Certificate of Substantial Completion Not A Safety Net For Surety

Tuesday, April 03, 2018 9:05 am
April 2018 - Volume 40 Number 4

Breach of Contract --- Performance Bond

City of Wolfe City v. Am. Safety Cas. Ins. Co., 2018 Tex. App. Lexis 1145 (Jan. 5, 2018)

A certificate of substantial completion was no match against contract language and faulty project results that left a surety on the hook for a contractor’s poor performance.

Wolfe City, Texas (the City) successfully appealed a trial court’s decision for summary judgment in favor of surety American Safety Casualty Insurance (American Safety). The City claimed that American Safety failed to stand by the performance bond it issued, guaranteeing the work of contractor McKinney and McMillen, LLC (M&M) on a City project to upgrade a water distribution system.

In December of 2011, the City entered into a contract with M&M to enhance its water system by installing 722 automatic meter-readers (AMRs). The total value of the contract, after change orders, was $839,665, which American Safety agreed to bond. Under the terms of the bond, American Safety "bound itself to perform M&M’s contract with the City if M&M failed to do so." Specifically, the bond incorporated the terms of the City-M&M contract and stated that "American Safety is only liable to the City under its bond if M&M has breached the Contract." See Great Am. Ins. Co v. N. Austin Mun. Util. Dist. No1, 1, 908 S.W.2d 415-419 (Tex. 1995).

Before M&M had completed its project work, the City began experiencing problems with the installed meters (e.g., they failed to correctly register water amounts, ran backwards, and sent random error messages). The contract parties tried and failed to resolve the problems; the AMR system was never fully functional. In November 2013, the City made demand on American Safety under the performance bond. American Safety refused the demand, and the City sued.

Contractor responsible for subcontractor’s deficiency

American Safety first argued that there was no evidence M&M breached its contract with the City. Even though, M&M conceded that its contract required it to provide a fully functioning AMR system and that it did not. (The co[..]