Annual survey of fidelity and surety law, 1995.

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

1. PUBLIC CONSTRUCTION BONDS

   1. Miller Act Bonds

      1. Jurisdictional Issues

         Navajo tribal housing project not a public work to invoke Miller Act jurisdiction.

         Although the 10th Circuit in General Rock Sand Corp. v. Chuska Development Corp.(1) declined to hold that payment bond disputes in connection with Indian Housing Authority projects, could never be brought in federal court, it upheld the dismissal of a Miller Act claim made by a subcontractor on a reservation housing project. The court stated that it was debatable whether such a project was "public work of the United States" under the act, but its principal basis for denial of jurisdiction was what it referred to as "the diminished federal role in Indian organization affairs" contemplated by the Self-determination Act, 25 U.S.C. [sections] 4500)(a).

         No jurisdiction under Miller Act to hear state law claim for bad faith.

         In Capps v. Fidelity & Deposit Co.(2) the federal district court in Alabama granted summary judgment in favor of a surety on the Miller Act claimant's contention that the surety was guilty of bad faith in refusing to investigate a bond claim. In a rather well-written opinion, the court pointed out significant differences between claims against sureties and claims against casualty insurers but based its decision on the exclusiveness of the remedies provided under the Miller Act.

      2. Procedural issues

         Miller Act complaints may be filed with one year of date on date on which last labor or material was tendered by claimant.

         In Dragone Bros. v. Moniaros Contracting Corp.(3) the Miller Act claim was filed on November 12, 1993, and it was undisputed that the last date of delivery of materials was November 5, 1992. The plaintiff successfully argued that its tender of delivery of additional materials in January 1993 was sufficient to constitute "furnishing" them under the act. The federal district court's discussion leaves something to be desired.

         General contractor not indispensable party in Miller Act suit.

         While it seems surprising that anyone would contend to the contrary, the brief opinion in Henderson v. Nucon Construction Corp.(4) establishes once more that the surety can be sued by itself in a Miller Act case, state law to the contrary notwithstanding.

      3. Substantive

         Claimant may recover in quantum meruit for delay costs.

         Noting that other circuits have contrary decisions, the federal district court in Kansas upheld the right of a subcontractor to recover out-of-pocket labor and material costs, as well as overhead and profit. It went on to hold that the subcontractor also could recover for the use value of its own equipment. D & P Corp. v. Transamerica Insurance Co.(5)

         No cause of action over certificates of sufficiency in connection with individual Miller Act Sureties.

         In Terracom v. Valley National Bank(6) the Ninth Circuit was presented with what is apparently a unique claim. A contractor on a project for the U.S. Navy had filed Miller Act bonds with individual sureties. In accordance with government regulations, the sureties attached certificates of sufficiency from banks attesting the truth of affidavits furnished by the sureties. The court refused to hold that the banks had a to perform an independent investigation into the financial condition of each surety applicant.

   2. State and Local Bonds

      1. Procedural

         Surety bound by arbitration award against principal.

         In a somewhat convoluted legal proceeding, Town of Melville v. Safeco Insurance Co.,(7) it appears that a contractor defaulted on a municipal project and then demanded arbitration. The case went to arbitration, and the town was awarded $63,321. It then proceeded to sue the contractor's surety. In an earlier appeal, the Louisiana Court of Appeal affirmed the trial court's grant of summary judgment in favor of the town (589 So.2d 625), but the Louisiana Supreme Court reversed and remanded to allow the surety to present issues of material fact related to personal defenses it had. 593 So.2d 376.

         On a second trial, the court again upheld the arbitrator's award of $63,321 and proceeded to assess attorney's fees of $75,000. On a second appeal, the court of appeal upheld the decision with the remarkable argument that, since judgment in favor of the principal would be conclusive in favor of the surety, a judgment against the principal also is conclusive.

         Notice not defective because of one digit error in contractor number.

         If for no other reason, we should be grateful to Thomas Jefferson for the Louisiana Purchase. Louisiana civil law permits an action for the avoidance of sale on account of a defect that renders the thing sold either absolutely useless or so inconvenient and imperfect that it must be supposed the buyer would not have purchased it had it know of the vice.

