United States Court of Appeals
For the First Circuit
No. 08-2576
ST. PAUL FIRE & MARINE INSURANCE CO.,
Plaintiff, Appellee,
v.
VDE CORPORATION,
Defendant, Appellant,
BANCO SANTANDER PUERTO RICO,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. José Antonio Fusté, U.S. District Judge]
Before
Torruella, Lipez and Howard,
Circuit Judges.
Edilberto Berríos-Pérez, with whom Fernando E. Longo-Quiñones
and Berríos & Longo Law Offices, P.S.C., were on brief for
appellant.
Leslie Alvarado-Lliteras, with whom Carlos A. Steffens and
Alvarado, Viñas & Fernández, P.S.C., were on brief for appellee.
May 5, 2010
LIPEZ, Circuit Judge. Defendant VDE Corporation (VDE)
appeals from the district court's grant of summary judgment in
favor of plaintiff St. Paul Fire & Marine Insurance Company (St.
Paul) releasing St. Paul from its obligations under a construction
performance bond. After careful review, we affirm.
I.
The relevant facts are largely undisputed. In the spring
and summer of 2005, VDE arranged for the construction and financing
of a residential real estate project, Villas Del Este Project, in
Gurabo, Puerto Rico (the project). In April 2005, VDE entered into
a construction contract with F&R Contractors Corporation (F&R),
engaging the company to serve as contractor for the project. VDE
obtained financing for the project from Banco Santander Puerto Rico
(BSPR).
On June 28, 2005, St. Paul, as surety, issued a
performance bond (the bond) for the benefit of VDE, as obligee, to
guarantee performance under the construction contract by F&R, as
principal. The bond was a standard document, the American
Institute of Architects document A312 performance bond (AIA A312).
That same day, St. Paul issued a "dual obligee rider" to the bond,
adding BSPR as a co-obligee.
Paragraph 4 of the surety bond sets forth St. Paul's
options for performance in the event that F&R defaults under the
construction contract. Paragraph 4 provides:
-2-
When the Owner [VDE] has satisfied the
conditions of Paragraph 3 [setting forth
requirements for declaring contractor
default], the Surety [St. Paul] shall promptly
and at the Surety's expense take one of the
following actions:
4.1 Arrange for the Contractor [F&R], with
consent of the Owner, to perform and complete
the Construction Contract; or
4.2 Undertake to perform and complete the
Construction Contract itself, through its
agents or through independent contractors; or
4.3 Obtain bids or negotiated proposals from
qualified contractors acceptable to the Owner
for a contract for performance and completion
of the Construction Contract, arrange for a
contract to be prepared for execution by the
Owner and the contractor selected with the
Owner's concurrence, to be secured with
performance and payment bonds executed by a
qualified surety equivalent to the bonds
issued on the Construction Contract, and pay
to the Owner the amount of damages as
described in Paragraph 6 in excess of the
Balance of the Contract Price incurred by the
Owner resulting from the Contractor's default;
or
4.4 Waive its right to perform and complete,
arrange for completion, or obtain a new
contractor and with reasonable promptness
under the circumstances:
.1 After investigation, determine the
amount for which it may be liable to
the Owner and, as soon as practicable
after the amount is determined, tender
payment therefor to the Owner; or
.2 Deny liability in whole or in part
and notify the Owner citing reasons
therefor.
(Emphasis added.)
-3-
On November 7, 2007, VDE declared F&R in default on its
obligations as contractor and terminated F&R's right to continue
work on the project. In support of its declaration of default, VDE
stated that F&R had refused to abide by its contractual
obligations, failed to work at a reasonable pace, abandoned work on
the project, insisted on collecting payments not due, and failed to
act in good faith. Two days later, VDE notified St. Paul that it
had declared F&R in default and requested that St. Paul perform its
obligations under the bond. VDE informed St. Paul that it
"oppose[d] that the project be completed with F&R as contractor,
either directly or indirectly."
