[00:00:01] Speaker ?: Case number 18-33, Western Charity Company versus U.S. [00:00:06] Speaker ?: Engineering and Construction LLC Appellant. [00:00:09] Speaker ?: Mr. Sutton, the appellant. [00:00:11] Speaker ?: Mr. Moran, the appellate. [00:00:36] Speaker 02: Good morning, Your Honor. [00:00:38] Speaker 01: Good morning. [00:00:39] Speaker 02: I'm Steve Seiden, and I represent U.S. [00:00:41] Speaker 02: Engineering Company. [00:00:43] Speaker 02: We're here today not to discuss the Balance of Energy Amendment or the Medicare Act. [00:00:47] Speaker 02: We are here today on appeal from a summary judgment granted by the lower court after implying a time limitation on U.S. [00:00:56] Speaker 02: Engineering's notification to a surety on a performance bond that it issued under Section 3.2 that required that it had to [00:01:06] Speaker 02: had provided that notice before it completed any work that was left undone by a defaulting subcontractor. [00:01:12] Speaker 02: There were three conditions preceding to establishing the surety's liability under the bond. [00:01:19] Speaker 02: It's in Section 3. [00:01:20] Speaker 02: Section 3.1 had specific time limits and detailed time provisions with regard to a pre-default notice in order to have a conference among the surety, the contractor, [00:01:35] Speaker 02: in U.S. [00:01:38] Speaker 02: engineering, and it specifically says then in Section 4, if those notice periods aren't provided, the surety cannot be discharged in its entirety but has to demonstrate actual prejudice resulting there from. [00:01:49] Speaker 02: But in Section 3.2, which was the core issue in the [00:01:52] Speaker 02: lower course decision, it says that the U.S. [00:01:56] Speaker 02: engineering had to provide notice of a default, notice that it had terminated the contractor, and provide notification to the surety, but has no specific time period for any of those things to occur or any particular order. [00:02:10] Speaker 01: So you're not disputing that the end notifies the surety is a [00:02:15] Speaker 01: condition precedent, but simply that the timing doesn't apply there. [00:02:20] Speaker 01: That's correct. [00:02:21] Speaker 01: So it does have to notify the jury. [00:02:22] Speaker 02: The time limit imposed by the trial or the lower court is not stated there. [00:02:28] Speaker 03: You're saying that there is no doctrine of reasonableness involved in that question. [00:02:34] Speaker 03: Well, soon you can have it. [00:02:36] Speaker 03: Soon you must give the notice. [00:02:38] Speaker 02: No, I don't believe there is, Judge. [00:02:42] Speaker 02: If you never give it before, you can give it today. [00:02:46] Speaker 02: Yes, we could. [00:02:47] Speaker 02: We could give it today, and the question then becomes what the consequence is. [00:02:52] Speaker 02: Because if you understand the facts, and I'm sure you do, the facts here, in September 2013, we notified the contractor that it was performing after having notified them many times before that we were going to default the contract. [00:03:06] Speaker 02: So we declared a default, terminated the construction contract, and then without the subcontractor there to complete this work, we had to complete the work for it. [00:03:14] Speaker 02: And we went ahead and did that at the cost of $586,000. [00:03:17] Speaker 02: And then that took about 60 to 90 days. [00:03:21] Speaker 02: And then in June of 2014, notified the surety that the contract had been defaulted and the termination had been made. [00:03:28] Speaker 02: The work had been completed. [00:03:29] Speaker 02: And they asked them to pay the completion costs incurred by US engineering. [00:03:34] Speaker 02: So the time period between the notification of the surety and the completion of the work, once it was completed, it was completed. [00:03:42] Speaker 02: And there wasn't any. [00:03:43] Speaker 02: particular prejudice to the surety after that point. [00:03:47] Speaker 02: And the court relied heavily upon the Hunt case, which is the DC Circuit Court of Appeals opinion in 2009, which found that in two things it says, one of them which we fully support, which is that it was trying to interpret the surety bond as actually written, which we applaud. [00:04:06] Speaker 02: And the second part of it, it said that the surety had not notified, excuse me, the contractor in the U.S. [00:04:13] Speaker 02: engineering position had not notified the surety before it completed the work. [00:04:17] Speaker 02: And