Annual survey of fidelity and surety law, 2001 -- Part I: this roundup of recent cases covers public and private constructions bonds, fidelity and financial institution bonds, and sureties' remedies.

• Author: May, Ronald A.

1. PUBLIC CONSTRUCTION BONDS

   1. Bonds under Federal Laws

      1. Procedural

         Federal government's suit against Miller Act surety for additional costs of completion barred by six year statute of limitations.

         United States v. American States Insurance Co. (1) involved the renovation of military housing at an air force base in Florida. In 1985, the U.S. government terminated the contract for the contractor's failure to perform in accordance with its terms. The surety informed the government that the termination was wrongful, but in earlier litigation the termination was upheld by federal courts. The government utilized another contractor to complete the work, and in 1992, it demanded that the original contractor and its surety pay for the excess costs.

         Litigation followed, and the surety moved to dismiss under 28 U.S.C. [section] 2415(a), which requires that actions for money damages be brought by the government within six years from the accrual of the cause of action or one year from final decision in any administrative proceeding. The U.S. district court denied the motion and awarded summary judgment to the government.

         On appeal, that decision was reversed by the 11th Circuit. The government had argued that the limitations statute did not apply because the action was not for money damages but to enforce a judgment--the decision of the contracting officer. The court rejected this argument, characterizing the action as one for damages under the surety bond. It also turned down the contention that the government had one year from the contracting officer's final decision, citing previous authorities.

         Subcontractor's notice of filing lien met Miller Act requirements of notice to prime contractor.

         The Miller Act sets up three conditions for payment under a bond: (1) notice must be given within 90 days of the claimant's last work; (2) the notice must state the amount claimed with substantial accuracy; and (3) the notice must include the name of the party to whom or form whom the work or labor was done.

         In S&G Excavating v. Seaboard Surety Co., the federal district court had added a fourth requirement: that there be an explicit demand for payment. The claimant subcontractor had filed notice of a mechanic's lien and furnished a copy to the general contractor. The notice included an itemized bill for the work performed, the amount claimed and the identity of the firm that hired the subcontractor. It arrived within 90 days. The Seventh Circuit reversed the lower court and found the notice sufficient. (2)

      2. Substantive

         A completing surety is entitled to claim delay damages caused by general contractor's delay in the performance of its contract.

         A somewhat bizarre opinion emanated from the Seventh Circuit in Aldridge Electric Co. v. Pickus Construction & Equipment Co., (3) a case that arose from a contract at the Great Lakes Naval Training Center in Illinois.

         The general contractor hired a subcontractor to do the electrical work. The subcontractor became insolvent and stopped work. The general contractor's surety assumed the sub's obligations and engaged another contractor to finish the project. On completion, the general contractor paid the balance due under the subcontract, but the surety contended that the general contractor's own delays increased the cost of the work by some $400,000.

         The completing contractor and surety brought suit under the Miller Act against the general contractor and its surety. After a bench trial, the district judge found for the defendants. On appeal to the Seventh Circuit, the decision was reversed and remanded. The opinion first questioned why the completing contractor was a plaintiff, although that did not seem to have any bearing upon the decision. The decision noted that the district judge "missed the boat" because he had concentrated on what happened after the completing contractor took over. The opinion was very critical of the way in which the suit was tried and of the district judge for stopping the trial prematurely. It therefore reversed and remanded the case for a new trial before a new judge.

         Miller Act surety bound by principal's agreement to arbitrate.

         In Employer's Insurance of Wausau v. Bright Metal Specialties, (4) the U.S. National Park Service contracted for the repair of the roofs of certain buildings in the Everglades National Park in Florida. The government subsequently terminated the contractor for failure to perform, and the contractor's surety entered into a takeover agreement. The surety subcontracted a portion of the work to the eventual claimant in this case.

