Arch Ins. Co. v. Graphic Builders LLC

36 F.4th 12

ARCH INSURANCE COMPANY, Plaintiff, Appellee,

v.The GRAPHIC BUILDERS LLC, Defendant, Appellant,RCM Modular, Inc., Defendant.

No. 21-1126

United States Court of Appeals, First Circuit.

June 1, 2022

Richard E. Briansky, with whom Eckert Seamans Cherin & Mellott, LLC and Peckar & Abramson, P.C. were on brief, for appellant.

Jonathan C. Burwood, with whom Watt, Tieder, Hoffar & Fitzgerald, LLP was on brief, for appellee.

Before Thompson, Lipez, and Kayatta, Circuit Judges.

LIPEZ, Circuit Judge.

In this diversity case, The Graphic Builders LLC ("Graphic"), a general contractor, is seeking to enforce a performance bond issued by Arch Insurance Co. as surety for a subcontractor hired to work on a major project for Graphic. Arch, however, claims that Graphic breached the terms of the performance bond, and it seeks a judgment declaring that it has no liability under the bond. The district court sided with Arch, concluding that Graphic was required to terminate the subcontractor as a condition of seeking performance from Arch but had not done so. See Arch Ins. Co. v. Graphic Builders LLC, 519 F. Supp. 3d 54, 60-61 (D. Mass. 2021). Accordingly, the court granted summary judgment for Arch.

On appeal, Graphic argues that the district court erred in concluding that Arch's obligation to provide the warranty performance it seeks was conditioned on termination of the subcontractor. Graphic asserts that both the bond's language and relevant precedent support its position. We disagree and therefore affirm the district court's judgment.

I.

When reviewing a grant of summary judgment, we consider the facts in the light most favorable to the nonmoving party. See, e.g., Modeski v. Summit Retail Sols., Inc., 27 F.4th 53, 56 (1st Cir. 2022).

In this case, there is no material disagreement about the facts, which we set forth below. Graphic and Arch debate only whether those facts give rise to Arch's obligations under the performance bond.

In 2017, Graphic was hired for a construction project in Charlestown, Massachusetts, that consisted of converting an existing commercial building to loft-style apartments and constructing a four-story apartment building on the same property. Graphic and the property owner agreed on a modular method of construction for the new building, and Graphic then selected an experienced modular manufacturer, RCM Modular, Inc., to fabricate and assemble the structure at a cost of about $8.6 million. Among the obligations included in the subcontract was a "Special Manufacturers [sic] Warranty" for the modular units' windows and doors.¹

A performance bond issued in conjunction with the subcontract rendered Arch, as surety, "jointly and severally" responsible for RCM's obligations. Section 3 of the bond, which is reproduced in Section II below, specifies the actions by Graphic that would trigger Arch's "obligation under th[e] Bond," including declaring RCM in default and terminating the subcontract.²

Shortly after RCM delivered the modular units to Graphic in May 2018, Graphic complained to RCM that the units were defective. Graphic reported that, among other issues, the windows leaked and the exteriors of the modules were misaligned. In a letter to Arch recounting the sequence of events that followed its initial complaints, Graphic reported that it had received "no meaningful response from RCM." It therefore "engaged in remedial efforts to correct the defectively delivered and installed modules."³ Issues remained, however, and Graphic and RCM met at the project site in September 2018 to "develop[ ] a remediation plan to correct the defective work[,] including producing the window manufacturer's warranty." According to Graphic, "RCM failed to complete the remediation plan," and the manufacturer refused to provide a warranty.

There followed a series of letters from Graphic to RCM and Arch, initially providing notice only of RCM's potential default and then, on April 30, 2019, notifying RCM and Arch of RCM's default. The April 30 letter stated that Graphic was declaring RCM in default because, among other reasons, it had failed to deliver a window warranty and had not "undertake[n] remedial steps to defectively rendered Work and forc[ed] Graphic to do so at its own expense." Graphic noted, however, that it was "not yet terminating its Subcontract with RCM," but reserved the right to do so. Graphic followed up with another letter to Arch, dated May 3, reiterating the notice of default and advising that "Graphic is not yet taking the next step of terminating the Subcontract and making demand on the Bond in the hope that RCM and/or Arch" would arrange to quickly complete the unfinished work and "make a good faith move to reduce the large financial impacts Graphic has suffered."⁴ In a letter dated May 3, Arch acknowledged receipt of Graphic's April 30 and May 3 communications, noting its understanding that Graphic was "not attempting to make a claim on the Arch Performance Bond."

