Annual survey of fidelity and surety law, 2001.

AuthorLinder, Charles W., Jr.
PositionPart 2

By Ronald A. May, R. Earl Welbaum, Randall I. Marmor and Roger P. Sauer

  1. PUBLIC CONSTRUCTION BONDS

    1. Bonds under Federal Laws

      1. Procedural

        Ninety-day notice commenced when rented pilings were returned to subcontractor, not when pilings stopped being used.

        This Fifth Circuit case represents one more installment in the already lengthy legal history of the Miller Act's requirement that the claimant under a bond give notice within 90 days after furnishing work or materials.

        A general contractor had agreed to perform construction work on a Veterans Administration hospital in Biloxi, Mississippi. The construction required two cofferdams, and the subcontractor responsible for them entered into a rental agreement with the claimant in this case to provide the necessary pilings. The question arose as to whether the time started running on the notice requirement when the subcontractor returned the pilings or when they were removed from the site.

        The federal district court in Mississippi held that the time started running when the pilings were removed. On appeal, this decision was reversed, and the Fifth Circuit ruled the 90 days commenced when the pilings were returned to the supplier. The action therefore was timely. J.D. Fields & Co. v. Gottfried Corp. (1)

      2. Substantive

        Subcontractor could recover from contractor and Miller Act surety for either breach of contract or quantum meruit.

        Maris Equipment Co. v. Morganti Inc. (2) is a federal district court decision from New York. The project was a $103 million federal detention center in Brooklyn. While most of the court's lengthy opinion is devoted to elements of damage, the significant legal issues involve the basis for the lawsuit itself.

        The subcontractor, who eventually prevailed after a four-week trial, was seeking recovery not only under the Miller Act but also under the theory of quantum meruit. Most of the jury's verdict was rendered under the quantum meruit claim. The district court eventually ordered a remittitur and the parties were able to settle the damage claim. A few weeks later, the court issued another opinion awarding prejudgment interest. (3)

        Bid bond held non-responsive to federal agency's solicitation where substituted form inadvertently failed to include bond's penal sum.

        Bid bond held non-responsive where bid was by joint venture, but bond was issued in name of corporation as principal although joint venture and corporation were same legal entity.

        It's somewhat unusual, but two cases involving bid bonds were decided by the United States Court of Federal Claims within a few days of each other.

        In the first case, Interstate Rock Products v. United States, (4) the plaintiff wanted to bid on a road job at Bryce Canyon National Park and notified its bonding agent, who had the interesting name of Budd O. Scow, that it needed a bid bond. The bond was procured in the correct amount and included the appropriate penal sum. The original copy of the bond included some illegible parts, however, apparently caused by facsimile transmission, and Scow was requested to issue another bond.

        This time the bond was legible, but. "inadvertently" the penal sum was left blank. When the bids were opened, the plaintiff's low bid was rejected in favor of a bid half a million dollars higher. After an interminable discussion of 19 pages, the court finally concluded that the inadvertent omission of the penal sum invalidated the bid.

        The other bid bond case involved the construction of a contract with the Army Corp of Engineers for modernization of a school in the District of Columbia. The bid bond named as principal James G. Davis Construction Corp. The bid, however, was made in the name of Davis/HRGM, a joint venture. It seems to have been uncontradicted that the two entities were identical. Nevertheless, the court found the bond non-responsive. Davis/HRGM Joint Venture v. United States. (5)

    2. State and Local Bonds

      1. Procedural

        Statute of limitations on action against surety began to run when work completed, not when work accepted.

        In Arbor Vitae-Woodruff Joint School District No. 1 v. Gulf Insurance Co., (6) a school district filed a declaratory judgment action seeking a declaration that the statute of limitations on actions under a contractor's surety bond began on the date the district's architect accepted the work. The surety

        contended that the statute began to run on the date the contractor completed its work. Since the latter contention comported with the statute under which the public works bond was issued, the Wisconsin Court of Appeals reversed the judgment in favor of the school district and remanded the case to dismiss the claim against the surety.

        Claimant's failure to give notice to contractor within 15 days after work commenced bars claim.