On November 16, St. Paul requested certain documentation
from VDE in order to investigate VDE's allegations of contractor
default. St. Paul also acknowledged VDE's statement that it
opposed the use of F&R as completion contractor and advised VDE
that "should the Surety choose to complete under Paragraph 4.2 of
the Bond, the terms of the Bond do not allow the Obligee to oppose
the contractor that the Surety selects as its own completion
contractor, whether it be the Principal or otherwise."
On December 6, St. Paul informed VDE that it had not yet
received much of the requested documentation related to its
investigation of VDE's allegations of contractor default. St. Paul
listed the missing documents and asked that VDE provide the
information as soon as possible. VDE responded that same day,
-4-
asserting that "[t]he time for the surety to act has expired" and
declaring St. Paul in default on its obligations under the bond.
On December 14, following VDE's declaration that St. Paul
was in default, St. Paul filed this declaratory judgment action
against VDE and BSPR in federal district court. St. Paul requested
a declaration that, inter alia, VDE had breached the terms of the
bond by not permitting the surety to take action under the
circumstances set forth in Paragraph 4 of the bond, and asked that
St. Paul be released from its obligations under the bond. VDE and
BSPR filed counterclaims, alleging that St. Paul had failed to
perform its obligations under the bond.
On December 26, VDE provided St. Paul with some of the
documentation previously requested, and stated again that it would
"not consent to F&R performing additional work at the project,
either directly or indirectly." VDE further stated that it would
provide St. Paul with an additional fifteen-day period to perform.
On January 10, 2008, St. Paul notified VDE that it intended to
undertake completion of the project pursuant to Paragraph 4.2 of
the bond, using F&R as completion contractor. St. Paul explained
that if VDE "maintains the position that the Surety may not use F&R
Contractors to complete under Paragraph 4.2 of the Performance
Bond, VDE will be in breach of the terms and conditions of the Bond
and not only will VDE be waiving its rights under the Bond, but
this will also serve to discharge the obligations of the Surety
-5-
thereunder." VDE responded the following week, maintaining that
under Paragraph 4.2 of the bond it had the authority to withhold
consent to the use of F&R as the completion contractor.
The district court granted summary judgment to St. Paul.
The court reasoned that VDE materially breached the bond by
insisting that St. Paul could not undertake to complete the project
using F&R as completion contractor, contrary to the plain language
of Paragraph 4.2, and released St. Paul from its obligations under
the bond. The district court dismissed the counterclaims with
prejudice.
VDE filed this timely appeal from the judgment.1
II.
VDE contends that the district court erroneously granted
summary judgment to St. Paul because, under Paragraph 4 of the
bond, St. Paul may not undertake to perform and complete the
construction contract through the original contractor without VDE's
consent. VDE further argues that even if consent is not ordinarily
required by Paragraph 4, it is required where, as here, VDE has
alleged that the original contractor acted in bad faith.
Summary judgment is properly granted where "the
pleadings, the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to a judgment as a matter of
1
BSPR is not a party to this appeal.
-6-
law." Fed. R. Civ. P. 56(c). We review the district court's grant
of summary judgment de novo, drawing all reasonable inferences from
the facts in the nonmoving party's favor. Velez v. Thermo King de
Puerto Rico, Inc., 585 F.3d 441, 446 (1st Cir. 2009).
This case arises under our diversity jurisdiction, and
therefore we apply Puerto Rico law. See Erie R.R. Co. v. Tompkins,
304 U.S. 64, 78 (1938). 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.'" In
re Sinking of M/V Ukola, 806 F.2d 1, 5 (1st Cir. 1986) (citations
omitted) (quoting Martin v. Vector Co., 498 F.2d 16, 23 (1st Cir.
1974)). Under Puerto Rico law, if "'the text of a bond agreement
is clear, or the true meaning of its clauses can be easily
discerned, the courts should adhere to its text.'" Citibank v.