therefore, because there was specific language in the bond that required that that says there had to be reasonable notice to the surety, it couldn't recover under the bond. [00:04:28] Speaker 02: But that language isn't in this bond, not in 3.2 or anywhere else. [00:04:33] Speaker 02: I really noted requirement in this bond. [00:04:35] Speaker 02: There's a notice requirement, but there's not a timing of the notice requirement that the lower court imposed, which then it had to occur. [00:04:43] Speaker 02: The lower court had done a theory of reasonable notes, right? [00:04:48] Speaker 02: The court said that, Your Honor. [00:04:50] Speaker 02: I understand that. [00:04:51] Speaker 02: But the question as to whether a US engine could possibly have known that it had to do that is not stated in the bond. [00:05:00] Speaker 02: In addition to the Hunt case, the court relied upon Section 5, which is the provision of the bond that details the obligations of the surety if Section 3, the conditions preceded and are satisfied. [00:05:15] Speaker 02: So in that section, it says that it sets out alternative performances available to the surety, and they are either A, to have the [00:05:27] Speaker 02: terminated some contractor to complete the work with U.S. [00:05:29] Speaker 02: engineering's consent, B, to have another contractor complete the work with our consent, or have the surety do it itself, or, and then finally in subpart four, do none of that, investigate the facts and either pay U.S. [00:05:42] Speaker 02: engineering what it believed its liability was, or deny that there was any liability and inform U.S. [00:05:48] Speaker 02: engineering, which is, and the latter is what it did. [00:05:51] Speaker 02: And it did that after we notified them about the claim, [00:05:54] Speaker 02: They asked for more information. [00:05:56] Speaker 02: We provided our entire file with regard to United Sheet Metal, including the plans, drawings, specifications, billings, invoices, labor costs, labor hours. [00:06:05] Speaker 02: The file was noticed not given back at the time of the termination. [00:06:12] Speaker 02: They were under the gun. [00:06:14] Speaker 02: U.S. [00:06:14] Speaker 02: Engineering had to fill in and do the work that sheet metal hadn't completed. [00:06:19] Speaker 02: So there was a timing requirement because the schedule for the contract to be completed was on it now. [00:06:26] Speaker 02: How did that prevent you from giving notice? [00:06:30] Speaker 02: It didn't, Judge. [00:06:31] Speaker 02: I'm not offering an excuse here. [00:06:33] Speaker 02: I'm just trying to say that the facts on the ground were that it was working on getting the work done. [00:06:39] Speaker 02: And the second part was it should have done so sooner after it completed the work. [00:06:45] Speaker 02: But once the work is completed, there was no difference to the surety whether it was a month or two months later. [00:06:50] Speaker 02: I mean, the work was done. [00:06:53] Speaker 04: Once the work is completed, [00:06:55] Speaker 04: They've lost their options under Section 5 of the contract. [00:07:00] Speaker 02: Well, Your Honor, Section 5 says, first of all, that Section 3 has to be satisfied before Section 5 comes into play. [00:07:08] Speaker 02: The opening clause to Section 5 says once Section 3 is satisfied, then the surety has the alternative. [00:07:16] Speaker 04: Surety has options, right? [00:07:18] Speaker 04: They can cajole the sub to finish the job. [00:07:21] Speaker 04: They can get another sub, or they can just pay you [00:07:24] Speaker 02: the difference. [00:07:25] Speaker 02: Or they can do none of those things and investigate the facts. [00:07:29] Speaker 04: And after you go out and get another sub to finish the job, they've lost their options under the culture. [00:07:37] Speaker 02: But those aren't guaranteed options. [00:07:39] Speaker 02: Those are alternative promises that the case law says if you have four things you can do and three of them aren't available, you have to do the fourth. [00:07:48] Speaker 04: It doesn't say you can compel them to [00:07:52] Speaker 04: performed by any one of the four at your choice? [00:07:57] Speaker 02: No. [00:07:59] Speaker 02: I understand that, but they have to do... Which is what you do. [00:08:02] Speaker 02: They get the ability to consider doing any one of those four things. [00:08:07] Speaker 02: And, but there's no guarantee. [00:08:08] Speaker 02: You're taking that ability away when you don't