Annual survey of fidelity and surety law, 1993.

• Author: May, Ronald A.
• Position: Part 2

1. PUBLIC CONSTRUCTION BONDS

   1. Miller Act Bonds

      1. Jurisdictional Issues.

         Waste water treatment plant not public work under Miller Act merely because funded by Farmers Home Administration.

         General Electric Supply Co. v. United States Fidelity & Guaranty Co.(1) is a particularly good treatment of the issue that frequently arises as to whether a particular project is or is not a "construction, alteration or repair of any public building or public work of the United States," as required by the Miller Act.

         A city in Kentucky contracted to make improvements to its waste water treatment plant, federal funding for which was provided through the Farmers Home Administration. After a good discussion of the authorities, the Sixth Circuit found that the purposes of the Miller Act were not served by extending the act to a situation in which the government was neither the owner of the property, the intended owner, nor even a party to the construction contract, notwithstanding that it was an obligee under the bond.

         Repair of federally owned ships was public work, but jurisdiction depended on whether Miller Act bond actually issued.

         In an unusual fact situation, a shipyard contracted to repair three ships belonging to the Department of Transportation and the United States Navy. A subcontractor filed suit only against the contractor and not the surety, alleging the existence of a performance bond and not a payment bond. The defendant shipyard contended that the contracts were not for "public works" and that the action should have been brought against the surety. An issue was also raised as to whether a bond was ever issued.

         The federal district court in Owens v. Olympic Marine Services Inc.(2) wasted no time on the public works issue and found that in fact it was such. Likewise, the court held that the failure to join the surety was not a bar to a Miller Act claim. The court denied the motion to dismiss but stated that it would hear evidence on whether a bond existed. If no such bond existed, the action would be dismissed.

      2. Procedural Issues

         For relation back of 90-day notice, it is essential that there be underlying contract covering all items supplied by claimant.

         In a somewhat suspicious set of circumstances, Double-R Construction Corp. performed work as a subcontractor on a construction project at a naval station. Robert DeFillippis Crane Service alleged that it furnished rental equipment to Double-R over a period of several years and for rentals of $1.6 million.

         There was considerable evidence that one of the "R"s in Double-R was, in fact, Robert DeFillippis himself. He was not exactly forthcoming about his relationship with Double-R at meetings with the prime contractor and others. When Double R went broke, DeFillippis made a claim under the bond, notwithstanding that it never gave notices until more than a year after the so-called account had become delinquent.

         In Robert DeFillippis Crane Service v. William L. Crowe Construction Co.,(3) the federal district court was unwilling to deny the DeFillippis claim in its entirety but stated that DeFillippis should have given 90 days' notice under the Miller Act as to each of a series of contracts, there being no underlying enforceable contract involving all the rentals. The court also indicated that it would hear evidence on the issue of whether DeFillippis was equitably estopped from recovery at all due to Robert DeFillippis's lack of candor.

         Prime contractor may assert recoupment defense where materials supplied under subcontractor were defective. Setoff distinguished.

         The jurist slated to become the newest member of the U.S. Supreme Court wrote an excellent opinion in United Structures of America v. G.R.G. Engineering,(4) giving surety lawyers some hope that at least one member of the High Court will have some insight into this area of the law.

         A steel supplier to a bankrupt subcontractor sued under the Miller Act, and the general contractor defended that the steel was defective. The U.S. District Court for the District of Puerto Rico held that the Miller Act forbids the general contractor from taking such "off-setting" reductions, citing the Ninth Circuit's decision in Martin Steel Constructors v. Avanti Steel Constructors.(5)

         While acknowledging that case, Judge Breyer for the First Circuit distinguished a set-off arising from a transaction extrinsic to plaintiff's cause of action from a recoupment related to the claim under consideration. He pointed out that the language of the Miller Act permits a supplier to recover not the full contract price, but the "sums justly due him." He went on to say: "Indeed, we do not see how the full contract price of goods supplied can possibly be 'justly due' a person who supplied defective goods."

