Arch Insurance Company v. The Graphic Builders LLC ( 2022 )

United States Court of Appeals
For the First Circuit
No. 21-1126
ARCH INSURANCE COMPANY,
Plaintiff, Appellee,
v.
THE GRAPHIC BUILDERS LLC,
Defendant, Appellant,
RCM MODULAR, INC.,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Thompson, Lipez, and Kayatta,
Circuit Judges.
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.
June 1, 2022
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
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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
1Graphic asserts in its brief that Arch was obliged "to issue
a post-completion window warranty and other warranties," but it
does not specify what "other warranties" are at issue. At oral
argument, Graphic's counsel stated that only the window warranty
is at issue. Following Graphic's lead, we focus on the window
warranty and consider waived any assertion that a different
analysis would apply to "other warranties."
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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
2Arch's performance bond is in a standard format commonly
used in the construction industry and known as an American
Institute of Architects A312 Performance Bond (2010 ed.). See,
e.g., St. Paul Fire & Marine Ins. Co. v. VDE Corp., 603 F.3d 119,
124 (1st Cir. 2010) (noting that a leading commentator on
construction law has described the A312 performance bond as "one
of the clearest, most definitive, and widely used type of
traditional common law 'performance bonds' in private
construction" (quoting Philip L. Bruner & Patrick J. O'Connor,
Jr., 4A Bruner & O'Connor on Construction Law § 12:16 (2009))).
3Although the record is somewhat unclear on this point, it
appears that a substantial amount of the remedial work was done by
third-party subcontractors hired by Graphic but that RCM itself
was asked to address the window deficiencies.
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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
4 The May 3 letter detailed the expedited remedial work
Graphic deemed necessary to allow building occupancy by June 1 and
asked that "RCM and/or Arch deploy, without further delay, the
qualified staff, materials and equipment needed to correct
defectively rendered Work" or to complete unfinished work. Among
the listed requests, subject to the project owner's agreement, was
"a warranty bond as a substitute for the window warranty that RCM
has been unable to deliver."
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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
5 An earlier state-court lawsuit filed by Graphic against RCM,
later amended to include Arch, was removed to federal court by
Arch and consolidated with this action. In its brief, Arch reports
that, in May 2021, an arbitration panel awarded Graphic roughly
$1.8 million against RCM. We note these other proceedings solely
as background; they play no role in our resolution of this appeal.
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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
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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:
Graphic also brought a claim under Massachusetts's unfair
6
business practices statute that it does not pursue on appeal. See
Mass. Gen. Laws ch. 93A, §§ 2, 11.
The performance bond identifies Graphic as "Owner," but
7
provides in section 15 that, if the bond covers an agreement
between a contractor and subcontractor, "the term Contractor in
this Bond shall be deemed to be Subcontractor and the term Owner
shall be deemed to be Contractor." Thus, we have replaced the
term "Owner" in section 3 with "Contractor," "Construction
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.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,
Contract" with "Subcontract," and "Contractor" with
"Subcontractor."
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jointly and severally, bind themselves, their heirs, executors,
administrators, successors, and assigns to the [Contractor] for
the performance of the [Subcontract], which is incorporated herein
by reference."
B. Governing Law of Contract Interpretation
Under Massachusetts law, "we construe [the] insurance
policy de novo under the general rules of contract interpretation."
Clark Sch. for Creative Learning, 734 F.3d at 55 (quoting Valley
Forge Ins. Co. v. Field, 670 F.3d 93, 97 (1st Cir. 2012)). Neither
party claims that the language of the performance bond is
ambiguous; each insists that the plain language of the bond
supports its position. We agree that there are no ambiguities in
the contested provisions and, hence, our task is to "interpret
[the bond] according to its plain terms." Farmers Ins. Exch. v.
RNK, Inc., 632 F.3d 777, 784 (1st Cir. 2011) (quoting Den Norske
Bank AS v. First Nat'l Bank of Bos., 75 F.3d 49, 52 (1st Cir.
1996)); see also Nicolaci v. Anapol, 387 F.3d 21, 26 (1st Cir.
2004) ("Ambiguity is not created merely because the litigants
disagree about the meaning of a contract.").