give notice until after you've already exercised one yourself. [00:08:12] Speaker 02: Your Honor, Your Honor, I believe the surety, if it wanted to guarantee that that ability was there, it should have written into the bond that the notification had to come before any work was completed. [00:08:23] Speaker 02: That was simple to put into Section 3.2, and it didn't do that. [00:08:27] Speaker 02: And the consequence is now a total default on forfeiture. [00:08:31] Speaker 03: There's no timeline there. [00:08:32] Speaker 03: The question is whether there is a reasonableness requirement imposed by law. [00:08:41] Speaker 03: I'm not sure how it's reasonable to think that you can give them the notice termination long after you've taken away three of the options for remedy. [00:08:50] Speaker 02: Well, I think that they could have put in the bond that the notice had to be given before any work was completed, and then they would be assured. [00:08:58] Speaker 03: It takes me back to my question as to why a notice wasn't given at the time of the termination. [00:09:04] Speaker 03: And you're asked, you're responsible, it's not an answer. [00:09:08] Speaker 02: Judge, I think that the record establishes that they should have done that and didn't. [00:09:14] Speaker 02: I think the testimony of one of our witnesses in the deposition was that they missed it. [00:09:19] Speaker 02: But the point is, what's the prejudice to the surety here when they have the alternative under Section 3.1? [00:09:32] Speaker 02: So you don't have any reason for not giving the notice at the time of the termination? [00:09:38] Speaker 02: You know, Your Honor, I don't have a reason. [00:09:41] Speaker 02: They could have done that, they didn't, but there has been no prejudice to the surety that justifies the total forfeiture of the bond when, under Section 3.1, they still can raise those defenses if the court reverses the lower court's order and remanages the case to the district court. [00:09:59] Speaker 02: Because in that instance, they have to show and demonstrate actual prejudice. [00:10:03] Speaker 01: And that's still available. [00:10:07] Speaker 01: Best case for reading, there aren't any cases actually reading this form provision to not require timely notice, right? [00:10:17] Speaker 01: They're not decided cases on that, nor are there decided cases reading it to provide that the surety has to pay unless it can show prejudice. [00:10:31] Speaker 01: It has to pay the extent that it has to have prejudice. [00:10:34] Speaker 01: So you don't have cases under this provision, right? [00:10:37] Speaker 01: from any other court. [00:10:38] Speaker 02: No, but this would be the only decision that provides the relief that the lower court provided. [00:10:44] Speaker 01: And the best case for you, the closest case for you, tending in that direction is, case or cases, that we could impose the prejudice requirement on the surety here rather than [00:10:57] Speaker 01: You can do that, and it's already in the case in the sense that under 3.1, if they... Well, that's really... I mean, that cuts the other way because there's a prejudice requirement for the 3.1 notice, but not for the provision issue here, right? [00:11:12] Speaker 01: The 3.2. [00:11:15] Speaker 02: Yeah, I know, but my point is it's still available to the surety to make the argument under 3.1 as long as they can demonstrate actual prejudice. [00:11:24] Speaker 02: Even if you reverse the lower court's decision on 3.2, 3.1 is still available to the jury and the case can go forward in the district court on that basis. [00:11:37] Speaker 01: So no cases that you particularly want us to look at in your support other than what's cited in your brief? [00:11:42] Speaker 02: No. [00:11:45] Speaker 02: Okay, I'll reserve the balance of my time. [00:11:46] Speaker 02: Thank you. [00:11:49] Speaker ?: Take the balance. [00:11:58] Speaker 00: Good morning, and may it please the Court. [00:12:00] Speaker 00: My name is Thomas Moran, and I am here on behalf of the Appellee Western Charity Company. [00:12:06] Speaker 00: We're here to request that the District Court's decision be affirmed because U.S. [00:12:11] Speaker 00: Engineering failed to comply with the bond's notice requirement when it terminated the principal under the bond, United Sheet Metal, without notice. [00:12:20] Speaker 00: Because of that decision, however, it came about [00:12:23] Speaker 00: Western surety lost the right to choose how to perform under section 5 