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

The annual survey of fidelity and surety, law is a project of the IADC Fidelity), and Surety Committee and is published in two parts. This is Part II of the 1998 survey. Part I appeared in the January 1999 issue of Defense Counsel Journal, page 109.

The sections of the survey were prepared as follows:

"Public Construction Bonds," by IADC member Ronald A. May of the Little Rock firm of Wright, Lindsey & Jennings.

"Private Construction Bonds," by IADC member R. Earl Welbaum of the Miami (Coral Gables) firm of Welbaum, Guernsey, Hingston, Greenleaf & Gregory.

"Fidelity and Financial Institution Bonds," by IA.DC member Randall I. Marmor of the Chicago firm of Clausen, Miller P.C.

"Sureties' Remedies" and "Miscellaneous, " by IADC member Roger P. Sauer of the Roseland, New Jersey, firm of Friedman & Siegelbaum.

The survey material is edited by IADC member Charles W. Linder Jr., of the Indianapolis firm of Linder & Hollowell. While the contributors' principal work is identified by the above categories, some of their work may appear in another category.

Edited by Charles W. Linder Jr.


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.'

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. …

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