In examining the terms of the bond, we must be mindful
that "a contract should be construed to give it effect as a
rational business instrument and in a manner which will carry out
the intent of the parties." Starr v. Fordham, 648 N.E.2d 1261,
1270 (Mass. 1995) (quoting Shane v. Winter Hill Fed. Sav. & Loan
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Ass'n, 492 N.E.2d 92, 94 (Mass. 1986)). To ascertain "the scope
of a party's obligations" under an agreement, we may not "isolat[e]
words and interpret[] them as though they stood alone," id. at
1269 (quoting Bos. Elevated Ry. Co. v. Metro. Transit Auth., 83
N.E.2d 445, 451 (Mass. 1949)), but must instead "construe the
contract as a whole, in a reasonable and practical way, consistent
with its language, background, and purpose," USM Corp. v. Arthur
D. Little Sys., Inc., 546 N.E.2d 888, 893 (Mass. App. Ct. 1989)
(cited favorably in MCI WorldCom Commc'ns, Inc. v. Dep't of
Telecomms. & Energy, 810 N.E.2d 802, 810 (Mass. 2004)). Surety
agreements are similarly construed. See St. Paul Fire & Marine
Ins. Co. v. VDE Corp., 603 F.3d 119, 122 (1st Cir. 2010) ("As a
general matter, 'surety contracts are subject to the same rules of
construction as other contracts. The terms of surety obligations,
therefore, "should be interpreted as a whole, and not out of the
context of all the other terms."'" (quoting In re Sinking of M/V
Ukola, 806 F.2d 1, 4 (1st Cir. 1986))); Gordon & Dilworth v.
Abbott, 154 N.E. 523, 524 (Mass. 1926) ("The liability of a surety
or guarantor is to be ascertained from the terms of the written
instrument by which his obligation is expressed, construed
according to the usual rules of interpretation in the light of the
subject-matter, the well-understood usages of the business, and
the relations of the parties to the transaction.").
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C. Does the Bond Oblige Arch to Provide the Window Warranty?
It is undisputed that Graphic fulfilled the requirements
of section 3.1 of the performance bond with respect to its warranty
claim. As described above, Graphic sent multiple letters to Arch
stating that it was considering declaring a default, including on
the warranty issue, and it sought a conference among the parties
(which occurred in April 2019). It also is undisputed that Graphic
did not fulfill the requirements of sections 3.2 and 3.3. Although
Graphic declared RCM in default, it did not terminate RCM and it
never agreed to pay Arch any portion of the contract price.
Graphic, however, maintains that its demand that Arch provide a
window warranty does not require compliance with section 3's
conditions.
Graphic's argument depends on distinguishing the
provision of the window warranty from the physical work that RCM
was obligated to perform under the subcontract. Its principal
contention is that a "post-completion" warranty obligation is not
reasonably subject to section 3's termination requirement.
Graphic, however, is not making a post-completion warranty claim
in the sense that such a claim ordinarily would be
understood -- i.e., a demand under an operative warranty for
remediation of construction work that is revealed, post-
completion, to be defective. See, e.g., Sweetwater Apartments,
PA, LLC v. Ware Constr. Servs., Inc., No. 11-CV-155, 2012 WL
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3155564, at *5 (M.D. Ala. Aug. 3, 2012) (concluding that the surety
was liable for repairs under a one-year warranty issued by its
principal) (citing cases).8 Rather, Graphic asserts that RCM
failed to produce a promised warranty.
The caselaw Graphic cites provides no support for
excluding that sort of warranty claim from section 3's scope.
Together, sections 3 and 5 of the A312 bond protect the surety by
clearly signaling when the surety must take over for a defaulting
principal and by giving the surety the choice on how to remediate
the default. See generally St. Paul Fire & Marine Ins. Co. v.
City of Green River, 93 F. Supp. 2d 1170, 1178 (D. Wyo. 2000),
aff'd, 6 Fed. App'x 828 (10th Cir. 2001) (noting the importance of
preserving the surety's "ability to protect itself pursuant to
performance options granted under a performance bond"); Enter.
Cap., Inc. v. San-Gra Corp., 284 F. Supp. 2d 166, 177 (D. Mass.
