Title: SHIPWRECKED: Dealing With Construction Contract Defaults in the Real World
1SHIPWRECKED Dealing With Construction Contract
Defaults in the Real World
American Bar Association Forum on the
Construction Industry
2007 Fall Meeting
- George J. Bachrach, Esq.
- Whiteford, Taylor Preston, LLP
- Baltimore, Maryland
- Deborah S. Butera, Esq.
- Shapiro, Fussell, Wedge Martin, LLP
- Atlanta, Georgia
2SCENARIO NO. 1 OWNERS THREAT TO TERMINATE
GENERAL CONTRACTOR
- 1. Default concepts
- material default
- waiver
- Contract provisions
- Types of default events
- The suretys investigation
- The suretys assertion of the principals
defenses
3IS THERE A MATERIAL DEFAULT?
- Restatement (Second) of Contracts 241
- Was the injured party deprived of the benefit it
expected? - May the injured party be adequately compensated?
- Will the breaching party suffer forfeitures?
- Is a cure likely?
- Does the breaching partys behavior comport with
standards of good faith and fair dealing?
4AIA A 201 ARTICLE 14.2 TERMINATION OF THE
CONTRACTOR FOR DEFAULT BY THE OWNER
- Persistent failure to supply labor or materials
- Failure to pay subcontractors
- Persistent disregard of laws
- Other substantial breach of contract provisions
5TYPES OF GENERAL CONTRACTOR DEFAULT EVENTS
- Failure to perform
- - nonperformance
- - deficient performance
- - delayed performance
- 2. Failure to pay subcontractors
- 3. Failure to administer the contract
- 4. Violation of laws
6THE SURETYS INVESTIGATION
- Why, when, who, what and how
- 2. The suretys analysis of its investigation
7THE SURETYS ASSERTION OF THE PRINCIPALS DEFENSES
- The obligees failure to pay
- The obligees design obligations
- The obligees duty to cooperate
- The obligees failure to properly administer the
contract - The obligees failure to provide an opportunity
to cure - Waiver and/or release and settlement
- The principals setoffs or counterclaims
8SCENARIO NO. 2 OWNER/OBLIGEES DEMAND ON
PERFORMANCE BOND
- AIA A312 and A311 performance bond claim
procedures - What happens when the performance bond claim
procedures are not followed - The suretys defenses to the performance bond
claim
9AIA A312 PERFORMANCE BOND CLAIM
- Provide notice to contractor and surety that
owner is considering a declaration of default - Request conference to be held within 15 days of
receipt of notice - Declare a contractor default and formally
terminate not earlier than 20 days from receipt
of notice - Agree to pay contract balance to surety or
replacement contractor
10AIA A311 PERFORMANCE BOND CLAIM
- Contractor in default
- Owner/obligee declaration of default
- Owner/obligee has performed its obligations
11- Bad things may happen to everyone if the
performance bond claim procedures are not
followed - and why
12DRAGON v. PARKWAY BANK,678 N.E.2d 55, 58 (Ill.
Ct. App. 1997)
- We find the obligees failure to provide
adequate notice of the contractors termination
and their hiring of a successor contractor before
the surety received the late notice stripped
the surety of its right to limit its liability
and constituted a material breach of contract
which rendered the surety bonds null and void.
13ST. PAUL v. CITY OF GREEN RIVER, 93 F. Supp. 2d
1170, 1179 (D. Wyo. 2000)
- While the Board did properly notify St. Paul of
Westgates default, it prohibited St. Paul from
exercising its contractual right to perform
itself or to participate in the selection of the
replacement contractor. Because the Court
concludes that St. Paul would not have entered
the performance bond in the absence of its
performance options under Paragraph 4, the
Boards action depriving St. Paul of those
options was a material breach, which discharged
St. Paul from any further duty of performance
under the bond.
14SEABOARD SURETY V. GREENFIELD, 266 F. Supp. 2d
189, 198 (D. Mass. 2003)
- Because a clear and direct default notice was not
served pursuant to Paragraph 5, the Court finds
that Greenfield was in material breach of the
Bond when it ceased its dealings with Seaboard
and hired another company to complete the
Project. . . Greenfields refusal to allow
Seaboard to complete the Project renders the Bond
null and void and discharges Seaboard from any
and all liability under the Bond.
15THE SURETYS ASSERTION OF THE PRINCIPALS DEFENSES
- The obligees failure to pay
- The obligees design obligations
- The obligees duty to cooperate
- The obligees failure to properly administer the
contract - The obligees failure to provide an opportunity
to cure - Waiver and/or release and settlement
- The principals setoffs or counterclaims
16THE SURETYS ASSERTION OF THE SURETYS OWN
DEFENSES
- The obligees failure to provide notice to the
surety and/or comply with the performance bonds
conditions precedent - The obligees actions prejudicial to the surety
- Material alterations
- Overpayment
- Extensions of time
- Failure to timely terminate principal
- Failure to mitigate damages
17THE SURETYS ASSERTION OF THE SURETYS OWN
DEFENSES
- The obligees release and/or discharge of the
principal (including the wrongful termination of
the principal) - Contractual and statutory limitations
- The obligees lack of good faith (concealment,
non-disclosure and/or misrepresentation of facts)
18SCENARIO NO. 3 RESPONSES TO THE OWNER/
OBLIGEES PERFORMANCE BOND CLAIM
- The contractors claim of wrongful termination
- The suretys options in response to the
owner/obligees AIA A312 performance bond claim - Where the positions of the principal and the
surety - Coincide
- Differ
19WRONGFUL TERMINATION BY OWNER/OBLIGEE
- 1. Discharges contractor and surety from all
performance obligations - 2. Bars owner/obligees recovery of costs of
completion - 3. Exposes owner/obligee to lost profits and
other damage claims - 4. May expose owner/obligee to bad faith claims
20AIA A312 BOND CLAIM THE SURETYS OPTIONS
- Arrange for contractor completion
- Perform through agents or independent contractors
- Obtain bids and arrange for completion contract
between owner/obligee and replacement contractor - Waive rights to the above and either (1) tender
payment or (2) deny liability
21- Where the positions of the principal and the
surety - Coincide
- Differ
22SCENARIO NO. 4 GENERAL CONTRATOR TERMINATION OF
BONDED SUBCONTRACTOR
- Alternatives to default termination
- Discussion of issues
23ALTERNATIVES TO DEFAULT TERMINATION
- Termination for convenience
- Correct and back charge
- Deductive change order
- Default and allow completion
- Withhold payment
- Change of personnel
- Supplement work force