Annual survey of fidelity and surety law, 1997.

• Author: Linder, Charles W., Jr.
• Position: Part 1

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

         Subcontractor's pay applications (and contractor's equivalent pay applications) constitute adequate evidentiary basis for award under Miller Act.

         In Towerridge Inc. v. T.A.O. Inc.(1) the Tenth Circuit affirmed an award against a prime contractor and in favor of a subcontractor over the contention of the prime contractor and its surety that the sub's proof was inadequate. The sub had presented testimony about its pay applications and their accuracy. It also introduced evidence of the prime's own pay applications, which tracked closely the ones submitted by the sub. The court found these to be legally sufficient.

         In the same case, the court reversed an award of attorney's fees because it was based solely on pre-litigation conduct of the prime contractor. The court concluded this to be an inadequate basis for awarding attorney's fees under the Miller Act.

      2. Procedural

         Evidence of prime contractor's settlement with government admissible in action by subcontractor.

         In the same case, the prime appealed from a ruling by the trial court that allowed testimony based on claims made by the prime against the government for delay and disruption. The Eighth Circuit found these admissible under Rule 402 of the Federal Rules of Evidence.

         Failure to give notice within 90 days bars subcontractor's claim.

         This rather routine case involved a typical failure to give notice within 90 days from the date on which materials were furnished. Roofing supplies were furnished on four successive dates. The contractor paid for supplies furnished on the last occasion, but did not pay for the earlier deliveries. The claimant argued that the notice period ran from the date of the last shipment and not from the last unpaid shipment.

         The district court held that liberal interpretation of the Miller Act did not justify such delay in giving notice. American Builders and Contractors Supply Co. v. Bradley Construction Co.(2)

   2. State and Local Bonds

      1. Substantive

         Surety that rescinded bond issued by agent with apparent authority liable to contractor that lost benefit of contract.

         In this interesting case, a contractor was awarded a public works contract that required it to furnish a bond within 10 days from the date of the award. The contractor's president flew to the surety's California office, obtained the bond, and returned to Nevada in order to file it as required. The bond included a power of attorney and the surety's corporate seal. The contractor paid the premium of $125,000. On the day before the bond was due, an attorney for the surety informed the contractor that the issuance of the bond was unauthorized and that the bond would be revoked. It was revoked, and the contractor lost the benefit of his contract. He was awarded substantial compensatory and punitive damages, and the surety appealed.

         The Supreme Court of Nevada affirmed and held that the surety had provided its agent with a seal and an unconditional power of attorney so that the contractor had reasonable basis for believing in the agent's authority. The attempt at cancellation before the effective date of the bond was no defense. The court, however, refused to accept the argument that the parties were in unequal bargaining positions and reversed the award of punitive damages. Great American Insurance Co. v. General Builders.(3)

         Colorado allows bad faith action against surety on construction contract.

         On the last point, the Supreme Court of Colorado held exactly to the contrary of the Nevada decision. Transamerica Premier Insurance Co. v. Brighton School District.(4)

         The contractor on a school project fell behind in its work and did defective work, causing the school district to remove the contractor from the project. Shortly, the contractor filed suit against the school district for breach of contract. The district met with the contractor's surety and attempted to negotiate a settlement in time to complete the project before the next term of school. Their negotiations were unsuccessful and the school district filed a counterclaim against the contractor and the bonding company for the cost of completion and the surety's bad faith. The jury awarded $10,000 on the bad faith claim, and the surety appealed.

         In an opinion that must come as a surprise to surety lawyers, the Colorado Supreme Court found itself completely unable to distinguish suretyship from insurance. It declared that the special relationship existing between an insurer and an insured is nearly identical to that between a surety and its obligee. The opinion went on to state that although the parties to the suretyship agreement were on an equal footing in terms of bargaining power when they enter into the agreement, the surety's ability to decide whether or not to pay the claims it "a distinct advantage" over the obligee, leading to the special relationship and liability for breach of it. Not surprisingly, there was a dissenting opinion that analyzed carefully and persuasively the essential differences between the surety-obligee and the insurer-insured relationship.

