Annual survey of fidelity and surety law, 1993.

• Author: May, Ronald A.
• Position: Part 1

1. PUBLIC CONSTRUCTION BONDS

   1. Miller Act Bonds

      None of the decisions involving Miller Act bonds during the first half of 1993 can be characterized as new or significant. On the other hand, several involve analyses and discussions of continuing issues.

      1. Procedural Issues

         Filing in court where venue improper tolls one-year limitation under doctrine of equitable tolling.

         As the Sixth Circuit notes in Kirchdorfer v. M.J. Kelley Corp.: "The unique facts presented by this appeal ... make this Miller Act case far from ordinary."(1)

         The government contract was for an installation at Guantanamo Bay, Cuba. The Miller Act requires that a suit to enforce rights under it be filed in the district in which the contract was to be performed and executed. This presents a claimant with something of a problem when the place of performance is outside the United States. The courts have uniformly held that plaintiffs may bring such claims in United States courts, and that the direction that they be filed in the district where the work was to be performed refers only to venue, not jurisdiction.

         The claimant first filed suit in Kentucky but was unable to get service on the contractor. It then dismissed and filed again in Ohio. By that time, however, the one-year statute of limitations had run. The Sixth Circuit had no trouble finding that the doctrine of equitable tolling applied during the period the case was pending in Kentucky, which rendered the later filing in Ohio timely. The court notes that case authority is limited and not current. The Sixth Circuit's analysis is full and careful, and the case deserves reading.

         Forum selection clause in subcontract allows transfer from district court where contract was to be performed.

         Arrow Plumbing v. North American Mechanical Services(2) involved a conflict between the Miller Act venue provisions and a forum selection clause in a subcontract.

         The subcontract provided that it would be governed by the laws of Texas and that the exclusive venue would be Bexar County, Texas. The work was performed in Rhode Island. Again noting that the venue provision is not jurisdictional and refers only to venue, the Rhode Island federal district court had no hesitancy in giving effect to the venue selection clause of the subcontract. The court made an independent inquiry as to whether its enforcement would be reasonable under the circumstances and determined that it would.

      2. Substantive Issues

         Court may not "collapse" two entities into one in order to enable remote supplier to make Miller Act claim.

         Thomas P. Harkins Inc. was a general contractor. Its president and chairman formed a limited partnership that assumed the obligations of the general contract. The same day the limited partnership contracted with still another corporation that also was owned by the Harkins president and chairman, and that corporation commenced construction but failed to pay two suppliers.

         In Global Building Supply v. WNH Limited Partnership(3) the Fourth Circuit noted that recovery under the Miller Act was limited to those dealing with the prime contractor and those having a contractual relationship with the subcontractor. Despite the obviously close relationship between the various parties separating the suppliers and the general contractor, the court felt that it could not "collapse" those entities into one in order to allow the remote claimant to recover. The opinion calls attention to the factors that might have permitted such a "collapse," including gross undercapitalization of the subservient corporation, failure to observe corporate formalities, non-payment of dividends, siphoning of the subservient corporation's funds, non-functioning officers and directors, lack of corporate records, etc.

         While the court's opinion is well written, the resolution of the case seems a little unfair.

         No recovery allowed for repairs caused by negligent misuse of equipment.

         In Rent It Co. v. Aetna Casualty & Surety Co.(4) an equipment rental company received its returned crane in damaged condition and sought recovery under a Miller Act bond. The 10th Circuit reversed an award in favor of the supplier and found that current repairs of an incidental and comparatively inexpensive character, which do not add substantially to the value of the equipment and compensate only for ordinary wear and tear, are the only such claims allowable. It based its decision on Continental Casualty Co. v. Boyd,(5) another 10th Circuit case decided 50 years ago, and noted: "Boyd may be a quite old case, but it remains the law of this circuit."

         The court also affirmed the district court's decision denying attorney's fees with an interesting discussion.

   2. State and Local Bonds

      The state and local bond cases during the first half of 1993 were almost all of only local interest. Four of them may have more transcending effects, all of which could be characterized as procedural.

