Annual Survey of Fidelity and Surety Law, 2003, Part II: This Roundup of Recent Cases Covers Public and Private Construction Bonds, Financial Institution Bonds and Sureties' Remedies

By Brownstein, Bettina E.; Welbaum, R. Earl et al. | Defense Counsel Journal, October 2004 | Go to article overview

Annual Survey of Fidelity and Surety Law, 2003, Part II: This Roundup of Recent Cases Covers Public and Private Construction Bonds, Financial Institution Bonds and Sureties' Remedies


Brownstein, Bettina E., Welbaum, R. Earl, Marmor, Randall I., Sauer, Roger P., Linder, Charles W., Jr., Defense Counsel Journal


I. PUBLIC CONSTRUCTION BONDS

A. Bonds under Federal Laws

1. Procedural

Miller Act's limitations barred suit by subcontractor that failed to bring action within one year after it last performed labor or supplied materials or equipment.

The U.S. Department of the Navy awarded Eastern General Contractors a contract to perform work on a revitalization project at the Gorton Submarine Base in Connecticut. The general contractor obtained a bond from Employers Insurance of Wausau. Eastern subcontracted with Safe Environment of America Inc. to provide all labor and materials for asbestos and lead-containing materials abatement.

After Safe began work, the Navy demanded changes in the scope of the project that caused significant disruptions and delays. Eastern and Safe then entered into a written agreement in which Eastern promised to sponsor and prosecute to the Navy on Safe's behalf a request for equitable adjustment. The agreement also provided that payment or disallowance of the equitable adjustment would extinguish all further obligations of Eastern to Safe and that Eastern would pay Safe its portion of the equitable adjustment within 10 days of Eastern's receipt of an adjustment from the Navy.

In February 2001, Safe submitted information to Eastern for an adjustment of approximately $1.1 million, but then Eastern terminated Safe and hired two replacement subcontractors, one of which used Safe's asbestos and lead abatement plan. In March 2001, Eastern submitted a request for adjustment for approximately $2.2 million, which included Safe's portion. The Navy settled with Eastern for $1.5 million, a settlement that applied to two different requests submitted by Eastern.

Unaware of the Navy's payment of $1.5 million, Safe wrote Eastern demanding prosecution of the request. Eastern informed Safe that it had been submitted but that its portion had been disallowed. Moreover, Eastern accused Safe of fraud, asserting that the $1.5 million exceeded the actual value of the services it provided. In response, after notifying Eastern that it might file a claim on Eastern's bond, Safe filed suit in state court. Then, after it learned of the Navy's $1.5 million payment through discovery, Safe filed suit in federal court under the Miller Act to recover on the bond.

In Safe Environment of America Inc. v. Employers Insurance of Wausau, (1) the surety moved to dismiss under Federal Rule 12(b)(6) for failure to state a claim and for summary judgment on the basis that the statute of limitations had expired before the complaint was filed. It claimed that the last labor, materials or equipment were supplied on June 29, 2001, while the date of the complaint, October 18, 2002, was more than the one-year Miller Act limitation period. The federal district court in Massachusetts found ample evidence to support the surety's position.

In opposition, Safe ingeniously argued that the replacement subcontractor's use of Safe's abatement plan was analogous to the use of a subcontractor' s piece of equipment by a contractor after the subcontractor had stopped work on the project. The court lauded Safe's creativity but declined to accept the contention. It determined that an abatement plan did not constitute materials within the meaning of the Miller Act and that the use of the plan did not equate to "supplying materials."

The court also rejected Safe's argument that the surety should be equitably estopped from asserting the limitations defense because Eastern had lied to it, or as the court delicately put it, "had been less than forthcoming." Safe had not shown any attempt by Wausau to mislead it, the court continued, and Safe could have filed suit against the bond before the limitations period had run.

The court also rejected Safe's contention that Eastern's bad behavior should be attributed to the surety because the latter "stands in Eastern's shoes," observing that the surety was not raising its principal's defense but rather raising the statute as its own defense. …

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Annual Survey of Fidelity and Surety Law, 2003, Part II: This Roundup of Recent Cases Covers Public and Private Construction Bonds, Financial Institution Bonds and Sureties' Remedies
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