Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 1998 -- Part II

Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 1998 -- Part II

Article excerpt

This roundup of recent cases covers public and private construction bonds, fidelity and financial institution bonds, and sureties' remedies

I. PUBLIC CONSTRUCTION BONDS

A. Bonds under Federal Laws

1. Substantive

Subcontractor entitled to collect from surety amounts due under subcontract's savings clause.

The excavation and foundation work subcontract on a federal project included a savings clause providing that if the total subcontract amount did not exceed a certain sum, any savings realized would be divided equally between the contractor and the subcontractor. A rather substantial saving was accomplished, but the surety on the prime contract refused to pay the subcontractor the amount it claimed to have earned under that clause, arguing that such an amount was neither labor nor material covered by the Miller Act.

The Ninth Circuit found that the plain language of the Miller Act made it clear such amounts were covered by the bond and affirmed a district's court's decision to that effect. Taylor Construction Inc. v. ABT Service Corp.(1)

Change order that was consented to by surety's agent was not material alteration sufficient to discharge surety's obligation.

In Am-Haul Carting Inc. v. Contractors Casualty and Surety Co.,(2) a surety argued that its obligation under a performance bond was so materially altered by a change order for blasting work, which added $250,000 to the contract, that the surety was discharged. A New York federal district court acknowledged that a surety could be discharged under its bond where the undertaking was materially altered without its consent. However, in this case, the surety's bonding agent had been notified of the change order, consented to it and confirmed his consent in writing.

2. Procedural

General contractor's declaration of subcontractor's default was not prohibited by stay order entered in subcontractor's bankruptcy proceeding.

In Am-Haul Carting, the court also had to deal with the effect of an automatic stay entered by a bankruptcy court in connection with the subcontractor's bankruptcy.

Shortly before trial, the parties settled the Miller Act claim, leaving only certain state law claims between the defendants. The court chose, in view of the extensive time already invested by it and the parties, to retain jurisdiction over the remaining claims. The surety argued that its obligations had not been triggered under the bond because of the declaration of default that occurred after an automatic stay order had been entered in connection with the bond obligee's bankruptcy.

The court concluded, however, that the bonding company's obligations were triggered by default notification, that the surety had breached its obligations under the bond, and that it was liable for the consequences thereof.

Ninety-day notice under Miller Act must be received by contractor and not merely mailed by subcontractor within period required by act.

The rather straightforward decision in B & R Inc. v. Donald Lane Construction(3) was complicated somewhat by some procedural irregularities.

The claimant filed suit in federal court under the Miller Act and sued the prime contractor, its surety, and a subcontractor for whom the claimant's work was actually performed. That subcontractor defaulted, and a judgment was entered against it. The plaintiff then filed a motion for summary judgment against the prime contractor and its surety. At that point, almost a year after the action had been filed, the prime and its surety moved to amend their answers in order to assert inadequacy of notice under the Miller Act.

A fairly extensive discussion of the default situation resulted in a finding that the prime contractor and its surety were entitled to amend. The question then came down to whether the 90-day notice was sufficient. The notice was mailed on the 89th day and received on the 92nd day after the last day on which labor had been performed by the plaintiff. …

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