Grupo Cupey, Inc., 382 F.3d 29, 31-32 (1st Cir. 2004) (quoting
Caguas Plumbing, Inc. v. Cont'l Constr. Corp., 2001 T.S.P.R. 164,
2001 WL 1618390, at *5 (P.R. Nov. 30, 2001)); see also P.R. Laws
Ann. tit. 31, § 3471 ("If the terms of a contract are clear and
leave no doubt as to the intentions of the contracting parties, the
literal sense of its stipulations shall be observed."). Although
"'[t]he prevailing doctrine is that [a surety bond] should be
liberally interpreted in favor of its beneficiary,' that principle
'is not a blank check to the judicial power to rule out the pacts
-7-
and agreements between the parties.'" Citibank, 382 F.3d at 31
(quoting Luan Inv. Corp. v. Rexach Constr. Co., 2000 T.S.P.R. 182,
2000 WL 1847637, at *5 (P.R. Dec. 8, 2000)). Instead, the principle
of liberal construction "applies only where the text of the
agreement is ambiguous." Id.
In this case, the text of Paragraph 4 of the bond is
unambiguous on the point at issue. Paragraph 4.2, under which the
surety assumes primary responsibility for completion of the
construction contract, contains no provision requiring the project
owner's consent as to the completion contractor. In proceeding
under Paragraph 4.2, St. Paul must "[u]ndertake to perform and
complete the Construction Contract itself, through its agents or
through independent contractors." By its terms, Paragraph 4.2
places no restrictions on whom St. Paul can use to complete the
project. See St. Paul Fire & Marine Ins. Co. v. Green River, 93 F.
Supp. 2d 1170, 1177 (D. Wyo. 2000), aff'd 6 F. App'x 828 (10th Cir.
2001) (construing identical provision of performance bond and
concluding that under Paragraph 4.2, "it is clear that there are no
limitations on who St. Paul could utilize to complete the
Project"). Paragraphs 4.1 and 4.3, however, both expressly require
St. Paul to obtain VDE's consent as to the completion contractor.
Under Paragraph 4.1, St. Paul must "[a]rrange for the Contractor,
with consent of the Owner, to perform and complete the Construction
Contract." (Emphasis added.) Similarly, under Paragraph 4.3, St.
-8-
Paul is required to "[o]btain bids or negotiated proposals from
qualified contractors acceptable to the Owner for a contract for
performance and completion of the Construction Contract."
(Emphasis added.)
The absence of a consent requirement in Paragraph 4.2,
and the presence of such a requirement in Paragraphs 4.1 and 4.3,
sensibly reflects the different obligations assumed by a surety
electing to proceed under each of these provisions. In choosing to
proceed under Paragraph 4.2, which requires the surety to undertake
to perform and complete the construction contract, St. Paul
"assumed primary responsibility to complete the contract, and with
that responsibility came the freedom to assemble the project team
of its choosing." Green River, 93 F. Supp. 2d at 1177; see also
Richard S. Wisner & James A. Knox, Jr., The ABCs of Contractors'
Surety Bonds, 82 Ill. B.J. 244, 246 (1994) (explaining that when a
surety elects to take over and complete the project, it directly
assumes the contractor's underlying contractual obligation to
complete the project). Once the surety has elected to perform
under Paragraph 4.2, the surety and the obligee (here VDE)
negotiate an agreement, commonly called the "takeover agreement,"
which is "the critical document for the completing surety and
obligee in defining their future rights and obligations and in
establishing a clear understanding of the scope of remaining work
to be completed." Philip L. Bruner & Patrick J. O'Connor, Jr., 4A
-9-
Bruner & O'Connor on Construction Law § 12:80 (2009). Following
negotiation of the takeover agreement, the surety awards a
completion contract to a contractor. Id.
