Surety Today: The Blog

New Contract? No Problem! – Unless You’re the Surety

May 17, 2022

In this Surety Today blog post we will provide a Case Law Note to consider the issue of novation and whether a surety that issues a bond for the original contact can also be held to bond a new contract.  Under applicable law, a “novation” is the “substitution of a new agreement in place of an existing agreement between the same parties.”  The case deals with the issue of whether the second agreement was a new agreement or merely an amendment of the original agreement, the intent of the parties and the effect of the surety’s waiver of notice of changes.  Read on to discover if what was old is new again.

HARRIS CNTY. WATER CONTROL & IMPROVEMENT DIST. NO. 89 V. PHILADELPHIA INDEM. INS. CO., 31 F.4th 305, 310 (5th Cir. 2022)

The United States Court of Appeals for the Fifth Circuit recently issued an opinion on an interesting surety case from Texas. A Texas county’s water control and improvement district (“District”) sought to build a new headquarters. The District retained an architect to design the building and manage its construction. In the process, the architect prepared a project manual and drawings. Using the project manual that contained all the relevant specifications and provisions, the District procured bids and awarded the contract to E&M Enterprises (“E&M”). E&M signed the notice of award, along with the project manual, to form the 2015 Agreement. Pursuant to that agreement, E&M executed a performance bond on the template provided in the manual. The bond included the fairly standard waiver of any changes, alterations, modifications, etc. to the terms of the contract language. The bond identified the 2015 Agreement as the bonded contract.

Before the start of construction, the architect backed out of its obligation to manage the project. After finding a new project manager, the District and E&M signed a new agreement – the 2016 Agreement. The 2016 Agreement incorporated general conditions of the contract, but those conditions were different in that they were adapted from a Construction Specifications Institute template rather than the AIA template used in the 2015 Agreement. Additionally, the 2016 Agreement called the contract “Revised.” Importantly, the 2016 Agreement restated the subject matter of the contract, the price, start date, completion date, and the requirement of E&M to furnish all materials to complete the job.

E&M was unable to complete the project, and the District made demand on the surety under the performance bond. The surety denied the claim on the grounds that it bonded the 2015 Agreement not the 2016 Agreement. In litigation, the surety moved for summary judgment on this ground. The issue before the Court was whether the 2016 Agreement was a new contract replacing the 2015 Agreement or simply an amendment to the 2015 Agreement.

The Court, in looking to Texas law and its principals of objective intent, determined that the 2016 Agreement merely amended the 2015 Agreement and did not replace it. Even though there were no specific terms that the 2016 Agreement simply amended the previous one, the Court was convinced by the plain terms of the 2016 Agreement that it was only an amendment. This was because conditions portion of the project manual had the same section number, section title, and subject matter as the previous one, even though the template was different. The Court was also persuaded by the use of “Revised” to describe the 2016 Agreement. Even though the general conditions were different, the Court was persuaded that multiple material terms were identical to those in the first – price, start date, commencement date, etc.

In the end, the Court determined that the parties’ intent was to simply change some of the conditions of the previous contract, not enter a completely new contract. Because the surety waived notice of changes to the contract in the performance bond, the surety remained on the hook despite the “new” contract between the District and E&M.

If you have questions regarding the issues discussed in this post, please do not hesitate to contact any member of the Surety and Fidelity Law Practice Group.