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Owners and general contractors can protect themselves effectively
against another party's default through the use of performance
bonds, surety bonds, and supply bonds. However, if
the beneficiary of the bond ignores notice requirements, or any
other conditions precedent, the security afforded by the bond
will be lost. New Viasys Holdings, LLC, v. The Hanover Insurance
Co., 2007 U.S. Dist. LEXIS 17924, demonstrates that
courts will not allow beneficiaries to recover against bonds
when the beneficiary fails to adhere to the bond's conditions
precedent.
In New Viasys Holdings, the Virginia Department of Transportation
("Owner") hired New Viasys Holdings, LLC
("Contractor") in April of 1999 to perform construction on
various highways in the Hampton Roads area of Virginia.
Contractor entered into a purchase order agreement (the
"Purchase Order") with Supplier ("Supplier") in late March of
1999 for the supply of signs, equipment and support on the
project. Supplier posted a supply bond (the "Bond") issued by
The Hanover Insurance Co., ("Surety") naming Contractor as
the beneficiary. The Bond allowed Contractor to seek damages
against Surety in the event that Supplier defaulted under the
Purchase Order. The Bond contained a number of conditions,
including a requirement that Contractor could not claim
against the Bond without providing immediate written notice of
Supplier’s default to Surety.
In August of 2003, Supplier failed to provide materials in accordance
with the Purchase Order; Contractor, however, provided Supplier an opportunity to remedy its breach. For thirteen
(13) months, Supplier failed to remedy. On September
17, 2004, therefore, Contractor finally sent a letter to Surety,
asserting a claim against the Bond, documenting Supplier’s
breach.
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After failed attempts between Contractor and Surety to resolve
the matter, Contractor filed an action in federal court
seeking payment under the Bond. Surety, in turn, filed a motion
for summary judgment, arguing that Contractor failed to
provide immediate written notice of Supplier's breach, as required
by the Bond. Contractor responded by arguing that
Supplier's defaults were continuing in nature and, additionally,
that Contractor provided notice immediately upon Supplier's
failure to cure its defaults.
The court granted Surety's motion, explaining that the Bond
clearly used the term "immediate notice" as a condition precedent
to a claim against the Bond. Though the court construed
the term "immediate notice" as providing Contractor a reasonable
time in which to provide notice of Supplier's breach,
Contractor's failure to give notice of Supplier's first default
within a reasonable time precluded Contractor's claim against
the Bond. Therefore, the court held that Contractor's claim
against the Bond was deficient.
This case serves as a reminder that bond provisions need to be
reviewed and fully complied with or beneficiaries run the risk
of having the bond's coverage denied by Courts.
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