Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company, 2015 U.S. Dist. LEXIS 10032 (W.D. Mo. 2015)

This dispute between a general contractor and its subcontractor’s performance bond surety arose out of a renovation project at Fort Leonard Wood in Missouri.  On October 19, 2010, the general contractor, Curtiss-Manes-Schulte, Inc. (“CMS”), entered into a subcontract with Balkenbush Mechanical, Inc. to replace the air conditioning system on the project.  A week later, Balkenbush obtained the required performance bond from Safeco Insurance Company of American.

By October 2011, CMS knew that Balkenbush was behind schedule.  In July 2012, CMS responded to a Contract Bond Status Inquiry and informed Safeco that the contract was not complete, that Balkenbush’s work was not progressing satisfactorily, that the project was nine months late, and that liquidated damages would be assessed.  Around the same time, Safeco hired consultants and a law firm to investigate, defend and resolve claims made against four performance bonds Safeco issued to Balkenbush on other projects.  In December 2012, Safeco filed a lawsuit against Balkenbush to recover its losses resulting from the claims on the four other performance bonds.  One month later, in January 2013, Balkenbush filed a bankruptcy petition and Safeco’s counsel entered their appearance in that proceeding.

In April 2013, CMS hired additional subcontractors to complete Balkenbush’s work on the project.  CMS ultimately completed the project in October 2013 and the owner assessed liquidated damages.  On December 12, 2013, CMS submitted a notice of claim to Safeco, demanding $65,450 for the costs CMS incurred completing Balkenbush’s work and for the liquidated damages the owner assessed against CMS.  Safeco denied the claim, prompting CMS to file suit against Safeco alleging breach of contract and vexatious refusal.

Safeco moved for summary judgment on the claims on two grounds.  First, Safeco argued that its performance bond obligations were not triggered because CMS did not provide Balkenbush with written notice of the default and an opportunity to cure.  Second, Safeco argued that CMS’s failure to provide written notice denied Safeco of its rights under the performance bond to take remedial action and mitigate its damages.

In arguing that its performance bond obligations were not triggered, Safeco relied on provisions in both the subcontract and performance bond.  With respect to the performance bond, Safeco relied on Article 4, which provided that “[w]henever [Balkenbush] shall be, and is declared by [CMS] to be in default under the Subcontract . . . [Safeco] may promptly remedy the default, or shall promptly” complete the subcontract, obtain new subcontractors, pay CMS, or deny liability.  The court was not persuaded, however, finding that “nothing in Article 4 . . . or any other provision of the performance bond require[d] CMS . . . to provide notice of Balkenbush’s default to Safeco.”  The court concluded that Safeco’s performance bond obligations were triggered when CMS declared Balkenbush in default, and were not dependent upon written notice.

Safeco also argued that its obligations were not triggered because CMS did not comply with “Failure of Performance” provision in the subcontract.  This section provided that if Balkenbush failed to cure a default “within three (3) working days from receipt of [CMS’s] written notice, then” CMS could perform the necessary work and charge Balkenbush for the cost it incurs.  The court disagreed, concluding that nothing in the subcontract required CMS to notify Safeco of Balkenbush’s default.  Furthermore, the court was not persuaded by the fact that CMS never “technically” declared Balkenbush in default.  Finding that “Balkenbush declared itself to be in default” by July 2012, the court refused to provide Safeco with a “technical escape-hatch” by requiring strict compliance with the subcontract notice provision.

Safeco’s second basis for seeking summary judgment was that CMS’s failure to provide written notice of default denied Safeco’s of its right under the performance bond to mitigate its damages by completing the contractor or obtaining substitute subcontracts.  The court concluded that even without written notice of default from CMS, Safeco had notice of the “troubled waters” that Balkenbush was in on this project and others.  The July 2012 Contract Bond Status Inquiry response, the fact that Safeco was involved in Balkenbush’s bankruptcy by January 2013, and Safeco’s claims against Balkenbush for losses on other bonds convinced the court that Safeco could not deny knowledge of Balkenbush’s default on the subcontract.  While concluding that Safeco’s performance obligations were not discharged due to the lack of written notice, the court explained that CMS’s damages may be limited by the delay in making the claim on the bond.  The court explained that CMS may not be able to recover any “escalated costs arising” between the time of default and the time it made its initial demand to Safeco.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.