of the bond. [00:12:31] Speaker 00: The bond was therefore discharged for failure to comply with the condition precedent. [00:12:38] Speaker 00: This case involves the American Institute of Architects AIA A312-2010 performance bond. [00:12:46] Speaker 00: Before I get into the language of the bond, it's useful to note that this is a bond form that was insisted upon by U.S. [00:12:57] Speaker 00: Engineering under the terms of the subcontract it had with United Sheet Metal, because U.S. [00:13:03] Speaker 00: Engineering had the right to determine which form would be used for the bond language. [00:13:08] Speaker 00: Now in Section 3 of the bond, it provides that the surety's obligation shall arise after three things occur. [00:13:14] Speaker 00: The first is that U.S. [00:13:16] Speaker 00: Engineering provides notice to United Sheet Metal and Western Surety that it is considering declaring a default. [00:13:23] Speaker 00: That then triggers a procedure for scheduling and convening meetings. [00:13:29] Speaker 00: The second thing that has to happen is that U.S. [00:13:31] Speaker 00: Engineering declares a default, terminates the contract, and notifies the surety. [00:13:37] Speaker 00: The third thing is that the owner agrees to pay the balance of the contract price to the surety or a contractor selected to perform the contract. [00:13:47] Speaker 00: Now, as Your Honor noted, Section 4 contains a prejudice requirement that relates back only to Section 3.1. [00:13:55] Speaker 00: It does not relate to Section 3.2 or Section 3.3. [00:14:00] Speaker 00: If the parties and if the drafters of the bond had intended for there to be an actual prejudice showing by the surety for failure to comply with Section 3.2, they surely could have put that in there. [00:14:13] Speaker 00: However, they only [00:14:14] Speaker 00: only referred specifically to Section 3.1. [00:14:17] Speaker 01: So it's a little harsh. [00:14:19] Speaker 01: Doesn't it seem that if you hire a surety to protect the work and you're busy getting it done and then you turn around at the end of the day and say, oh, we did have a bond here and we were super efficient in who we hired and, you know, mitigated all loss in getting a new contractor and it really, you know, [00:14:43] Speaker 01: minimize the loss to a very high degree, but hey, we have this bond, yet your view is, uh-uh, yours got free because they didn't bring you in earlier. [00:14:55] Speaker 00: Your Honor, Judge Williams spoke to this directly in the Hunt decision. [00:14:59] Speaker 00: He wrote that sureties that put notice requirements in their bond presumably are unwilling to submit to the vagaries of litigation exactly what it would cost, what it should have cost to complete the project. [00:15:14] Speaker 00: How do we get people in to come in and view the project and complete it? [00:15:20] Speaker 00: So everything that you were getting at in terms of [00:15:23] Speaker 00: The contractor, U.S. [00:15:27] Speaker 00: Engineering, saying that they did everything right, that they saved us money by coming in and completing the job, we don't have a way to test that. [00:15:34] Speaker 00: We didn't have an opportunity to bring in a consultant, which is what we usually do with surety lawyers, to bring in a consultant to view the project, sell them with an extensive construction background to figure out what needs to be done on the project. [00:15:47] Speaker 00: That right, and it's determined to be a right in Hunt, it's determined to be a right in other applicable case law, and it's also determined to be a right in the bond itself. [00:15:59] Speaker 01: And U.S. [00:16:00] Speaker 01: Engineering also argues that your reading of the contract requires near instantaneous notice after termination of a contract, that it has to be pretty much contemporaneous with the termination to avoid it being too late to get the [00:16:17] Speaker 01: project back on track or too early so that you couldn't yet determine the scope of loss. [00:16:22] Speaker 01: And that's actually not a problem in your view. [00:16:26] Speaker 00: It would certainly be prudent to give notice of termination when that termination happens. [00:16:31] Speaker 00: It would be prudent for the contractor itself because then you bring in the resources of the surety that it can rely on and it can bring in people to view the job, to get boots on the ground if need be. [00:16:45] Speaker 00: or to tend to a replacement contractor if need be, and that depends on the