Appellate Court of Maryland: Obligee under A312 Performance Bond Must Give Timely Notice to Surety

In a case of first impression in Maryland, the Appellate Court of Maryland in Wildewood Operating Co. v. WRV Holdings, LLC, et al., 2023 Md. App. LEXIS 720 (Oct. 30, 2023), held that a performance bond surety was discharged from liability where the obligee failed to give notice to the surety of the contractor’s default termination until after a third party had completed the work.

The project owner, Wildewood Operating Company, LLC (Wildewood), contracted with Clark Turner Construction, LLC (Clark Turner) to construct an assisted living facility. The surety, First Indemnity of America Insurance Company (First Indemnity), issued an AIA A312-2010 performance bond (Bond) on behalf of Clark Turner in favor of Wildewood. The Bond incorporated by reference the construction contract and outlined Wildewood’s obligation to notify First Indemnity in the event of Clark Turner’s default.

Specifically, Section 3.1 of the A312 performance bond addresses the owner’s obligation to provide notice that it is considering a contractor default; and Section 3.2 addresses notice by the owner that it has declared a contractor default and terminated the construction contract. Section 5 of the performance bond sets forth the remedies of the surety when the owner has satisfied the notice requirements.

Clark Turner did not construct the stormwater management work in accordance with the construction contract, and Wildewood, Clark Turner, and others entered into a Work Agreement to ensure completion of the work.  First Indemnity was not a party to the Work Agreement.

When Clark Turner still failed to complete the work pursuant to the Work Agreement, a third party completed the defaulted work by October 2015. By letter dated November 3, 2015, Wildewood notified First Indemnity that it was considering declaring Clark Turner in default.

After a conference with First Indemnity, Wildewood notified First Indemnity, by letter dated November 20, 2015, that it declared Clark Turner in default under the construction contract and terminated that contract. Wildewood made a claim against First Indemnity under the Bond for completion costs, which claim First Indemnity denied. Wildewood then filed suit in the Circuit Court for St. Mary’s County alleging First Indemnity breached the terms of the Bond.

First Indemnity moved for summary judgement, which the trial court granted on two bases. First, Wildewood breached a condition precedent of the Bond by failing to provide timely notice of Clark Turner’s default and termination until after the work had been completed by a third party. First Indemnity was, therefore, deprived of its right to elect a remedy under Section 5 of the Bond, which resulted in “inherent prejudice” to First Indemnity.  Second, the trial court concluded that First Indemnity was discharged of its Bond obligations when Wildewood entered into the Work Agreement.

Wildewood appealed the trial court decision to the Appellate Court of Maryland, which affirmed the judgment of the circuit court, on the first of the trial court’s two bases—the contractor’s failure to provide timely notice to the surety. (The appellate court did not rely on the second basis for the trial court’s entry of summary judgment.)

The appellate court concluded its decision as follows:

We decline to extend First Indemnity’s liability beyond the terms of the Bond.  . . . The parties entered into a contract wherein Wildewood Operating agreed to satisfy certain conditions precedent, and First Indemnity is entitled to elect among specified options upon the satisfaction of those conditions. Because Widlewood Operating failed to timely notify First Indemnity of Clark Turner’s default and termination under Section 3.2, First Indemnity’s liability under the Bond is discharged. Section 4 of the Bond does not require First Indemnity to demonstrate actual prejudice for failure to give notice under Section 3.2, but even if it did, First Indemnity was prejudiced as a matter of law under the circumstances.  While we recognize that the purpose of the performance bond is to secure the owner against loss under the bonded contract and impose on the surety an obligation to cure the default of the contractor, that purpose “is not a blank check to the judicial power to rule out the pacts and agreements between the parties.” . . .

A lucid and eminently quotable paragraph for sureties on the power of notice provisions in bonds.

The author of this article is Martha Perkins, General Counsel at NASBP. She can be reached at mperkins@nasbp.org or 240.200.1270.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels and should not act upon any information contained in this article without such advice.