In contrast, a surety electing to proceed under Paragraph
4.1 must arrange for the original contractor to perform and
complete the construction contract with the owner's consent, by
financing the original contractor's continuing performance. See
Wisner & Knox, supra, at 245-46. Under this provision, the surety
"does not assume primary responsibility for completing the
contract, and the owner is required to maintain an ongoing
contractual relationship with the terminated contractor." Green
River, 93 F. Supp. 2d at 1177; see also Wisner & Knox, supra, at
246. Thus, "[w]hile it makes sense that the owner would have the
right to object to such a 'shotgun wedding' to the contractor it
just terminated [under Paragraph 4.1], it does not follow that the
[owner] would have this right when the surety assumes primary
contractual responsibility [under Paragraph 4.2]." Green River, 93
F. Supp. 2d at 1177 (alterations added).
Our interpretation of Paragraph 4.2 is also consistent
with common practices in the construction industry. The surety
performance options contained in Paragraph 4 of the AIA A312 bond,
the bond at issue here, are "standard in the industry." Green
River, 93 F. Supp. 2d at 1178; see also Bruner & O'Connor, supra,
at § 12:16 (describing the A312 performance bond as "one of the
-10-
clearest, most definitive, and widely used type of traditional
common law 'performance bonds' in private construction"). It is
common practice for a surety undertaking to complete the project
itself to hire the original contractor, as St. Paul elected to do
here. Wisner & Knox, supra, at 246 (explaining that when the
surety elects to take over and complete the construction project,
it "does not undertake the construction itself but hires a new
contractor, the principal, or the principal's employees under the
direction of a consultant"); Bruner & O'Connor, supra, at § 12:80
(stating that "[t]he obligee has no right to unreasonably interfere
with the surety's selection of its completion contractor, unless
the bond provides otherwise"); Green River, 93 F. Supp. 2d at 1178
("[I]t is common practice for a surety that elects to perform the
project itself to hire the principal's employees under the
direction of a consultant. . . .").
VDE's arguments in support of a contrary interpretation
of Paragraph 4.2 are unavailing. VDE argues that Paragraph 4.2 is
ambiguous as to whether it requires owner consent. VDE contends
that the capitalized term "Contractor," as used in Paragraph 4.1,
refers to the original contractor, in this case F&R. VDE reasons
that the term "agents" as used in Paragraph 4.2 cannot also refer
to the original contractor. We do not understand these terms to
create any ambiguity. If the surety elects to undertake completion
of the contract using F&R as the completion contractor, as
-11-
permitted under Paragraph 4.2, then F&R's role has shifted from
that of original contractor to that of agent of the surety.
VDE also suggests that because Paragraph 4.2 neither
requires nor expressly dispenses with owner consent, "a well-
founded objection to a selected 'agent' prevents its selection and
use by the surety." However, the text of the bond does not support
this reading. As discussed above, Paragraphs 4.1 and 4.3 both
expressly require owner consent as to the completion contractor,
while Paragraph 4.2 contains no such consent requirement. We
cannot rewrite Paragraph 4.2 to require owner consent in cases
where the owner voices a "well-founded objection" to the selected
contractor.
VDE further contends that even if Paragraph 4.2 does not
ordinarily require that the owner consent to the use of the
original contractor as completion contractor, owner consent was
required in this case in light of VDE's allegations that F&R acted
in bad faith. However, VDE provides no authority for the
proposition that F&R's alleged bad faith is in any way relevant to
the interpretation of Paragraph 4.2. Paragraph 4.2 places no
restrictions on St. Paul's selection of a completion contractor,
and does not suggest a different standard for cases in which the
owner has alleged bad faith. It is understandable, in light of
VDE's allegations of bad faith, that it would be concerned with St.
Paul's decision to complete the project using F&R. However, in
-12-
proceeding under Paragraph 4.2, St. Paul assumes primary
responsibility to complete the construction contract. In the event
that St. Paul fails to meet its obligations to complete the
contract, VDE has a remedy against St. Paul.
III.
We conclude, as the district court did, that VDE
materially breached the bond by insisting that St. Paul could not
employ F&R as completion contractor under Paragraph 4.2. See Green
River, 93 F. Supp. 2d at 1179 (holding that owner's refusal to
allow surety to complete construction under Paragraph 4.2 using
employees of original contractor was material breach of performance
bond). This breach discharged St. Paul from its obligations to
perform under the bond. P.R. Laws Ann. tit. 31, § 3052.2
Affirmed.
2
In light of our conclusion, we need not address St. Paul's
contention that there are additional, independent grounds for
affirming summary judgment in its favor.
-13-