The Rhode Island Department of Transportation (RIDOT) filed a third-party lawsuit against a contractor’s performance bond surety (“Surety”) alleging the Surety must indemnify RIDOT for the contractor’s indemnity obligations for third-party tort claims.
RIDOT’s action against the Surety was filed nine years after the third-party tort claimant filed the action, and approximately six years after completion of the underlying bridge project. No notice of default or breach was provided to the Surety by RIDOT.
On April 19, 2023, the Rhode Island Supreme Court discharged the Surety’s obligation under the performance bond for the lack of notice before the underlying project had been completed. The Surety on this appeal was represented by R. Thomas Dunn, partner-in-charge of Pierce Atwood’s Providence Office. The 11-page opinion can be viewed here.
A performance bond, which provides secondary protection for the public owner if the contractor defaults and cannot complete the project, is required on all public works projects in Rhode Island. When there is a default, the performance bond surety will “step in the shoes” of the contractor to complete the project capped at the bond amount. A threshold issue on appeal was the appropriate scope and purpose of a statutory public works performance bond in Rhode Island.
On this appeal, RIDOT claimed that performance bond Surety’s liability was co-extensive with the contractor without a declaration of default or notice to the Surety. It further claimed that a performance bond surety’s liability extends to Rhode Island’s 10-year statute of limitation and does not cease upon completion of the public works construction project.
Finally, RIDOT claimed that a performance bond surety could be liable for third-party tort claims for which the contractor provided contractual indemnification. Specifically, RIDOT sought indemnity from Surety for the contractor’s alleged trespass on a third-party abutter’s property years after the public works construction project was completed. The nature of the third-party tort claimant’s damages included lost business income, property damage, and loss of use (not improvements advancing the construction work of the public works project).
Chief Justice Paul A. Suttell, on behalf of the Rhode Island Supreme Court, wrote that “[i]n order to trigger a surety’s obligation to perform under a bond, it must first have notice of the principal’s default or breach.” In such a circumstance, the surety can intervene to perform and minimize its liability under the performance bond.
Under the facts of the case, the court found that “[t]he record is, however, devoid of any type of notice to the [Surety] regarding the [contractor’s] breach or [third-party claimant’s] claim against RIDOT.” Because of the lack of notice of default and satisfactory completion of the underlying project, the court held the performance bond itself became null and void.
A contrary ruling would have greatly expanded the liability of surety companies that issue public works performance and payment bonds in Rhode Island. Such an increase in liability may have led to decreased competition and increased cost for Rhode Island taxpayers. In addition, if the amount of a performance bond, which is capped at 100% of the contract value, was allowed to be used to pay indirect, third-party tort claims as the appellant argued, then the purpose of a performance bond, which is to guarantee the work in question will be completed, would be frustrated because the limited, secondary source of assets designed to complete the public construction project could be depleted by such indirect claims.
In the end, this case confirms general principles of suretyship law for Rhode Island public works projects — that a performance bond surety’s liability is secondary and conditional to the contractor’s liability, that timely notice must be given to the surety, and that such notice is not timely if given after satisfactory completion of the public improvement project.
For questions about suretyship law in Rhode Island, or for any other construction project-related concerns, please contact Pierce Atwood partner Tom Dunn.