2003) (same). Graphic appears to be arguing that this protection
is inapplicable to its warranty claim for two primary reasons: (1)
it is not asking Arch to remedy or complete RCM's physical window
work, and (2) the warranty does not come into play until after the
physical work is done. Neither reason stands up to scrutiny.
8We cite to the unpublished decision in Sweetwater Apartments
because Graphic relies on that case, and on a half-dozen other
cases cited in Sweetwater, both published and unpublished, to
support its argument.
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The obligation to provide a manufacturer's window
warranty is a distinct element of the Graphic-RCM subcontract.
The mere fact that the warranty obligation does not involve hands-
on construction does not reveal why it would be excluded from the
conditions in the bond that apply to other performance elements of
the subcontract. Nor does timing provide the explanation. While
the benefits of a warranty ordinarily may be realized after a
construction project is completed (or substantially completed),
see, e.g., Stonington Water St. Assocs., LLC v. Hodess Bldg. Co.,
792 F. Supp. 2d 253, 260 (D. Conn. 2011) (describing "the punch
list" as the "list of warranty work"), procuring the warranty from
the window manufacturer was an obligation that needed to be
fulfilled before RCM's performance under the contract would be
complete. Indeed, Graphic has valued RCM's warranty obligation at
$2 million, a significant proportion of the subcontract's total
price tag of roughly $8.6 million.9
We see nothing in the language of the bond that would
exclude RCM's default in fulfilling the warranty obligation from
section 3's requirements. The performance options available to
Arch under section 5 of the bond are no less suitable for the
9 In its Opposition to Plaintiff's Motion for Summary
Judgment, Graphic stated that it was "forced . . . to sign an
independent guaranty in the amount of $2 million providing the
[project] Owner the same rights as under the contractual warranty,"
and it listed "a warranty liability in the amount of $2 million"
among its damages related to RCM's work.
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warranty obligation than for the physical work of fixing the
windows. Arch might have attempted to secure the warranty by using
its own agents or a new subcontractor to remedy the window
problems, as contemplated by section 5. Or it might have attempted
to secure the warranty through negotiations with the window
manufacturer based on the remedial work that RCM had already
performed.
Importantly, as these possible scenarios for Arch's
actions under section 5 reveal, the warranty "performance" that
Graphic seeks is inextricably linked to the window installation
itself. The warranty was withheld based on the manufacturer's
assessment that the installation remained problematic even after
RCM's remedial efforts.10 In effect, then, Graphic's version of a
warranty claim is an attempt to shift to Arch the risk Graphic
assumed when, instead of terminating RCM and placing the burden of
remediating the window installation in Arch's hands, it persisted
in demanding action from RCM.
To separate the subcontract's window installation and
warranty obligations in the way Graphic proposes would be
inconsistent with the "language, background, and purpose" of the
performance bond, USM Corp., 546 N.E.2d at 893, as it would clearly
In a March 2019 email to Graphic, the window manufacturer
10
referred to ongoing "installation deficiencies at this project
[that] are incompatible with issuance of a warranty."
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frustrate the bond's design to allow the surety to manage the
response to a default for which it would be responsible. With
respect to securing the warranty, Graphic's decision to eschew
termination and continue working with RCM despite Graphic's
ongoing dissatisfaction with RCM's performance was no different,
under the terms of the bond, from a unilateral decision to replace
RCM with a third-party subcontractor. Both decisions sidestep the
requirements of section 3 and "extinguish[] the options available
to [the surety] under [section 5] of the performance bond." Solai
& Cameron, Inc. v. Plainfield Cmty. Consol. Sch. Dist. No. 202,
871 N.E.2d 944, 956 (Ill. App. Ct. 2007); see also, e.g., Seaboard
Sur. Co. v. Town of Greenfield, 370 F.3d 215, 220 (1st Cir. 2004)
(noting that "[c]ourts have consistently held that an obligee's
action that deprives a surety of its ability to protect itself
pursuant to performance options granted under a performance bond
constitutes a material breach, which renders the bond null and
void" (quoting St. Paul Fire & Marine, 93 F. Supp. 2d at 1178));
Dragon Constr., Inc. v. Parkway Bank & Tr., 678 N.E.2d 55, 58 (Ill.
