Journal Article

RECENT DEVELOPMENTS IN FIDELITY AND SURETY LAW

Wynn, Jessica L, Pickett, Mark L., Jr, Dimatteo, Amanda, Etcheverry, Justin E, Zanin, Angela, Daily, Megan, Beauchamp, Steven M, Weeks, Ryan J, Horne, Jane A, Oertel, Mark, Goldberg, Gina, Harris, David A, Blum, Christopher, Berry, Matthew R, Bilodeau, Kelsey M, Chang, Ryan

2024

Overview

Jurisdiction, Venue, and Forum In Key Construction, Inc. v. Western Surety Co.,6 a subcontractor default on a project in Washington resulted in a project-wide shut down.7 The prime contractor brought suit in Kansas state court under the subcontract's forum-selection clause, which provided that to the extent the contractor did not elect arbitration, the \"Eighteenth Judicial District, District Court Sedgwick County, Kansas is the court of exclusive jurisdiction and venue\" to resolve disputes between the prime contractor and subcontractor.8 The surety removed to federal court and sought transfer to Washington.9 The prime contractor moved to remand back to Kansas state court.10 The court denied both motions.11 As to the motion to transfer, the court explained that the balance of factors did not strongly favor transfer as required under precedent.12 The court noted that the prime contractor's choice of forum and court congestion weighed against transfer, whereas conflict of laws and allowing a local court to decide localized issues favored transfer.13 In denying the motion to remand, the court explained that the subcontract only applied to disputes with the subcontractor, and that the performance bond did not specify that the surety assumed all obligations undertaken in the subcontract.14 In Jackson Contractor Group, Inc. v. Travelers Casualty & Surety Co. of America,15 a subcontractor ceased working on an Idaho project.16 The prime contractor sued the subcontractor's performance bond surety in federal court in Washington.17 The surety moved to dismiss under the performance bond's forum-selection clause, which designated Idaho.18 The surety also moved to transfer to federal court in Idaho on forum non conveniens grounds.19 The prime contractor argued that the forum-selection clause was void ab initio under a Washington statute that provides that insurance contracts may not \"depri[ve] the courts of this state of the jurisdiction of action against the insurer\" and that venue transfer was inappropriate as private and public interest factors weighed in favor of staying in Washington.20 The court denied the surety's motion, explaining that the forum-selection clause was void ab initio because the performance bond was subject to Washington law as it was signed in Washington, work was partially performed in Washington, and the prime contractor and subcontractor were located in Washington.21 The court further explained that transfer was inappropriate because relevant witnesses were located in Washington.22 3. Conditions Precedent In Sterling & Wilson Solar Solutions, Inc. v. Fidelity & Deposit Co. of Maryland,23 a prime contractor default-terminated a subcontract and sent the subcontractor's performance bond sureties written notice in which it advised the sureties that the subcontractor had \"defaulted\" on the subcontract.24 The notice further advised the sureties that the notice was being provided pursuant to section 3 of the AIA A312-2010 performance bond.25 The sureties lost the notice and did not respond, and the prime contractor obtained a completion contractor and filed suit against the sureties.26 The sureties moved for summary judgment, arguing that the notice failed to satisfy the express conditions precedent of section 3, which required pre-termination notice and a post-termination agreement to pay the balance of the subcontract price.27 In denying the sureties' motion, the court held that violation of a notice requirement exonerates a surety only to the extent of resulting prejudice even when notice is an express condition precedent to liability.28 4. \"34 The court found that the contracts could not be district contracts absent the district's inclusion as a party.35 Therefore, the court held that the liquidated damages clauses were unenforceable penalties under Texas law.36 In Apex Development Co. v. Rhode Island Department of Transportation,37 after substantial completion of an interstate highway project a property owner sued the DOT, claiming trespass and damage to property during construction.38 The DOT sought to enforce the contract's indemnification claim against the prime contractor's sureties.39 The sureties argued that the bond only applied to direct construction costs and that their obligations were conditioned on the prime contractor's default and notice to the sureties.40 The supreme court affirmed summary judgment in favor of the sureties, finding the performance bond was null and void without a declaration of default and notice.41 The court further held that it would be unreasonable to extend liability to the sureties where the failure to provide notice prevented them from intervening to minimize their liability for damages.42 In E&I Global Energy Services, Inc. v. United States,43 after prime contractor's termination on a federal project the performance bond sureties retained a completion contractor under a contract in which the sureties were responsible for paying pre-default debts owed to subcontractors and suppliers.44 The completion contractor had difficulty retaining subcontractors and suppliers and paid some of prime contractor's outstanding debts to retain their performance.45 The completion contract was terminated for default for untimely performance.46 The completion contractor sued the government seeking damages and a conversion of the termination to a termination for convenience. On appeal, the Federal Circuit concluded that the factual allegations were sufficient to support the completion contractor's theory of excusable delay.47 The court explained that the sureties' failure to pay subcontractors and suppliers could constitute an adequate excuse for delay if it substantially impaired the completion contractor's performance.48 The court further explained that the sureties' alleged failures and the government's failure to enforce the sureties' payment obligations could also constitute an adequate excuse for delay under federal law.49 In U.S. Specialty Insurance Co. v. Trawick Contractors, Inc.,50 following a subcontractor default, its surety filed a declaratory judgment action against the prime contractor who counterclaimed for completion costs.51 After discovery, the surety issued payment to the prime contractor that excluded legal and consulting expenses.52 The surety then moved for summary judgment, arguing that it was not obligated for such costs because the performance bond did not reference legal or consulting fees and did not otherwise incorporate the subcontract by reference.53 The court denied the surety's motion, explaining that the subcontract and bond must be \"read together\" because the bond described the subcontract and the work required thereunder, and the subcontract required the bond at issue.54 The court then found that the subcontract and bond, as read together, required the surety to reimburse the prime contractor for legal and consulting expenses up to the penal sum of the bond.55 5.

• Publisher: American Bar Association
• Subject: Arbitration / Construction costs / Declaratory judgments / Failure / Jurisdiction / Liquidated damages / State courts / State laws / Subcontractors / Sureties / Surety bonds / Surveys