Too often, contractors and sureties taking over the performance of construction contracts don’t dot the i’s and cross the t’s with respect to the timely assertion of claims. Missteps can be costly, in the form of litigation costs, or worse yet, fatal to a claim. This is especially true on public projects.
A recent case demonstrates this. In Berkley Insurance Company v. Kent State University, Kent State University terminated the contractor and made a claim on the performance bond. The surety took over performance, thinking there was over $1,000,000 left in the contract to which it would be entitled. It completed performance and negotiated with the university over back-charges, which would eat up almost all of the remaining $400,000 contract balance. The parties negotiated for months, but no formal claim was submitted by the surety. When the parties were unable to resolve their differences, the surety brought suit.
Very early in the case, the university filed a motion for summary judgment arguing that the construction contract—by which the surety was also bound—required that a formal claim be submitted within ten days “after the occurrence of the event giving rise to the Claim,” and failure to timely submit the claim constituted a waiver of the claim. The university contended that it had given the surety notice of substantial back-charges. Although the surety disputed the amounts in correspondence, it never did institute a formal claim.
The surety argued that the university had not finalized its back-charges and, therefore, there had been no “event giving rise to [its] Claim.” The letter from the university had described itself as an “update,” indicated that it was still reviewing close-out documentation to determine how much retainage to release and indicated its willingness to work with the surety on remaining issues. The letter did not reference the contract claims provisions in any way.
The Ohio Court of Claims rejected the surety’s argument that the university’s letter describing its back-charges was not an event giving rise to a claim by the surety. The court noted that the letter detailed the university’s “intention to withhold amounts from the contract balance.” It further found that the surety never initiated the claims procedure as required by the contract. Therefore, the court granted the university’s motion for summary judgment dismissing the surety’s claim for payment.
The matter was appealed earlier this year, so the outcome is not yet known. Nonetheless, the lesson is clear for contractors: Don’t get yourselves in this mess. Even if you ultimately win, you’ve spent your recovery on attorneys fees. If you lose, even worse. No doubt, the law is very harsh on contractors—and their sureties—with respect to public contracts. There is no reason to believe that the university did not have full knowledge of the basis of the dispute or was in any way prejudiced by the surety not filing a formal claim. Instead, the surety was caught in what the average person would think of as a legal technicality. Nonetheless, legal technicalities are real and affect substantial rights. Best to be very prudent with respect to notice and the timely assertion of claims.