App. Ct. 1997) ("Surely, [the insurer] would not have issued the
surety bonds if it did not have the authority to protect itself
through the selection of a successor contractor.").
Arguably, then, to obtain Arch's performance of RCM's
promise to provide the manufacturer's window warranty, Graphic
should have terminated RCM and asked Arch to take over the task of
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properly completing the window installation work to the
satisfaction of the manufacturer. At a minimum, however, the terms
of the bond required Graphic to comply with section 3's
prerequisites to trigger Arch's specific obligation to furnish the
window warranty. Put simply, Graphic is claiming that RCM
defaulted in performing the warranty portion of its window
obligations, but it has not satisfied the bond's condition
precedent for Arch to assume responsibility for that default.
In resisting this construction of the bond, Graphic has
insisted that, pursuant to the subcontract and general principles
of contract law, it properly gave RCM the opportunity to cure the
window defects.11 See generally 4A Philip L. Bruner & Patrick J.
O'Connor, Jr., 4A Bruner & O'Connor on Construction Law § 12:42
(August 2021) (hereafter "Bruner & O'Connor") (stating that
"[t]ermination for default clauses commonly require the obligee to
give the contractor and the surety 'notice of default' prior to
termination for default" for the purpose of "giv[ing] the
contractor an opportunity to 'cure' the default and thereby
preclude termination"). Moreover, Graphic says, it would have
11In its September 2019 letter to RCM and Arch, Graphic said
that it had "expressly negotiated the right to cure RCM's defects
without terminating the Subcontract and collect these costs from
both RCM and the Surety." Although section 16.3.1 of the
subcontract states that Graphic is authorized to correct RCM's
defective work and charge RCM for "any damage, loss, cost or
expense suffered or incurred," the provision makes no reference to
the surety.
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faced "the potential risk of a claim for wrongful termination" if
it had terminated RCM and invoked the performance bond instead of
working with RCM to resolve the window issues.
We acknowledge the difficulty contractors may face in
navigating between the risk of premature termination of a
subcontractor and the risk of failing to comply with the
requirements of section 3 of the A312 performance bond. See 4A
Bruner & O'Connor, supra, at § 12:38 (noting that "[a] wrong
decision to terminate is a material breach of contract and results
in the obligee's completion of the contract without recourse
against the contractor or surety" and that "[t]he wrong decision
not to terminate may result in unsatisfactory completion . . . ,
with recourse limited to the contractor and not the surety"). Yet
that is the framework under which Graphic agreed to operate
pursuant to the performance bond, and it was obliged to adhere to
the bond's terms to invoke the bond's coverage. Under those terms,
it was Graphic's burden to determine if, and when, RCM had
defaulted and to terminate RCM if it sought recourse for the
default from Arch. See generally Salois v. Dime Sav. Bank of N.Y.,
FSB, 128 F.3d 20, 26 n.10 (1st Cir. 1997) ("[U]nder Massachusetts
law, 'one who signs a writing that is designed to serve as a legal
document . . . is presumed to know its contents.'" (quoting Hull
v. Attleboro Sav. Bank, 596 N.E.2d 358, 362 (Mass. App. Ct. 1992))
(omission in original)).
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In any event, the record unequivocally belies Graphic's
suggestion that a delicate balance between premature and required
termination existed here. Graphic first sought remediation from
RCM in May 2018, and it complained repeatedly about defective
window installation -- along with making demands for the warranty
-- through the spring of 2019. In the first of two letters sent
to RCM in October 2018, Graphic demanded "a full-scale remediation
effort" that would "ensure complete and permanent correction of
every window." In the same letter, Graphic directed RCM "to
immediately provide the missing warranty," along with
"confirmation that the final installation currently in progress
complies with the manufacturer's requirements."
More than two months later, in its January 2019 letter
notifying RCM and Arch of RCM's potential default, Graphic stated
that RCM was in "material breach of the Subcontract" and
identified, among the breaches, the "[f]ailure to install properly
all windows in accordance with the manufacturer's requirements."
