A five-sentence decision from the Eighth Circuit Federal Court of Appeal may not be a record, but it sends a blunt message: failure to provide notice of default is fatal to a performance bond claim. The reader has to go back to the lower court decision to learn the context. The case is Curtiss-Manes-Schulte, Inc. v. Safeco Insurance Company of America, available here, and the lower-court decision is available here.
Curtiss-Manes-Schulte (CMS) was the prime contractor for a renovation project at Fort Leonard Wood. CMS engaged an HVAC sub, who provided a performance bond via Safeco. The sub failed to timely perform, and may have gone out of business. CMS filled out “Contract Bond Status Query” forms from Safeco, noting that the sub was behind schedule and that liquidated damages would be assessed. But CMS – to its current regret – never declared the sub in default. CMS eventually went out of pocket for additional costs to complete the sub’s work, and for liquidated damages to the owner which CMS claims were due to the sub. When CMS sought recovery from Safeco under the performance bond, though, Safeco took the position that CMS had violated the terms of the performance bond when it failed to issue a notice of default, and Safeco was prejudiced by this lack of notice and an opportunity to address any default.
The lower court discussed the default notice requirement in the bond, and cases holding that such a notice is a condition of the surety’s obligation under the bond. It quoted from a Fifth Circuit decision:
a declaration of default sufficient to invoke the surety's obligations under the bond must be made in clear, direct, and unequivocal language. The declaration must inform the surety the principal has committed a material breach or series of breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of its bond.
Even though the HVAC sub faltered badly, when CMS failed to issue a notice of default it was failing to comply with an essential condition to pursue its rights under the performance bond. And the courts have shut the door unceremoniously on the performance bond claim. In some situations there is no substitute for a proper notice of default.