In September 2019, Graphic sent a detailed letter to Arch, with a copy to RCM, stating that it was providing notice of RCM's default pursuant to the terms of the performance bond and demanding that Arch pay $3.175 million in remedial costs that Graphic had incurred "as a result of [RCM]'s failure to perform." In response, Arch denied liability on the ground that Graphic had not complied with multiple prerequisites specified in the bond for triggering Arch's surety obligations. Arch noted, inter alia, the undisputed fact that Graphic had "not terminat[ed] RCM before it undertook to complete RCM's scope of work," a failure that, according to Arch, rendered the bond "null and void."

In December 2019, Arch filed this action seeking a declaratory judgment that Graphic had materially breached the performance bond, thereby discharging Arch from liability.⁵ Graphic counterclaimed, asserting that the preconditions for performance set forth in section 3 of the bond do not apply to Arch's obligations to indemnify Graphic for its costs related to RCM's defective work or the surety's obligation to provide a window warranty in RCM's stead. Arch subsequently moved for summary judgment. In its opposition, Graphic asserted, among other arguments, that it could not satisfy the bond's termination requirement "because RCM had ‘substantially completed’ its work under the subcontract and thus could not be terminated." Arch Insurance Co., 519 F. Supp. 3d at 61.

In granting summary judgment for Arch, the district court rejected Graphic's assertion that it was unable to terminate the subcontract. It found that Graphic had "indisputably failed to comply with a condition precedent" for Arch's liability under the performance bond by "unilaterally arrang[ing] for third-party subcontractors to remediate RCM's work" instead of terminating RCM. Id. Accordingly, the court held that Graphic materially breached the bond and that Arch was "discharged from any and all liability" under it. See id. This appeal followed.

II.

On appeal, Graphic reiterates its contention that it had no obligation to comply with section 3 of the bond to be entitled to the performance it demands from Arch, and it also again argues that termination was neither feasible nor legally permissible because RCM had substantially completed its work under the subcontract. Before turning to those issues, however, we briefly pause to note a change in Graphic's approach. As described above, Graphic asked the district court to impose two types of obligations on Arch: indemnification for Graphic's costs in completing RCM's work and "complet[ion of] RCM's Warranty Obligations Post Completion." Graphic has abandoned its indemnification claim on appeal.⁶ Hence, as stated by Graphic's counsel at oral argument, "the sole and only issue ... in this appeal is to enforce Arch's post-completion guarantee of its obligation to issue a window warranty."

We review a district court's grant of summary judgment de novo. Clark Sch. for Creative Learning, Inc. v. Phila. Indem. Ins. Co., 734 F.3d 51, 54 (1st Cir. 2013). Here, as noted above, the material facts are undisputed. The parties' differences spring from the terms of the performance bond and related caselaw.

A. The Terms of the Performance Bond

The question at the heart of this appeal is whether section 3 of the bond, which sets forth a series of preconditions for Arch's obligation to act on behalf of RCM, applies to Graphic's window warranty claim. In relevant part, section 3 states:

§ 3 If there is no [Contractor]⁷ Default under the [Subcontract], the Surety's obligation under th[e] Bond shall arise after:

.1 the [Contractor] first provides notice to the [Subcontractor] and the Surety that the [Contractor] is considering declaring a [Subcontractor] default. Such notice shall indicate whether the [Contractor] is requesting a conference among the [Contractor], [Subcontractor] and Surety to discuss the [Subcontractor]'s performance ....

.2 the [Contractor] declares a [Subcontractor] Default, terminates the [Subcontract] and notifies the Surety; and

.3 the [Contractor] has agreed to pay the Balance of the [Subcontract] Price in accordance with the terms of the [Subcontract] to the Surety or to a contractor selected to perform the [Subcontract].

Under section 5 of the bond, "[w]hen the [Contractor] has satisfied the conditions of Section 3," the surety must take one of several specified actions at its own expense. These include arranging for the original subcontractor to complete the job; taking over completion of the work "through its agents or independent contractors"; arranging for a new subcontractor acceptable to the contractor; or, in lieu of completing the work, determining "the amount for which it may be liable" and making that payment to the contractor.

As described below, Graphic also invokes section 1 of the bond, which states in full: "The [Subcontractor] and Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors, and assigns to the...