In March 2019, as noted above, the window manufacturer communicated
its concern about continuing installation deficiencies. Then, in
April and May 2019, Graphic notified Arch of RCM's default,
including the failure to provide the warranty, while expressly
declining to terminate the subcontract.12 Hence, even if Graphic
In May 2019, Graphic proposed three "undertakings" to RCM
12
and Arch "to avoid termination and to mitigate the cascading
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justifiably and properly allowed RCM to attempt to cure the window
problems and obtain the manufacturer's warranty into the fall of
2018, that rationale for refraining from termination cannot
insulate Graphic's decision not to do so when those initial
curative efforts failed -- or at least by the following spring,
when it deemed RCM in default.13
We likewise find untenable Graphic's contention that
section 1 of the bond, which broadly asserts RCM's and Arch's joint
and several responsibility for performing the contract, supports
its warranty claim against Arch. Graphic makes the astonishing
assertion that "[n]owhere in [section] 1 of the Arch Performance
Bond or the Subcontract . . . are any of [Graphic]'s rights
negative consequential impacts associated with such a decision."
As noted above, these included a demand that "RCM and/or Arch
secure a warranty bond as a substitute for the window warranty
that RCM has been unable to deliver."
We note that, in deposition testimony, Graphic's
13
representative, Marvin Lahoud, stated that Graphic's interactions
with Arch and RCM in 2018 and 2019 were aimed at eliciting
cooperation in resolving the construction problems without the
need to terminate RCM. Lahoud explained that RCM's "specific
manufacturing techniques and abilities" precluded terminating the
subcontract because no other subcontractor could have
satisfactorily completed the modular construction work in RCM's
stead, at least without extraordinary expense and a lengthy delay.
We do not minimize the difficulties Graphic faced in completing
the project in a timely way. However, the view that only RCM could
appropriately perform the remedial work is inconsistent with
Graphic's acceptance of a bond under which Arch's obligation to
perform includes the right to choose the path forward in the event
of a default, including the option to select alternative
contractors.
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contingent upon termination of RCM." While that statement is
accurate, basic contract principles -- and Massachusetts law --
make clear that section 1 of the bond is only reasonably understood
as qualified by the provisions and conditions that follow. See
McAdams v. Mass. Mut. Life Ins. Co., 391 F.3d 287, 299 (1st Cir.
2004) ("Contracts must . . . be read as a whole."); Bos. Elevated
Ry. Co., 83 N.E.2d at 451 (rejecting a construction of a contract
derived from "isolating words and interpreting them as though they
stood alone"). The surety is not a party to the subcontract, and
it necessarily plays a different role in the relationship among
the parties. That role is defined by the bond, which, for the
specific warranty claim at issue here, requires Graphic to fulfill
the prerequisites of section 3 before Arch's "obligation under
th[e] Bond shall arise." See Elm Haven Constr. Ltd. P'ship v.
Neri Constr. LLC, 376 F.3d 96, 100 (2d Cir. 2004) (noting that one
of the "standard principles of contract interpretation" applicable
to surety bonds "is that, before a surety's obligations under a
bond can mature, the obligee must comply with any conditions
precedent" (quoting U.S. Fid. & Guar. Co. v. Braspetro Oil Servs.
Co., 369 F.3d 34, 51 (2d Cir. 2004))).
Hence, pursuant to the unambiguous language of the
performance bond, any obligation of Arch to provide the window
warranty was conditioned on Graphic's termination of RCM, an action
Graphic chose not to take.
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D. Was Termination of RCM Foreclosed as a Matter of Law?
As a backup argument, Graphic asserts that applicable
judicial precedent prevented it from terminating the subcontract
after RCM had delivered and installed the modules -- i.e., after
the "physical" work covered by the subcontract, albeit defective,
was completed. Graphic's contention that it was not permitted to
terminate RCM despite the bond's requirement rests on the
proposition that a contractor may not lawfully be terminated once
its work under a contract is "substantially complete." But even
if this proposition is generally correct, see 4A Bruner & O'Connor,
supra, at § 12:45,14 it does not help Graphic on the record before
us.
Section 10.1.3 of the Graphic-RCM subcontract defines
"substantial completion" as "the time when construction Work is
sufficiently complete in accordance with the Drawings and
Specifications so the Owner can occupy or utilize the Work or a
designated portion thereof for the use to which it was intended."