   2. State and Local Bonds

      1. Procedural Issues

         Forum selection clause enforced

         A contract for a public project in Virginia was entered into with a Maryland contractor. The general contractor then subcontracted some of the work to a Michigan corporation. The surety was a Pennsylvania corporation. Action was brought on the payment bond in Georgia. The bond contained language stipulating that no claim could be commenced other than in a state court of competent jurisdiction in the county in which the project was situated or in a federal court in the district where the project was situated, "and not elsewhere."

         It was clear to the Georgia Court of Appeals in Harry S. Peterson Co. v. National Union Fire Insurance Co.(6) that the state court had jurisdiction over these parties, although some issues were raised as to the validity of the service of process. In an opinion well worth reading, however, the court went on to enforce the forum selection clause after an extensive discussion of state and federal authorities.

         Agreement to arbitration between general contractor and owner is binding on subcontractor in claim against general contractor.

         In 3A Industries Inc. v. Turner Construction Co.(7) the general contractor was erecting an inmate housing project for a corrections center in Washington state. That contract included an arbitration clause. Turner subcontracted with 3A, but the subcontract did not specifically include an arbitration clause. Turner contended that the contract with the state was incorporated by reference in the subcontract.

         The Washington Court of Appeals extensively discussed both state and federal authorities. It characterized the Washington bonding statute as a "Little Miller Act" and ultimately concluded that the arbitration clause was incorporated by reference and remanded the case to the lower court with directions to stay it pending arbitration.

         Notice provision in contract not in conflict with statutory scheme.

         In Pennington v. Apollo Piping Supply Co.(8) the bond under which recovery was sought required that a claimant, other than one having a direct contract with the general contractor, should give written notice within 90 days after work was performed or materials furnished. There was no such state statutory provision; the state bonding law merely required that an action be brought within one year.

         Over a vigorous dissent, the South Dakota Supreme Court held that the notice provision in the bond did not shorten the limitations and was therefore enforceable.

      2. Substantive Issues

         Materials must be used or consumed on job and not merely delivered.

         In a case of first impression, the federal district court in New Jersey had to resolve a controversy as to whether bond coverage extended to a supplier regardless of whether the materials were physically incorporated into the project. It concluded in Poly-flex v. Cape May County(9) that the statutory language referring to materials "used or consumed in, upon, for or about the construction" required that the materials be physically incorporated.

         Subcontractor and subcontractor considered to be a single entity and not too remote to recover on bond.

         In ordinary circumstances, the Kansas bonding law does not extend coverage to second-tier suppliers, but in Vanguard Products Corp. v. American States Insurance Co.,(10) the Kansas Court of Appeals held that there was a close corporate relationship between the first- and second- tier suppliers. One was named Consolidated Utilities Inc. and the other Consolidated Construction Inc. The court found that in fact they were a "single entity" and consequently not too remote to recover under the Kansas law.

         Prime may assert recoupment defense where materials supplied to subcontractor were defective. Set-off distinguished.

         Judge Breyer's decision in United Structures, discussed above (footnote 4), also considered a claim under Puerto Rico's Little Miller Act and applied the same reasoning employed in the Miller Act claim.

         Damages under bid bond determined as of time of breach and not later.

         A bidder on the contract for the construction of a school made an error in calculating the cost of roofing, which resulted in its refusal to proceed when its bid was accepted. The school district negotiated a contract with another bidder for $85,728 more than the low bid. The school district filed suit against the low bidder and its bonding company. When the work was completed by the second contractor, it appeared that considerably less excavation of rock was required, so that the eventual contract with the second bidder was for less than the amount bid by the first bidder.

         The bonding company contended that its liability should be determined retrospectively rather than prospectively. But the Arkansas Supreme Court disagreed in Mountain Home School District No. 9 v. T.M.J Builders Inc.(11)

         Attorney's fees and claims against surety.

         Ayers Enterprises v. Exterior Designing Inc.(12) is a fairly straightforward case involving the law of Georgia and holding that the specific Georgia statute involving claims against sureties must be followed as to an award of attorney's fees, rather than a general statute having to do with claims under contracts. The...