An Arch Insurance Group Inc. unit does not have to pay $3.18 million under a performance bond it issued to a subcontractor because a general contractor did not first terminate the subcontractor as required, a federal appeals court said Wednesday, in affirming a lower court ruling. 

In 2017, Woburn, Massachusetts-based The Graphic Builders LLC was hired for a construction project that consisted of converting an existing commercial building to loft-style apartments and constructing a four-story apartment on the same property, according to the ruling by the 1st U.S. Circuit Court of Appeals in Boston in Arch Insurance Co. v. The Graphic Builders LLC. 

Graphic selected Saint-Benoît-Labre, Quebec, Canada-based RCM Modular Inc. to fabricate and assemble the structure at a cost of about $8.6 million. A performance bond was issued in conjunction with the subcontract that made Arch, as surety, “jointly and severally” responsible for RCM’s obligations. 

A section of the bond specified that Graphic’s actions would trigger the bond, and that these included declaring RCM in default and terminating the contract, the ruling said. 

Graphic complained to RCM that its modular units were defective shortly after they were delivered, the ruling said. In September 2019, Graphic sent a detailed letter to Arch stating RCM had defaulted, and demanding Arch pay $3.18 million in remedial costs that Graphic had incurred in the matter. 

Arch denied liability on the ground that Graphic had not complied with multiple prerequisites needed to trigger its surety obligations, noting it had not terminated RCM before it undertook to complete RCM’s scope of work as required, which rendered the bond “null and void.” 

Arch filed suit in U.S. District Court in Boston seeking a declaratory judgement it was not liable. The district court ruled in the insurer’s favor and was affirmed by a three-judge appeals court panel. 

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 ruling said. 

Attorneys in the case did not respond to requests for comment. 

In April, a federal appeals court overturned a lower court ruling and held a Tokio Marine unit must pay a surety bond because a new contract issued in a construction project was essentially the same as the one under which its bond had been issued.