         Furnisher of temporary labor entitled to recover under bond even though not licensed as a contractor.

         In this case the claimant was in the business of furnishing skilled and unskilled temporary workers to licensed construction contractors. It did so on a project involving the construction of a railway station for the California Department of Transportation. The surety argued that a prior intermediate appellate court decision in California(5) was authority to deny status to this claimant. In that case, an employment services company performed personnel and payroll services for a subcontractor but did not actually furnish the employees.

         The California Court of Appeal in this case had no difficulty in distinguishing that case and allowing the claimant status to proceed. The surety further argued that the claimant was not itself licensed as a contractor and that it was barred from recovery under California law. The court held that the mere furnishing of services did not require a contractor's license. Contractors Labor Pool Inc. v. Westway Contractors Inc.(6)

      2. Procedural

         Declaration that project "complete and ready for occupancy" was not evidence of "Final completion and acceptance" to start 60-day period for filing suit.

         An Indiana prison project required the contractor to do some construction and also provide furniture for the new facility. The claimant in this case was a furniture dealer that completed its delivery on May 21, 1993. Prior to that date, on May 10, the county authorities signed an affidavit declaring the project "complete and ready for occupancy." Indiana law required that the lawsuit be filed within 60 days of the final completion. This claimant did not file within the 60-day period from the date of the owner's affidavit, but it did file within 60 days of its own delivery.

         The Indiana Court of Appeals held this to be adequate in Moduform Inc. v. Harry H. Verkler Contractor Inc.(7)

         Suit after two years barred in New York.

         In Majstrovic v. R. Maric Piping Inc.,(8) claimants seeking to recover prevailing wages and benefits on a public project failed to bring their action within two years from the date of the alleged underpayment. The New York Supreme Court for Kings County held that this claim was barred as against the contractor's surety.

         Five-year period to bring claims is prescriptive not preemptive and does not bar Louisiana claim for hidden defects.

         It always is agreeable to report on developments in Louisiana law. The experience is as instructive as reading Proust or arguing with teenagers.

         The case of Louisiana v. McInnis Bros. Construction(9) involved the doctrine of contra non valentem agere nulla currit praescriptio. Louisiana has a statute requiring the state to bring actions on public works contracts within five years of the date a notice of acceptance is filed. In this case, the notice was filed on May 9, 1985. It was not until March 1991 that maintenance personnel noticed defects in the exterior walls of the project. More than three years later, and more than nine years after the notice of acceptance had been filed, the state got around to filing suit.

         Under the doctrine mentioned above, the five-year period does not run where the cause of action is not known or reasonably knowable by the plaintiff. This is only in the case that the limitation is a prescriptive one rather than an preemptive one. A lengthy and scholarly discussion ensues in which the Louisiana Court of Appeals remarked "it is not always easy to determine whether a period of time fixed by law is preemptive or prescriptive." Its bottom line was, however, that the law was prescriptive only and that the action would be permitted with costs to the defendant.

   3. Miller Act

      Penal sum and bond term no limit to surety's liability on "indefinite delivery, indefinite quantity" contract with renewal options.

      In United States v. AKM Associates Inc.,(10) the contractor entered into an indefinite delivery, indefinite quantity contract for roofing repairs at the U.S. Air Force Academy. The contract was for a one-year period, subject to renewal options, and provided for work between a minimum value of $200,000 and a maximum of $9 million. The surety provided Miller Act performance and payment bonds with penal sums of $200,000 and $100,000, respectively. The contract was renewed and the surety billed for additional premiums, although it never executed a formal consent to the renewal.

      On the contractor's default and termination, unpaid contractors and materialmen sued the contractor and the surety. On cross-motion for summary judgment, the district court held that the penal sum of the payment bond was overridden by the bond provision of the ADDUCE contract, which...