         After completion, negotiations proceeded for an equitable adjustment of the amount due, and the completing contractor filed a demand for arbitration. At this point, the surety filed suit for declaratory judgment. The claimant filed a motion to compel arbitration, and the federal district court ordered the parties to arbitrate, a decision affirmed by the 11th Circuit. It held that by signing the takeover agreement, the surety assumed all duties and responsibilities under the prime contract, including the arbitration provision.

         Employee may seek wages due under Davis-Bacon Act in suit on Miller Act bond.

         In Bradbury v. TLT Construction Corp., (5) a U.S. Navy construction project in Rhode Island resulted in a claim by a laborer for additional wages due under the Davis-Bacon Act. When the employee filed suit under the Miller Act, the surety argued that claims under Davis-Bacon should not be regarded as appropriate under the Miller Act and should have been handled by the other act's own procedures. The federal district court found that the plaintiff would have to secure an administrative determination under the Davis-Bacon Act, but that, on doing so, he could proceed with his claim under the Miller Act.

   2. State and Local Bonds

      1. Procedural

         County's action not barred by limitations under lullum tempus occurit doctrine. Montgomery County v. Microvote Corp. (6) was an action by a Pennsylvania county brought more than a year after the contractor and its surety has been found to have defaulted. Under Pennsylvania law, such actions must be commenced within one year after default. The county alleged successfully that it was excused by the doctrine of lullum tempus occurit, which states that statues of limitations are not applicable to actions brought by the state or its agencies, unless a statute expressly so provides.

         Since the doctrine is held to be available only in "very limited circumstances," the issue boiled down to whether the cause of action accrued to the state agency in its governmental capacity and was brought to enforce an obligation imposed by law or whether it was one arising from a contract voluntarily entered into by the state agency. The U.S. District Court for the Eastern District of Pennsylvania found that the action arose from the county's obligation to perform the work contracted.

         Elevator contractor's action more than one year after construction was completed, but less than one year after maintenance services were performed, was timely because contract did not apportion payment between two phases of work.

         In Otis Elevator Co. v. Westchester Fire Insurance Co., (7) the elevator company was a subcontractor on a public school construction project in Massachusetts. On completion, it sought payment from the general contractor and its surety. The work on the project had been accepted in July 1992. Under the contract, Otis was obligated to provide "complete maintenance and service" for a period of 12 months after substantial completion. The contract price did not apportion amounts to completion work and maintenance work.

         A lower court decision denying the claim was reversed by the Massachusetts Court of Appeals based primarily on the lack of apportionment and the conclusion that the one-year period ran from the time maintenance work was performed.

      2. Substantive

         Contract with state agency for removal of debris from private property not contract for public improvement and therefore not subject to state bonding requirements.

         In December 1996, an Oregon state agency solicited bids on a contract for the removal and disposition of tires and tire shreds from private property, a former tire recycling and soil treatment facility. The solicitation required the successful bidder to furnish a performance bond. A subcontractor later made demand for payments under the performance bond, but the surety denied the claim, contending that the bond only required the successful performance of the contract by the prime contractor and not payment to subcontractors.

         A decision in favor of the surety was affirmed by the Oregon Court of Appeals, holding that the contract was not one for public improvement requiring a payment bond and that the performance bond did not make the surety liable. State of Oregon v. United Pacific Insurance Co. (8)

         ERISA does not pre-empt claims under California's payment bond legislation or stop notice legislation.

         In Southern California IBEW-NECA Trust Funds v. Standard Industrial Electric Co., (9) the administrators of several employee benefit plans associated with unions filed suit to collect money owed for work on a public construction project. A subcontractor became delinquent in its contributions to the employment benefit plans, and the plans served a stop notice on the school district that had engaged the original contractor. At the same time, claim was made against the surety bond, and the claim was denied.

         The federal district court held that the federal Employees Retirement Income Safety Act pre-empted the California stop notice claim but not the payment bond claim. On appeal, the Ninth Circuit concluded that neither claim was pre-empted. The discussion in the appellate court's opinion is extremely useful in that it reviews a number of previous decisions by the U.S. Supreme Court and attempts to make them coherent.

         Subcontractor not entitled to recover under "stop notice release bond"...