Annual survey of fidelity and surety law.

AuthorMay, Ronald A.
PositionPart 2

This roundup of recent cases covers public and private construction bonds,fidelity and financial institution bonds, and sureties' remedies

  1. PUBLIC CONSTRUCTION BONDS

    1. Bonds under Federal Laws

      1. Substantive

        Claimant entitled to total amounts due under contract, not merely amounts due when suit filed.

        The Miller Act provides that suits thereunder may be brought for the amount "unpaid at the time of institution of such suit." In McAmis Industries of Oregon Inc. v. M. Cutter Co.,(1) suit was filed April 10, 1995 for barge rentals. The barges were not returned by the defendant until June 29, 1997. The Ninth Circuit affirmed a judgment of the Oregon federal district court for the full amount of money due, holding that it would be contrary to the purposes of the Miller Act to require the plaintiff to file a new suit in order to obtain money that became due after filing of the first suit.

      2. Procedural

        Prime contractor receiving copy of claimant's demand on subcontractor had adequate notice where further written and oral communications made it clear claimant was looking to prime contractor for payment.

        There is a fairly substantial body of law holding that the mere forwarding to the general contractor of a copy of demand sent to the subcontractor does not, by itself, satisfy Miller Act notice requirements. This doctrine has been softened somewhat where the evidence shows that it is unambiguously clear the supplier is seeking payment from the general contractor.

        In Waterworks Supply Corp. v. George Hyman Construction Co.,(2) the First Circuit affirmed a decision of the Massachusetts federal district court holding that the further oral and written communications between the supplier and the general contractor in this case could only be perceived and were in fact perceived as a demand on that general contractor.

        The opinion is an excellent primer on notice requirements, and it merits reading on that account alone. It goes on to hold that the Miller Act runs from the last delivery of materials on an oral contract, not from each other as it is made. Again, the discussion is enlightening.

        Venue is exclusively in federal district court where project is located, notwithstanding contractual language to contrary.

        In Cals' A/C and Electric v. Famous Construction Corp.,(3) a federal district court in Louisiana chastised a contractor for its "economic tyranny" in compelling subs on a federal project in Louisiana to agree that their claims would be governed by Texas law and that exclusive venue would be in Travis County, Texas. The court held that such language does not get around the clear language of the Miller Act, which provides for venue in the federal district court in which the project is located. Pointing out that the Miller Act is supposed to receive liberal construction, the judge went on to say that the heavy-handedness of the Texas contractor in this case illustrates both the need for and the purpose of the Miller Act.

        Federal court action stayed where prior state court action has progressed further.

        In Arrow Concrete Co. v. Ohio Farmers Insurance Co.,(4) the prime contractor filed suit against a subcontractor based on the sub's having furnished defective concrete on a federal project. The suit was filed October 24, 1996, in West Virginia state court. The following June, the sub sued the prime and its surety in federal court under the Miller Act. The surety moved to dismiss, abstain or stay the federal action pending resolution of the state court action.

        In a brief but enlightening opinion, the district court in West Virginia considered the various factors on which abstention depends and gave particular weight to the fact that the earlier suit had progressed steadily and was set for trial, whereas in the federal court case a scheduling order only recently had been entered. In those circumstances, the court granted the stay, asking the parties to report to the court on the litigation in six months.

    2. State and Local Bonds

      1. Substantive

        Surety not liable for attorney's fees based on principal's violation of prompt payment statute.

        In a sometimes confusing opinion, a Missouri intermediate appellate court finally concluded that the prime contractor alone, and not its surety, would have to pay the penalties due under a state "prompt payment statute." Part of the problem with the opinion is that the trial court had botched the trial with jury forms, which did not seem to make sense at all. City of Independence v. Kerr Construction Paving Co.(5)

        Punitive damages not properly pleaded when based only on the prime contractor's reliance on "pay when paid" clause.

        In Pinnacle Environmental Systems Inc. v. R.W. Granger & Sons Inc.,(6) a subcontractor sued the payment bond surety and included counts for punitive damages. The surety filed a motion to dismiss those counts, and the court upheld the motion to the extent that they had to do with the prime contractor's reliance on a "pay when paid" clause. The New York Appellate Division found that this fell far short of the "morally culpable conduct" required to sustain a claim for punitive damages. This court did, however, go on to leave standing a claim for punitive damages based on the diversion of trust funds received by the prime contractor from the owner.

        Bidder remained liable for penal amount of its bid bond despite efforts to withdraw bid after bid opening.

        After it had submitted a bid on a bridge construction project, the contractor realized that it had made a unilateral error of approximately $299,000 in calculating its bid. It requested the state agency to release it from its bid bond obligation, and the agency refused. The contractor then informed the agency that it was withdrawing the bid, but the agency refused to accept the withdrawal. It accepted the bid and publicly announced that it had awarded the contract pursuant to the bid. When the contractor received the contract but refused to execute it, the agency awarded the contract to the next lowest bidder and filed sued the contractor's surety under its bid bond.

        The trial court granted summary judgment to the surety, concluding that the bid was based on an unintentional, unilateral clerical mistake, and it relieved the surety under the principle of equitable rescission.

        The Georgia Supreme Court reversed in Department of Transportation v. American Insurance Co.(7) While the court acknowledged that the agency had the right to release the bidder in these circumstances, it held that the agency was not obligated to do so. It went on to hold that equitable relief in the form of rescission was not available where a public contract was involved to the same extent that it would be if the contracting parties were private parties. There was a vigorous and intelligent dissent.

      2. Procedural

        Failure to file payment bond in accordance with statute made bond common law bond so that claimant not bound by statutory notice requirements.

        In WPC Inc. v. Hartford Accident & Indemnity Co.,(8) the subcontractor did not comply with presuit notice requirements of the Florida statutes. This should have barred its action, but the bond had not been filed with the clerk of court. Instead, it had been filed with the school board.

        Clearly, this was not in accordance with the Florida statutes. In the circumstances, a Florida intermediate appellate court found that failure to file the bond properly kept it from the status of a statutory bond and made it a common law bond, so that the claimant's failure to give notice was excused.

        Thirty-day notice requirement is specific to each contract, so that notice timely for later deliveries was adequate for bond coverage on those deliveries but not as to earlier ones.

        In a rather typical history, a supplier of masonry materials to a subcontractor was not getting regular payments and stopped making deliveries. After negotiating an agreement for payment of the past due amount, a new contract was entered into. Michigan law required a 30-day notice for claims under the bond.

        In Grand Blanc Cement Products Inc. v. Insurance Co. of North America,(9) a Michigan intermediate appellate court discussed the legislative history and the policy behind the statute and found that each delivery constituted a separate and independent contractual arrangement. Consequently, the giving of notice on later deliveries was adequate, but not enough to sustain a claim for the earlier deliveries.

  2. PRIVATE CONSTRUCTION BONDS

    1. Liability of Surety

      Under Virginia law, surety may not rely on "pay when paid" clause in principal's subcontract where subcontract is not specifically incorporated into its payment bond.

      In a case of first impression under Virginia law, a federal district court there rejected a payment bond surety's reliance on a "pay when paid" clause in its principal's subcontract. In Moore Brothers Construction Co. v. Brown & Root Inc.,(10) two subcontractors sought both the enforcement of an arbitration award for contract extras and an early completion...

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