A unit in Arch Insurance Group Inc. does not have to pay $ 3.18 million under a performance guarantee it issued to a subcontractor because a general contractor did not first complete the required subcontractor, a federal appeals court said on Wednesday, when it upheld a lower court decision.
In 2017, The Graphic Builders LLC, based in Woburn, Massachusetts, was hired for a construction project that consisted of converting an existing commercial building into loft-style apartments and building a four-story apartment on the same property, according to the 1st decision. US Circuit Court of Appeals in Boston i Arch Insurance Co. v. The Graphic Builders LLC.
Graphically, Saint-Benoît-Labre, Quebec, chose Canada-based RCM Modular Inc. to manufacture and assemble the structure at a cost of approximately $ 8.6 million. A performance guarantee was issued in connection with the subcontract as made Arch, as guarantor, “jointly and severally”; liable for RCM’s obligations.
Part of the bond specified that Graphics actions would trigger the bond, and that these included declaring RCM negligent and terminating the contract, it was stated in the judgment.
Graphic complained to RCM that its modular units were defective shortly after delivery, the ruling said. In September 2019, Graphic sent a detailed letter to Arch stating that RCM had failed and demanding that Arch pay $ 3.18 million in remedial costs that Graphic had in the case.
Arch denied responsibility due to the fact that Graphic had not met several requirements required to trigger its sureties, noting that it had not terminated RCM before committing to complete the RCM’s scope of work as required, rendering the bond “invalid.”
Arch brought an action before the US District Court in Boston for a declaratory judgment which was not responsible. The district court ruled in favor of the insurer and was determined by an appellate body with three judges.
Graphic “had ample knowledge of RCM’s alleged failures at a time when termination remained a viable option under relevant legal principles,” the ruling said.
Lawyers in the case did not respond to requests for comment.
In April, a federal appellate court overturned a lower court ruling, ruling that a Tokyo Marine entity must pay a surety bond because a new contract issued in a construction project was essentially the same as the one under which its bond had been issued.