        In this Georgia case, a sub-subcontractor sued the subcontractor, the general contractor and the surety for earth moving services performed in construction of a school. The Georgia statute on payment bond claims required that those furnishing labor or services give a notice of commencement no later than 15 days after work is commenced. The claimant in this case failed to do so, and the Georgia Court of Appeals held that the claim was barred. J. Kinson Cook Inc. v. Weaver. (7)

      2. Substantive

        Principal on bond could not recover against surety for bad faith refusal to pay claims.

        In Masterclean Inc. v. Star Insurance Co., (8) the claimant, Masterclean Inc., contracted with the University of South Carolina to remove asbestos from a university building. It obtained a performance bond, and when it was declared to be in default, the university made a claim against Star Insurance Co., the surety, while at the same time formally terminating the contract with Masterclean. The surety eventually concluded that its principal, Masterclean, had defaulted, but the surety refrained from settling any bond claims pending negotiations with the university, which in the meantime had hired a replacement contractor. Ultimately, the university and the surety negotiated a settlement for $900,000, of which the surety paid $100,000 and the defaulting plaintiff contractor, Masterclean, $800,000.

        Masterclean then sued its own surety in state court, claiming that Star could have mitigated the damages by undertaking its obligations under the bond sooner. The case was removed to federal district court, which then sought an answer to a certified question as to whether South Carolina recognizes a cause of action in tort by a principal against its surety for bad faith refusal to pay first-party benefits to its obligee.

        The Supreme Court of South Carolina concluded that South Carolina law did recognize an action for bad faith refusal to pay insurance claims, but it held that the doctrine did not apply to sureties. The court pointed out, however, that this fact would not prevent the principal from asserting a surety's bad faith as a defense to an indemnification claim.

        No recovery against surety for defalcation by "disbursing agent" that surety had required.

        Multi-state Contracting Corp. v. Midwest Indemnity Corp. (9) is a somewhat puzzling case. The construction contract was with the U.S. Air Force, so it would appear that the surety bond provided by the principal must have been a Miller Act bond. The surety and a separate business entity, referred to as "underwriter," required that the principal contractor use a "disbursing and escrow agent" to handle funds received from the Air Force on the project. The principal contracted with such an entity, which proceeded to lose some of the funds in "failed investments." At this point, the principal sued its own surety under an agency theory, rather than the Miller Act.

        The Georgia Court of Appeals held that while the use of the disbursement agent may have been a condition to the issuance of a bond, that requirement did not make the surety liable for its defalcations.

        Pre-claim notice to surety not required where concrete cutting services were labor rather than materials.

        The contractor on a school remodeling project in the State of Washington subcontracted for certain mechanical work. The subcontractor, in turn, contracted for "concrete cutting, sawing and coring." When the subcontractor failed to pay its sub-subcontractor, the latter sued the subcontractor, the general contractor and the general contractor's surety. The defendants moved for summary judgment on the ground that the sub-subcontractor had failed to provide a pre-claim notice under the bonding statue.

        The trial court refused to grant summary judgment, and its action was affirmed on appeal to the Washington Court of Appeals, the court holding that the concrete cutting services provided by the plaintiff did not involve furnishing materials but only labor, and that the bond statue's notice requirement did not apply to such claims. National Concrete Cutting Inc. v. Northwest GM Contractors Inc. (10)

        Estimating and bidding preparation services to contractor not covered by contractor's payment bond.

        The plaintiff in this case entered into an oral agreement with the contractor under the terms of which the plaintiff was to perform certain estimating and bidding preparation services and to be compensated by a weekly payment, plus a 6 percent commission on the gross receipts from bid projects. The other party to the transaction obtained a contract for work on the Raleigh-Durham International Airport.

        The contractor had financial difficulties and failed to pay the plaintiff. He sued the contractor and the contractor's surety. A judgment in favor of the surety was affirmed on appeal to the North Carolina Court of Appeals, the court holding that all the work done by and for the contractor was fully performed before the bonding contract was entered into. Monteau v. Reis Trucking & Construction. (11)

        Payroll services furnished by claimant to contractor not covered by payment bond.

        Two almost identical cases from different states reached identical-results in...

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