Sara M. Betancourth, Esq., AIA Contract Documents, Manager and Counsel
August 28, 2024
Following the procedures set forth in a surety bond may seem inconsequential when a project has gone off track, but the failure to do so can be detrimental for a claimant. A recent case out of New York highlights the critical importance of adhering to the specific procedural requirements contained within AIA Contract Documents A312®-2010 Performance Bond when seeking to enforce claims against a surety. This case shows that failure to strictly comply with the conditions precedent of the bond can bar recovery. The case clarifies that these procedural prerequisites apply to claims for delay damages, reaffirming the rule that a surety’s obligations are not triggered unless the bond’s explicit terms are followed.
In JDS Construction Group LLC v. Allied World Insurance Company,[1] a dispute arose between construction manager, JDS, and surety, Allied World, over a subcontractor’s, Parkside Construction, performance of superstructure work on the Steinway Tower in Manhattan. JDS initially hired Parkside to perform work on 85 floors and required Parkside to obtain a performance bond.[2] Parkside approached Allied World for the required performance bond, and due to restrictions in its reinsurance treaty, Allied declined the request. To facilitate the bond, JDS prepared a modified subcontract covering Parkside’s work through the 36th floor, rather than the 85th floor, and proportionately decreased the subcontract sum. As a result, Allied issued an A312 Performance Bond naming Parkside, as principal, and in favor of JDS, as obligee, in the penal sum amount of the 36th floor subcontract. Shortly thereafter, JDS found fault with Parkside’s work, including substantial delays to the project, causing JDS to consider terminating Parkside.[3] Ultimately, however, JDS decided against terminating Parkside due to business reasons and to prevent further delays to the project.
Over a year after the contractually required date, Parkside completed its work through the 36th floor, and JDS paid Parkside in full. Subsequently, JDS retroactively increased the subcontract sum of Parkside’s work through the 85th floor. Under the adjusted subcontract, Parkside continued to work on the project until indictments against Parkside and its principals for wage theft and workers compensation insurance fraud were unsealed, at which time, Parkside abandoned the project.
About a year and a half after Parkside completed its work through the 36th floor, JDS sent Allied a letter stating that it was “considering declaring [Parkside] in default” and requesting to meet and confer with the surety.[4] JDS later sent two correspondences to Allied – one declaring Parkside in default and another formally terminating Parkside from the project.
JDS made a claim under the performance bond and demanded Allied World to timely fulfill its obligations under the bond.[5] JDS filed suit and the parties made competing motions for summary judgment. Among other things, at issue was whether the procedures specified in paragraph 3 of the bond were conditions precedent to JDS’s recovery of delay damages from Allied World and if so, whether JDS had satisfied those conditions by carrying out those procedures after the bonded work was complete. These procedures include notifying the surety of potential default, offering a conference, declaring Parkside in default, and terminating Parkside’s right to complete the subcontracted work.
The New York Supreme Court affirmed summary judgment in favor of Allied, finding that JDS’s failure to comply with the A312 Performance Bond conditions precedent before the bonded work was completed barred its claim for delay damages. In its ruling, the Court emphasized the importance of strict compliance with the procedures outlined in the A312 bond as conditions precedent to a valid claim against the surety. The bond’s language clearly states that the surety’s obligations “shall arise after” the beneficiary complies with these procedures, and non-compliance deprives the surety of its options to mitigate damages.[6] The court rejected JDS’s argument that these conditions should not apply to claims for delay damages, noting that the bond’s terms do not exclude delay damages from its scope and that the surety’s liability is triggered only by termination for a breach constituting a default.[7]
In all, JDS’s failure to adhere to the procedural requirements of the A312 Performance Bond barred its claim against Allied. Strict compliance with bond conditions can be necessary to hold a surety liable. This case serves as a pivotal reminder that strict compliance with the conditions set forth in performance bonds can be essential to preserving the right to recover from a surety. The ruling emphasizes that any deviation from the bond’s procedural requirements, such as failing to provide timely notice or properly terminating the contractor, can result in barred claims.
[1] JDS Dev. LLC v. Parkside Constr. Builders Corp., No. 1608-09, 2024 WL 3817696 (N.Y. App. Div. Aug. 15, 2024)
[2] Id. at 2.
[3] Id. at 4.
[4] Id.
[5] Id. at 5.
[6] Id.
[7] Id. at 7-8.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.