circumstances. [00:16:51] Speaker 00: I could see there being a close case if there was a little bit of a delay in giving notice of the termination where we might be able to avoid the harsh result of a loss of any coverage under the bond, but this isn't a close case. [00:17:07] Speaker 00: They waited nine months until after the termination, let alone when there were first problems on the job. [00:17:13] Speaker 00: They waited nine months after the termination to provide any notice [00:17:17] Speaker 00: to the surety. [00:17:18] Speaker 00: So the surety gets a letter in the mail on June 12, 2014, nine months after the termination happened, basically saying, your principal was terminated, we're making a claim against the bond. [00:17:31] Speaker 00: Well, and the facts of this case make this basically the poster child of why sureties require notice, because by that time, United Sheet Metal was out of business. [00:17:43] Speaker 00: The principal and employees had standard to the winds. [00:17:49] Speaker 00: The job had been completed. [00:17:51] Speaker 00: So we're talking HVAC work here. [00:17:54] Speaker 00: A lot of that is behind walls by this point. [00:17:57] Speaker 00: So we literally would have had to come in and do destructive testing to figure out what had to be done. [00:18:04] Speaker 00: And surely that wasn't going to be acceptable to the owner, to the South African embassy. [00:18:09] Speaker 00: I don't know that it would have been acceptable to U.S. [00:18:12] Speaker 00: Engineering, who would have had to come back in and fix it, but that's just an example of what a shuri would need to do after it gets late notice. [00:18:29] Speaker 00: In my opinion, late notice is no notice at all. [00:18:33] Speaker 00: It has to be noticed, and the Hunt Court recognized this, it has to be noticed it's calculated to give the surety and opportunity to exercise its rights under the bond. [00:18:42] Speaker 00: And there's reference in the briefs filed by U.S. [00:18:46] Speaker 00: Engineering, and there's a reference made today that the options under Section 5 are only performance obligations. [00:18:55] Speaker 01: How do you respond to Mr. Sutton's argument that under Hunt, the language was a little clearer because under the bond there, the obligee could only arrange for performance of the defaulted obligation by a different contractor after reasonable notice to the surety. [00:19:16] Speaker 01: And so that's a little clearer that there's a temporal requirement there. [00:19:20] Speaker 01: or not? [00:19:21] Speaker 01: What's your response to that? [00:19:23] Speaker 00: Your Honor is completely right that the Hunt Court mentioned that. [00:19:28] Speaker 00: But before it even got there, the Hunt Court noted that the A311 bond form, which was that issue in that case, stated that whenever the principal shall be in default and declared by al-Wajih to be in default, if the al-Wajih has performed its contractual obligations, then the first option, first, surety may promptly remedy the default. [00:19:51] Speaker 00: The court looked at that language first and it said that that essentially implies a timely notice requirement because if the surety doesn't have timely notice, then that right that it has to promptly remedy the default is meaningless. [00:20:09] Speaker 00: And contracts in the District of Columbia have to be interpreted in such a way [00:20:17] Speaker 00: that there are no meaningless promises or illusory promises, and that's an interpretation that U.S. [00:20:23] Speaker 00: engineering is advocating, that those promises, those rights, as the bond itself refers to them in Section 5.4, are meaningless because U.S. [00:20:32] Speaker 00: engineering can just bypass those by keeping the surety in the dark. [00:20:35] Speaker 00: And I don't think that that was intended [00:20:38] Speaker 00: by the AIA who has issued numerous bond forms. [00:20:43] Speaker 00: And it certainly hasn't been recognized by the various courts, the few courts that have evaluated this bond form. [00:20:50] Speaker 01: So going... You may not have the answer to this, but how often does Assurity or does your client actually itself perform and complete as opposed to bid it out or arrange for completion elsewhere? [00:21:07] Speaker 00: It does happen, Your Honor. [00:21:10] Speaker 00: I can't speak to this client in particular. [00:21:12] Speaker 00: I don't know that I've had a case with this particular client where it takes over. [00:21:17] Speaker 00: It's not necessarily the first thing that we look to do as surety lawyers when we get a performance bond claim. [00:21:26] Speaker 00: The preference is to tender, generally. [00:21:33] Speaker 00: The classic example of when a surety would want to take over is when the job is fairly close to completion and there's substantial contract funds remaining. [00:21:41] Speaker 00: And also we do get sometimes in government projects, the government is not [00:21:46] Speaker 00: eager to allow a project to be rebid because of bidding requirements and all that that I don't need to get into. [00:21:55] Speaker 00: So sometimes, particularly the federal government, will require a surety to come and take over the project. [00:22:00] Speaker 00: And when that happens, we do that. [00:22:03] Speaker 00: So it's not unheard of. [00:22:04] Speaker 00: It's not… You actually arrange a new sub, more likely than not. [00:22:09] Speaker 00: That's right, yes. [00:22:11] Speaker 00: So the surety can contract and do a takeover. [00:22:14] Speaker 03: I haven't said it's been 50 years since I worked on one of these, but I think that's what we've been doing. [00:22:19] Speaker 00: I don't think the principles have changed too much, Your Honor. [00:22:22] Speaker 00: So the surety can enter into a contract itself with the owner, a takeover agreement, and then it assumes primary responsibility for the completion of the job. [00:22:33] Speaker 01: But the bond speaks of those as two different things, arranging for a new subcontractor versus completing the work itself. [00:22:39] Speaker 00: Well, the result ends up being more or less the same. [00:22:42] Speaker 01: I was just inquiring specifically about undertake to perform and complete the construction contract itself. [00:22:50] Speaker 01: I was just curious. [00:22:51] Speaker 01: But I thought your answer was very informative. [00:22:53] Speaker 01: Thank you. [00:22:54] Speaker 00: Thank you, Your Honor. [00:22:54] Speaker 00: I see that my time is up. [00:22:56] Speaker 00: So I'll conclude by again asking that the court affirm the decision of the district court. [00:23:01] Speaker 00: Thank you. [00:23:03] Speaker 01: Thank you. [00:23:03] Speaker 01: Did Mr. Sutton have rebuttal time remaining? [00:23:05] Speaker 01: Mr. Sutton, you don't have any rebuttal time remaining. [00:23:08] Speaker 01: If you have her bottle, you may take two minutes. [00:23:11] Speaker 02: If you'd like two minutes, then no reason to take them if you don't. [00:23:19] Speaker 02: I respect Mr. Rand's comments about the surety. [00:23:26] Speaker 02: situation, but I believe Judge Centella is correct. [00:23:30] Speaker 02: I've been a surety lawyer unfortunately longer than Mr. Moran and I know for a fact that sureties don't go out and do construction work. [00:23:36] Speaker 02: They subcontracted out and so in this situation if they'd exercised that option they would have gotten another contractor to do it. [00:23:44] Speaker 02: I do take issue with one of the [00:23:47] Speaker 02: comments that was made about having to go into the project and deconstruct what was finished and to get at the work that was done as if that was the only way to evaluate what the cost was that was incurred by U.S. [00:24:00] Speaker 02: engineering when in fact it's perfectly, you're perfectly able to do it today even because we have given them everything that's related to this project, the work that was done. [00:24:09] Speaker 02: They have the plans, drawing specification, the as-built drawings, [00:24:13] Speaker 02: The billings, all the information about what went in to the $586,000 is available and it's perfectly possible to find an expert witness to testify whether in September 2013 that work could have been done for less. [00:24:29] Speaker 02: If it could have been done for less than U.S. [00:24:31] Speaker 02: Engineering did it, then they wouldn't be able to show that they were financially prejudiced without having to take the building apart because [00:24:38] Speaker 02: The plans and drawings for like this building and what's above that ceiling is all laid out in some drawings and some in the government's offices somewhere that anybody could look at and an expert could render an opinion on without taking it apart. [00:24:53] Speaker 02: I believe that's the extent of my comments in rebuttal. [00:24:58] Speaker 02: So thank you very much for your time and attention today. [00:25:01] Speaker 01: Thank you. [00:25:01] Speaker 01: The case is submitted.