         These defects are known as redhibitory defects, and in Dixie Building Material Co. v. Liberty Somerset Inc.(8) the defendants presented such a claim. The Louisiana Court of Appeal wasted little time with redhibition, but it did discuss the principal claim made by the surety that the supplier's notice failed to comply with Louisiana law in that it referred to the contract number as E-021-91, when the correct contract number was E-011-91. The opinion by Judge Moon Landrieu is a model of sorts in jurisprudential literature.

         Period for giving notice commences with delivery of materials for repairs under Little Miller Act.

         It is fairly well established under the Miller Act that when a supplier gives notice within the statutorily required period after the last sale in a series, the notice is effective only as to sales made within the required notice period. In other words, corrective work by a subcontractor does not operate to extend the notice as to previous work.

         The Maryland Court of Appeals in Insurance Co. of North America v. Genstar Stone Products Co.(9) acknowledged that Maryland's Little Miller Act was modeled on the Miller Act, but it declined to apply Miller Act precedents. The opinion by Maryland's highest court recognized that the state's mechanics' lien law did allow extension of the notice period in that manner and further that the federal construction of the Miller Act had not become well established at the time the Little Miller Act was enacted in Maryland. The court went on to hold that delivery by a supplier to a subcontractor of materials that are used to correct defectively done work, to replace a defective product or to cure an omitted performance can qualify as the event that triggers the running of the time limit for notice.

         Common law bond not subject to notice requirements applicable to statutory bond.

         In Scaccia Concrete Corp. v. Hartford Fire Insurance Co.(10) the Appellate Division of the New York Supreme Court was called on to determine whether a bond was a statutory bond or a common law bond that did not require compliance with notice provisions. In a discursive but not very persuasive opinion, the court refused to uphold the notice provisions of the statute and allowed recovery by the claimant. The opinion attempts to distinguish what is apparently a contrary opinion by another department of the court,(11) and it would appear that the issue will have to be resolved by the New York Court of Appeals.

      2. Substantive

         Claimant's failure to apply payments to particular contract debt no bar to recovery in absence of knowledge that funds originated from that project.

         In another portion of the Maryland decision (footnote 9), that court refused to deny recovery to a claimant on the basis that it had a trust obligation to apply payments to the account that formed the basis for the suit. Again, the discussion is excellent but relies primarily on the absence of any showing that the supplier had knowledge of the source of the funds that, it was contended, should have been applied to the account.

         No common law duty of good faith between surety and bond obligee in Texas.

         The Supreme Court of Texas in Great American Insurance Co. v. North Austin Municipal Utility District(12) had occasion to determine whether there was a common law duty of good faith and fair dealing between the surety and bond obligee comparable to that between an liability insurer and its insured. This opinion should give heart to surety attorneys, since it is a rare one that seems to grasp the essential difference between suretyship and insurance.

         The court's opinion, which deserves careful study, points out that there is no unequal bargaining power between a surety and an obligee. The state bonding law sets forth the form of the bond itself, and the public authority completely controls the contract documents.

         Public agency is not liable for failure to require bonds.

         In two cases, both of which primarily involve questions of local law, courts refused to find public agencies liable for the inadequacy of bonds accepted on projects. "In S & W Cabinets Inc. v. Consolidated School District" the Missouri Court of Appeals held that the bonding statute did not create a duty on the part of the school district or its board members to investigate the adequacy of sureties. In Davidson Pipe Supply Co. v. Wyoming County Industrial Development Agency(14) the New York Court of Appeals court reached the same conclusion but based it on a holding that the project was not a "public improvement" subject to the bonding statute.

2. PRIVATE CONSTRUCTION BONDS

   1. Contractual Defenses

   Does "pay when paid" provision in subcontract violate New York lien law if owner becomes insolvent?

   A subcontractor sought to recover against a surety and a general contractor for monies allegedly owed under a written subcontract that contained a "pay when paid" provision in WestFair Electrical Contractors v. Aetna Casually and Surety Co.(15)

   The general contractor argued that the "pay when paid" provision waived the subcontractor's right to enforce the lien, claiming that the underlying debt was not yet due because the general contractor had not received payment. The...