CERTIFICATE OF SUBSTANTIAL COMPLETION DOES NOT FULFILL SURETY’S OBLIGATIONS UNDER PERFORMANCE BOND

Last week, the Texarkana court of appeals held a certificate of substantial completion on a construction project was not enough to relieve the contractor’s surety of its obligations under a performance bond.  In Wolfe City, Texas v. American Safety Cas. Ins. Co., No. 06-17-00075-CV, --- S.W.3d. --- (Tex. App.—Texarkana Feb. 9, 2018), a construction company contracted to install an automatic water meter system in Wolfe City.  American Safety provided a performance bond to the contractor.  The city’s engineer supervising the project signed a certificate of substantial completion. Afterward, significant problems with the meter system were found, and there was testimony the system was never fully functional. The city’s engineer testified that if he had known about the problems that were later discovered, he would not have signed the certificate.

In the resulting lawsuit, American Surety moved for and won summary judgment in the trial court on the ground that the certificate of substantial completion absolutely relieved it of any duty under the performance bond.  American Surety also won a no-evidence summary judgment on the ground that there was no evidence the problems which occurred after the certificate of completion was signed were the result of any construction defect rather than a design defect in the products supplied under the project’s specifications.

However, the court of appeals applied the time-honored Texas rule which requires the parties and the court to examine the contract itself to determine the parties’ obligations.  The contract expressly specified that the contractor’s obligation to complete the work in accord with the contract was absolute, and a certificate of substantial completion would not release the contractor from its obligations. American Surety had relied on a line of cases in which the certificate of substantial completion set the date on which the one-year statute of limitations for suit on a performance bond begins to run, but the certificate itself is not equivalent to full performance of the contract unless the contract states that it is… which this contract did not. To the contrary, the contract expressly imposed additional duties on the contractor (and by extension, on the surety company) to correct problems discovered within one year of substantial completion.

Having concluded the certificate of substantial compliance was not definitive proof of full performance of the contract, the court of appeals also reversed American Safety’s no-evidence summary judgment.  The court held there was some evidence the contractor had breached its contract because of the numerous problems discovered after the certificate was signed, and which the contractor had an obligation to correct.  The contract exonerated the contractor of any responsibility for a design defect in the project resulting from the negligence of the city or the engineer, and the contractor argued that because the project specifications required the contractor to use a specific brand of meters, the defects in those meters were the city’s fault and not the contractor’s.  However, the contract provided that the contractor was responsible for supervising all work performed by subcontractors, and the subcontractor who provided the defective meters was under the contractor’s supervision.