That definition tracks the widely accepted understanding of
"substantial completion" in the construction industry in
Massachusetts and elsewhere. See Kettle Brook Lofts, LLC v.
Specht, 177 N.E.3d 176, 186 (Mass. App. Ct. 2021) ("[T]he term
Section 12:45 of the Bruner & O'Connor treatise states that
14
an "obligee may not terminate for default a construction contract
that has been substantially performed."
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['substantially complete'] is well understood in the context of
construction of real property to refer to a state in which the
property is ready to be used for its intended purpose, in this
case, residential occupancy."); Kinetic Builder's Inc. v. Peters,
226 F.3d 1307, 1315 (Fed. Cir. 2000) ("A project should be
considered substantially completed when it is capable of being
used for its intended purpose."); 3 Bruner & O'Connor, supra, at
§ 8:27 ("As a general rule, substantial completion is defined as
that point in the construction where the work is sufficiently
complete that the owner may occupy or utilize the work for the use
for which it was intended."). Substantial completion does not
necessarily mean that the work is free of all defects, but only
that there is "such an approximation to complete performance that
the owner obtains substantially what was called for by the
contract." Handy v. Bliss, 90 N.E. 864, 864 (Mass. 1910); see
also id. at 864-65 (noting that "there might be a substantial
performance of the contract" even if "omissions and imperfections"
remain).
Graphic's position appears to be that these principles
of construction law supersede the bond's pre-condition for
termination (as we have construed the bond) for their warranty
claim. Specifically, it argues that it could not terminate RCM
after RCM had installed the modules because the subcontract work
was at that point substantially completed -- notwithstanding the
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defects. However, this assertion of substantial completion
directly conflicts with Graphic's representations to RCM and Arch
throughout the nine months, from July 2018 through April 2019, in
which Graphic was demanding remediation of the work performed by
RCM before ultimately declaring RCM in default. In its September
2019 letter to RCM and Arch, Graphic recounted that, when the first
modules were delivered and installed, the defects -- including
leaking windows -- "were so prolific and systemic that it precluded
[Graphic] and any of its subcontractors from completing the
remaining work on the Project." In its April 30, 2019 letter to
RCM and Arch providing notice of default, Graphic listed among
RCM's material breaches of the subcontract RCM's "[f]ailure to
deploy the labor and materials needed to achieve Substantial
Completion of the Work by May 31, 2019." Indeed, several days
later -- in its letter of May 3 -- Graphic demanded that RCM and
Arch expedite the remedial work so that the building would be ready
for occupancy by June 1. In that letter, Graphic accused RCM of
"fail[ing] to perform under the terms of the Subcontract, or for
that matter, to perform by any measure."
Graphic, in other words, told RCM and Arch that RCM had
not yet achieved "Substantial Completion" of its work as of May
2019 and that the building was not yet in a condition to be occupied
at that time. Graphic's argument that it could not lawfully
terminate RCM once the modular units had been installed -- or even
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after RCM's unsuccessful attempts to fix the windows -- thus lacks
both legal and factual support. We note, moreover, that Graphic
took the position that the option to terminate remained as late as
May 2019, when it advised RCM and Arch that it was "not yet taking
the next step of terminating the Subcontract and making demand on
the Bond."15
In sum, the performance bond required Graphic to
terminate RCM to trigger Arch's obligation to provide a window
warranty, and the undisputed facts in the record show that Graphic
had ample knowledge of RCM's alleged failures at a time when
termination remained a viable option under the relevant principles
of law. The district court therefore properly granted summary
judgment for Arch.
Affirmed.
15 In its reply brief, Graphic asserts that Arch may not rely
on deposition testimony to defend the district court's grant of
summary judgment by "attempt[ing] to establish that substantial
completion was never reached and that [Graphic] consciously chose
not to terminate Arch," stating that the testimony "at most, raises
a question of fact as to whether termination was permissible when
the warranty issue arose." Although we recount some of that
testimony above, see supra note 13, our conclusion regarding
substantial completion is based solely on the legal principles
cited above as applied to the undisputed facts in the record,
including Graphic's clear, express representations in the
correspondence it sent to RCM and Arch.
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