By Brian Kantar and Jase A. Brown of Chiesa Shahinian & Giantomasi PC
Originally published in the October 2023 Surety Claims Institute Newsletter
Lexon Ins. Co. v. Borough of Union Beach, 2023 WL 3727791 (D.N.J. May 30, 2023).
The surety issued an AIA 312 Performance Bond in the penal sum amount of $3,012,483 on behalf of Brunswick Builders, LLC (“Brunswick”), which was a general contractor and low bidder for a project to expand and renovate the Borough of Union Beach Municipal Building.
Shortly after Brunswick commenced construction on the project, Union Beach’s representatives determined that Brunswick was incapable of properly performing the work required to expand and renovate the municipal building. A meeting thereafter took place between Union Beach, Brunswick and the surety, and it was agreed that Rocon Construction Group, Inc. (“Rocon”) would assist Brunswick in completing the work.
Despite the assistance from Rocon, however, there continued to be numerous issues with the work including water leaks from the roof that caused damage inside the municipal building and inconvenienced Union Beach’s employees as well as members of the public. Union Beach ultimately terminated Brunswick and made a claim under the performance bond. Union Beach also notified the surety that there were potentially unsafe conditions at the municipal building relating to a temporary entrance that had been constructed by Brunswick and there was also water infiltration. Union Beach asked the surety to urgently perform roof repairs to stop the leaking and protect employees and visitors to the building. As a result, the surety and Union Beach entered into a December 20, 2018 Letter Agreement which stated that Rocon would be responsible for completing the roof repairs.
Subsequently, Union Beach took issue with the way Rocon undertook the repairs. Although Union Beach was eager to have the work completed as soon as possible, Rocon had workers on-site just six of the first fifty-five days after it could begin the repairs. As a result, the leaks continued for several months beyond when the municipality expected they would be cured. Despite the December 20, 2018 Letter Agreement, the roof repairs were not completed until approximately July 2019 and the warranty for the roof was not issued until October 18, 2019. In addition, Rocon did not install the roof membrane or shingle roofing in accordance with contract specifications. Nor did Rocon take adequate measures to secure the walkways into and out of the municipal building. This failure led the walkway to become wet, and at times icy, and resulted in a pregnant woman slipping and falling on the walkway.
On January 2, 2019, the surety sent Union Beach a draft tender agreement which proposed Rocon as the completion contractor, which Union Beach eventually rejected. The parties thereafter engaged in negotiations regarding the takeover agreement and although they were unable to agree to terms, the surety sent Union Beach an e-mail on February 21, 2019, stating that the surety had “approve[d] and authorize[d] Rocon to complete all remaining Contract Work,” and that “Rocon agree[d] to complete all work in accordance with the approved Contract documents for the project.”
The next day, February 22, 2019, Union Beach sent an e-mail to the surety stating that Rocon should limit its work to the roof repairs because the municipality was “exploring its options” as to how to complete the other aspects of the project.
On March 28, 2019, Union Beach sent a letter to the surety demanding “$1.6 million plus the tender of Ben Harvey Construction [a completion contractor] to resolve this matter.”
On April 11, 2019, the surety responded rejecting the demand and stating that the allegation that Rocon is not a competent contractor is not supported by the facts. The surety stated that “[t]he Borough’s refusal to allow Rocon to complete the work is a breach of the [Performance Bond] that discharges [the surety] from any liability thereunder . . . The Borough cannot choose whatever contractor it wants to complete the work and then charge the costs to [the surety].”
The following day, April 12, 2019, Union Beach responded stating that the municipality disputed the surety’s contention that Rocon was a responsible or competent contractor and that if the surety did not provide a lump sum payment and permit Ben Harvey Construction to complete the work, then Union Beach would rebid the project and pursue its claims against the surety separately.
The surety refused to tender Ben Harvey Construction to complete the project or make the lump sum payment demanded. Union Beach therefore rebid the project and ultimately hired H&S Construction & Mechanical, Inc. to be the general contractor at a lower cost than that initially estimated by Ben Harvey Construction.
Suit was filed by Union Beach and following discovery, the surety moved for summary judgment on the issue of whether it was discharged under the performance bond for Union Beach’s refusal to permit the surety to perform, with a contractor of its choosing, under section 5.2 of the bond. In relevant part, the bond provided the surety the following options:
§ 5.1 Arrange for the Contractor, with the consent of the Owner, to perform and complete the Construction Contract;
§ 5.2 Undertake to perform and complete the Construction Contract itself, through its agents or independent contractors;
§ 5.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the Owner and a contractor selected with the Owner's concurrence....; or
§ 5.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:
1 After investigation, determine the amount for which it may be liable to the Owner....; or
2 Deny liability in whole or in part and notify the Owner, citing the reasons for denial.
In awarding the surety summary judgment, the court noted that sections 5.1 and 5.3 of the bond require consent of the Owner. Section 5.2, on the other hand, by its plain language, does not require consent of the Owner. The court cited caselaw from other jurisdictions that when a surety elects to perform under section 5.2, an owner cannot unreasonably interfere with the surety’s selection of its completion contractor, even if the surety elects to use the same contractor as led to the original default. The court found that when a surety chooses to undertake completion of a construction project, it assumes primary responsibility for the contract, including the financial obligations, and thus it follows that the surety should have the freedom to choose its own completion team. To the extent Rocon continued with its poor performance, Union Beach’s remedy was a breach of contract claim against the surety, not a veto of the surety’s choice of contractor.
The court further rejected Union Beach’s argument that the surety breached the implied covenant of good faith and fair dealing. The court noted that a party breaches a duty of good faith and fair dealing in using its contractual discretion if it exercises that discretion arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract. The court found that there were no facts supporting such bad faith by the surety and that instead, it appeared that the surety wished to use Rocon as the completion contractor because Rocon was already familiar with the Project, thereby saving costs (i.e., its choice was a reasonable exercise of business judgment).
Brian Kantar is a Member of Chiesa Shahinian & Giantomasi PC. His practice is concentrated in commercial litigation, with a focus on fidelity and surety, construction, and bankruptcy matters. Kantar regularly represents surety companies, contractors, and developers in a wide variety of contract disputes, performance and payment bond claims, affirmative claims, loss recovery, bankruptcy issues, and contractor workouts. He can be reached at bkantar@csglaw.com or 973.530.2112.
Jase A. Brown is an Associate in the CSG Law Fidelity & Surety and Litigation Groups. He practices in the areas of surety law, fidelity law, construction law, and general commercial law. Brown has extensive experience representing sureties in connection with distressed contractor workouts and transactions, performance and payment bond claims and associated litigation, intercreditor transactions, bankruptcies, and all aspects of surety law. He can be reached at jbrown@csglaw.com or 973.530.2182.