Court

A recent decision from the D.C. Circuit Court of Appeals provides notice to construction performance bond owners and sureties that a bond owner may forfeit its rights under a bond if timely notice of default is not provided to the surety. See Western Surety Company v. U.S. Engineering Construction, LLC, — F.3d —, 2020 WL 1684040 (April 7, 2020)  In this case, the appellate court affirmed a district court’s summary judgment decision dismissing claims against a surety under a construction performance bond because the surety had not received timely notice of a default and therefore was prejudiced by its inability to have an opportunity to cure the default.   Subcontractor U.S. Engineering Construction, LLC (“U.S. Engineering”) contracted with sub-subcontractor United Sheet Metal for sheet metal work relating to the construction of a new South African embassy in Washington, D.C.  U.S. Engineering paid the premiums for a construction performance bond from Western Surety Company to ensure completion of United Sheet Metal’s work.  The parties entered into an AIA A312-2010 contract for the performance bond, which included a requirement under Section 3 for U.S. Engineering to provide Western Surety with notice if it considered declaring United Sheet Metal in default.  The bond did not explicitly state the required timing for such notice. United Sheet Metal failed to perform under its contract and U.S. Engineering terminated its subcontract with United Sheet Metal without any prior notice to Western Surety.  In fact, U.S. Engineering waited more than eight months after terminating United Sheet Metal before notifying Western Surety of the default, which notification only occurred when it filed a notice of claim against the bond. The district court granted Western Surety’s motion for summary judgment on the basis that timely notice was not provided under the bond.  In affirming that decision, the appellate court determined that U.S. Engineer’s delay precluded a claim under the bond.  Western Surety was harmed by the delay because “[b]y unilaterally completing United Sheet Metal’s remaining contractual obligations before notifying Western Surety, U.S. Engineering deprived Western Surety of its contractually agreed-upon opportunity to participate in remedying United Sheet Metal’s default.”  The appellate court concluded that, “because the bond expressly provides the surety with the opportunity to participate in curing the subcontractor’s default, we hold that it is a condition precedent to the surety’s obligations under the bond that the owner must provide timely notice to the surety of any default and termination before it elects to remedy that default on its own terms.” This case serves as a reminder for construction companies and sureties to review and follow the terms of a bond before taking any actions to enforce it, and that timely notice may be required in order to give the surety an opportunity to cure the default, even if not the bond does not explicitly state a deadline for such notice.

In Lakah v. UBS, 2019 QCCA 1869, the Court of Appeal of Québec denied leave to appeal a Superior Court decision that ordered than an arbitral party post a $1 million suretyship pending U.S. annulment proceedings. The Court of Appeal, in a very brief judgment, based its decision on the following considerations: The decision to impose a surety of $1 million was a matter of discretion and was governed by a standard of reasonableness; A surety of $1 million was not unreasonable considering that the arbitral award was in excess of US$150 million; The Superior Court decision was not inconsistent with the principle of proportionality in civil proceedings; and A stay of proceedings is a case management measure and, in principle, cannot be appealed barring exceptional circumstances. Background of Facts An arbitral award was issued on November 2, 2018 that required that Michel Lakah (“Mr. Lakah”) pay US$151,603,902.00 plus 12% interest per annum to UBS AG et al. (“UBS”). On February 4, 2019, Mr. Lakah applied to vacate the Arbitral Award before the U.S. District Court, Southern District of New York. Although no exact date has been set for the hearing of the application, a judgment is expected to be rendered by the U.S. District Court by December 2019. The Superior Court’s Decision In June 2019, in the face of the application to vacate the arbitral award in the United States, UBS applied to the Québec Superior Court in Montreal to recognize and enforce the Arbitral Award (the “Enforcement Proceedings”). Invoking article 654 of Québec’s Code of Civil Procedure, which was modeled after article 36(2) of UNCITRAL Model Law on International Commercial Arbitration (1985), Mr. Lakah sought to stay the Enforcement Proceedings until a final decision was rendered on the application to vacate before the U.S. District Court. In response, UBS requested that Mr. Lakah post a $5 million suretyship in the event that the Superior Court issued a stay. Justice Peter Kalichman of the Québec Superior Court noted that the right to a stay under article 654 C.C.P. is not automatic and should be granted only in exceptional circumstances, as a stay “impedes one of the key goals of arbitration, which is to avoid protracted litigation”. However, Justice Kalichman noted that the grounds alleged in the U.S. annulment proceedings “appeared serious” on their face and merited a stay of the Enforcement Proceedings, which was limited to a period of sixty days following the release of the decision in the application to vacate. After determining that a temporary stay was justified, Justice Kalichman stated that Mr. Lakah had the burden of resisting suretyship by demonstrating that he lacked the means to satisfy such an order, which he failed to do. The Court ultimately ordered Mr. Lakah to provide a suretyship in the amount of $1 million, noting that it was a “relatively modest” amount considering the quantum of the arbitral award. Court of Appeal Decision Mr. Lakah sought leave to appeal the Superior Court’s decision, claiming that the order to provide a $1 million surety was “unreasonable in the light of the guiding principles of procedure” and that the decision was “manifestly erroneous in fact and in law[1]”. Justice Patrick Healy held that a stay of proceedings is a case management measure and cannot be appealed barring “exceptional circumstances” in which the “ruling appears unreasonable” and results in a serious prejudice[2]. Justice Healy added that the decision to impose a surety of $1 million was “essentially a matter of discretion that is governed by a standard of reasonableness.” Quoting Justice Kalichman, he agreed that in an action of over $150 million, a surety of $1 million was “modest” and could not possible be considered unreasonable[3]. Finally, Justice Healy noted that nothing in the file established prima facie that the Superior Court decision was inconsistent with the principle of proportionality in civil proceedings and that nothing would “justify interference with the judge’s exercise of discretion under article 654 C.C.P.”[4] Implications to Arbitral Proceedings This case is representative of Canadian courts’ pro-arbitration stance and the reluctance to permit parties to engage in conduct that may result in parallel proceedings. Indeed, the Court of Appeal confirmed that a court’s exceptional power to stay the enforcement of an arbitral award pending an application to vacate that very award is entirely consistent with the general judicial policy in favour of the enforcement of arbitral awards. https://www.mccarthy.ca/en/insights/blogs/international-arbitration-blog/quebec-court-orders-modest-1-million-suretyship-short-term-stay-canadian-enforcement-pending-us-annulment?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original