      Surety bound by arbitration award and must pay attorney's fees in spite of contractual waiver by principal.

      This decision of an intermediate appellate court in California seems to be result oriented, and it drew a strong and well-reasoned dissent from one member of the panel.

      In Liton General Engineering Contractor v. United Pacific Insurance Co.(6) the general contractor entered into a subcontract that required arbitration of any disputes arising from the subcontract as a condition precedent to any right of legal action. It further specifically provided that each party would bear its own legal fees in connection with arbitration. When negotiations broke down between the parties, the subcontractor filed suit against the prime and its surety and prayed for attorney's fees. The prime moved to stay the action and require arbitration. Over the subcontractor's opposition, the trial court ordered the stay and compelled arbitration.

      The arbitration, to which the surety was not a party, went in favor of the subcontractor, and when the stay was lifted, it moved for summary judgment against the surety. This was granted, including attorney's fees that exceeded the amount of the arbitrator's award on the contested issues.

      The principal paid the arbitration award, and the surety claimed to have been exonerated. But the California Court of Appeal resolved all the issues against it, and the seemingly excessive attorney's fees were sustained notwithstanding the contractual provisions. The court's discussion is, to put it as charitably as possible, inadequate.

      The Kirchendorfer case, discussed above, also permitted enforcement of an arbitration award against a surety that was not a party to the arbitration.

      Statutory (Little Miller Act) bond has less stringent notice requirements than those set forth in the bond itself.

      Arizona has some rather arcane statutory and administrative rules involving procurement by public contracts. In Norquip Rental Corp. v. Sky Steel Erectors(7) a supplier to a subcontractor sought to recover under the prime contractor's bond. The bond had more burdensome notice requirements than those authorized by the state's procurement rules, and the Arizona Court of Appeals refused to enforce them.

      Letter to general contractor constituted "copy" of notice to surety and complied with statutory requirements.

      Connecticut's bonding statutes require that a claimant serve notice of a claim on the surety, with a copy to the contractor, within 180 days after the date on which the last work was performed. In OKEE Industries v. National Grange Mutual Insurance Co.(8) the claimant gave notice to the surety but did not provide a copy to the contractor. It had, however, sent numerous demand letters to the contractor, and the Connecticut Supreme Court held that this complied with the statutory requirements.

      Subcontractors' claims against retainage not allowed where action against surety is barred.

      Iowa requires that an owner retain portions of the contract balances and hold them for the benefit of claimants. In Northwest Limestone Co. v. Iowa(9) the retainage had been assigned to the surety. Two claimants, both of whom had let the time run on filing claims against the surety, tried to make claims against the retainage, which, in effect, would have deprived the surety of the rights of its assignment. The lower court allowed the claims, but the Iowa Supreme Court reversed on the authority of a 1928 case.(10)

2. PRIVATE CONSTRUCTION BONDS

   1. Liability of Surety

      Still an open question: under Georgia law, is surety released when creditor releases principal but reserves rights against surety?

      In a peculiar case that requires much assimilation, the 11th Circuit certified this question to the Georgia Supreme Court in Hardaway Co. v. Amwest Surety Insurance Co.(11)

      The federal district court had determined that under Georgia law, when an obligee prime discharges the principal as subcontractor, then the subcontractor's surety is discharged unless (1) the obligee prime reserves all rights against the surety, and (2) the discharge of the principal as subcontractor occurs with the knowledge and consent of the surety. Does this suggest that if the surety knows of the reservation, it consents? In this case, the general contractor had settled disputes with Amwest's principal and specifically reserved its right to proceed against Amwest. The surety had not consented to the general contractor's release of its subcontractor. The district court found that the surety was discharged.

      On appeal, the 11th Circuit agreed that the surety did not consent to the general contractor's release of the subcontractor, but went on to address the issue of whether the surety's consent is required for the surety to remain liable after the discharge of its principal. The court found confusion in the decisions of the Georgia courts regarding this issue and certified to the Georgia Supreme Court the question whether a creditor's agreement to release a principal, which contains an express reservation of rights against the surety...