],[1,"p",[[0,[],0,"\n\n\n\n\n\n\n\n"],[0,[11],1,"[1]"],[0,[],0," "],[0,[0],1,"Arch\nInsurance Company v. Graphic Builders LLC"],[0,[],0,",\n36 F.4th 12 (1st Cir. 2022).\n\n\n\n\n\n"],[0,[12],1,"[2]"],[0,[],0," "],[0,[0],1,"Id.\n"],[0,[],0,"at 14.\n\n\n\n\n\n"],[0,[13],1,"[3]"],[0,[],0," "],[0,[0],1,"Id. "],[0,[],0,"at 16.\n\n\n\n\n\n"],[0,[14],1,"[4]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0," at 18.\n\n\n\n\n\n"],[0,[15],1,"[5]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0,"\n\n\n\n\n\n"],[0,[16],1,"[6]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0,"\n\n\n\n\n\n"],[0,[17],1,"[7]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0," at 21.\n\n\n\n"]]]]}