Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company, 2015 U.S. Dist. LEXIS 57836 (W.D. Mo. May 4, 2015) 

In this opinion, the United States District Court for the Western District of Missouri (i) vacated its earlier order denying the surety’s motion for summary judgment (see earlier post) and (ii) held that the contractor’s failure to formally declare the sub-contractor in default precluded the contractor from recovering from the subcontractor’s performance bond surety.  The dispute involved the contractor, Curtiss-Manes-Shulte, Inc. (“CMS”) and Safeco Insurance Company of America (“Safeco”), who provided a performance bond to Balkenbush, CMS’s mechanical subcontractor.

During the course of the project, CMS responded to a “Contract Bond Status Inquiry” and informed Safeco that Balkenbush’s work was nine months past due and that liquidated damages would be assessed.  Ultimately, Balkenbush ceased performance and CMS hired additional subcontractors to complete Balkenbush’s work.  However, CMS never declared Balkenbush in default.  Two months after the owner declared the project complete, CMS submitted a claim on the performance bond to Safeco, demanding payment for CMS’s cost to complete Balkenbush’s work and for liquidated damages assessed by the Owner.  Safeco denied the claim on the basis that CMS did not comply with the terms of the performance bond because CMS never declared Balkenbush in default or notified Safeco of a default.  Safeco’s denial asserted that CMS’s failure to comply with the terms of the performance bond “deprived Safeco of an opportunity to mitigate damages[.]”

In its earlier opinion, the court concluded that “nothing in the performance bond or subcontract required CMS to provide notice of Balkenbush’s default to Safeco before Safeco’s duties under the performance bond were trigger.”  However, in its reconsideration opinion, the court concluded that the performance bond phrase “‘[w]henever the Principal [Balkenbush] shall be, and is declared by the Obligee [CMS] to be in default under the Subcontract’ is a provision that stipulates for notice [and] acts as a condition precedent to any duty owed by Safeco” under the performance bond.

The court relied upon earlier federal appellate court decisions interpreting performance bonds in L & A Contracting Co. v. Southern Concrete Servs., 17 F.3d 106 (5th Cir. 1994) and Elm Haven Constr. Ltd. P’ship v. Neri Constr. LLC, 376 F.3d 96 (2d Cir. 2004).  The court explained that both opinions had interpreted language almost identical to this performance bond.  Both the Fifth and Second Circuits concluded that the obligee must formally declare the principal in default as a condition precedent to the surety’s performance bond liability.

The court also distinguished the case it had relied upon when reaching its earlier decision that a default declaration and notice were not required to trigger Safeco’s performance bond duties.  The court explained that the Missouri Court of Appeals in Thomas v. A.G. Elec. Inc., 304 S.W.3d 179 (Mo. Ct. App. 2009) addressed a payment bond, not a performance bond, “a nuance previously missed by this Court.”  The court explained that “[t]he distinction is important because a payment bond does not afford the surety the right to complete the contract by takeover or to select new subcontractors to complete the work.”  While the Thomas opinion followed the “modern trend” in Missouri to “exercise restraint in requiring strict compliance with the terms of notice provisions[,]” the court concluded that because proper notice would give the surety the opportunity to mitigate its performance bond liability, strict compliance was necessary in this case.  The court also opined that “[i]t makes sense that a less strict standard may apply to payment bonds . . . because opportunities for the surety to limit its damages are less.”

The court concluded that because CMS never declared Balkenbush in default, Safeco’s performance bond duties were never triggered.  Thus, it vacated its earlier order denying Safeco’s motion for summary judgment and granted summary judgment in favor of Safeco.