Court Rejects Owner's Claim Against Bonding Company

After repeated performance deficiencies by a contractor, a public agency in Pennsylvania terminated the contract and filed a claim against the surety that issued the performance bond.  

Owner didn't provide notice and opportunity to cure:  After multiple court motions by both the Milton Regional Sewer Authority (MRSA) and Travelers Casualty & Surety Co. (Travelers), the U.S. District Court ruled in favor of the surety, affirming that MRSA had failed to provide the contractor with proper notice of the performance deficiencies and give them an opportunity to cure the problems prior to termination.  

Owner argues material breach the contract:  MRSA argued unsuccessfully that they were not required to provide the notice and give the opportunity for the contractor to cure the deficiencies because the contractor's lack of performance constituted a material breach of contract that would have allowed them to terminate without the notice and cure processes.   

Court rules no material breach of contract:  The Court disagreed with MRSA, ruling that the deficiencies cited by MRSA did not constitute a material breach of contract.  The contractor was guilty only of "poor performance of the contract, which is precisely within the contemplation of the cure provision in the contract." 

More information:  

• June 24, 2014 Court decision

• Article: "U.S. district court in Pennsylvania dismisses owner's claim against performance bond surety - repeated instances of poor performance by contractor were not so material as to allow owner to terminate without providing cure notice," by James M. Kwartnik, Jr, Attorney with Pepper Hamilton LLP, November 25, 2014 

Lessons learned:  If a contractor is not performing consistent with the contract documents, public agencies should:

• Document:  Thoroughly document deficiencies and the contractor's actions that are at variance with the contract documents.

• Keep surety informed:  Communicate clearly and often with the bonding company about the deficiencies.

• Abide by notice and cure provisions:  Follow the notice requirements of the contract for providing the contractor with the opportunity to cure deficiencies.

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