Surety Case Law Note – No Good Deed Goes Unpunished
August 30, 2022
In this Surety Today blog post we will provide a Case Law Note to consider the issue of the interplay between the terms and provisions of the underlying contract and the terms of the performance bond into which the contract has been incorporated. As discussed in the post, the surety performed by tendering a completion contractor and paying the excess completion costs, only to get hit with a near $2 million claim for additional damages. The case below gets into the various rules of contract construction and interpretation, as well as the common law rule that a surety’s liability is coextensive with and cannot be greater than its principal’s liability. The case also has a good discussion of consequential damages and what is and what is not consequential. Read on to learn more about a surety’s reliance on a waiver in the underlying contract.
IRON BRANCH ASSOCIATES, LP v. THE HARTFORD FIRE INSURANCE COMPANY, No. 21-463, 2021 WL 4129116 (D. Del.)
Iron Branch Associates, LP owns the Village at Iron Branch, a housing development administered by the United States Department of Housing and Urban Development and the Delaware Housing Authority. In June 2017, Iron Branch hired Petrucon Construction, Inc. to renovate the Village for a total contract price of $4,768,762.00. Hartford provided the performance and payment bonds for Petrucon. The Performance Bond incorporated the Construction Contract. The performance bond provided that Hartford’s responsibilities to Iron Branch were the same as Petrucon’s to Iron Branch, and that Hartford had exposure to pay additional damages for “legal, design professional and delay costs” resulting from Petrucon’s default and liquidated damages, or if none, actual damages caused by the delayed or non-performance of Petrucon. Pursuant to the bond Hartford was only liable for the damages for which Petrucon would be liable.
On January 30, 2019, Iron Branch declared Petrucon in default and on February 12, 2019, Iron Branch terminated the bonded contract. Iron Branch then notified Hartford of the termination and made demand under the Performance Bond. In response, Hartford chose to fulfill its surety obligations by tendering Delmarva Veteran Builders LLC to complete the renovations. Hartford also paid Iron Branch the difference in the Construction Contact balance and tender price – $438,163.29 – as well as certain additional costs incurred by Iron Branch due to Petrucon’s default totaling $72,384.43. In the Tender Agreement Iron Branch released Hartford from its obligations under the Construction Contract Performance Bond, but reserved the right to recover certain damages under the Performance Bond. Hartford, on the other hand, reserved all rights and defenses under the applicable agreements, as well as Petrucon’s rights and defenses, and specifically provided its payment of damages under the Tender Agreement was without prejudice to its defenses to Iron Branch’s claim for additional damages.
Iron Branch subsequently demanded an additional $1,849,857.48 from Hartford under the Performance Bond. Iron Branch based its new demand on alleged lost rental income; cost for relocation of tenants; subcontractor, consulting, and legal costs; Iron Branch project management time costs; extended financing costs; and lost tax credits. Hartford denied Iron Branch’s claim arguing that under the Performance Bond, Hartford’s liability could not be greater than Petrucon’s under the Construction Contract. Hartford also pointed to the Contract Documents in which Iron Branch and Petrucon agreed to waive consequential damages. The waiver of consequential damages provides that the mutual waiver includes: (1) damages incurred by Iron Branch for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and (2) damages incurred by Iron Branch for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work. The mutual waiver was applicable, without limitation, to all consequential damages due to either party’s termination.
Iron Branch then sued Hartford for breach of contract and for a declaratory judgment and the parties filed cross-motions for summary judgment. Iron Branch argues that it may recover damages from Hartford despite its waiver of consequential damages in the Construction Contract because the Construction Contract’s general incorporation into the bond was insufficient to overcome the Performance Bond’s express grant of damages that Hartford could be liable for. The Bond stated that Hartford would be responsible for specifically enumerated damages including that the Surely would be obligated, without duplication, for (1) the responsibilities of the Contractor for correction of defective work and completion of the Construction Contract; (2) additional legal, design professional and delay costs resulting from the Contractor’s Default, and resulting from the actions or failure to act of the Surety under the bond; and (3) liquidated damages, or if no liquidated damages are specified in the Construction Contract, actual damages caused by delayed performance or non-performance of the Contractor.
The Performance Bond incorporated the Construction Contract by reference. Under Delaware law, when the bond expressly incorporates the Construction Contract by reference, both the Performance Bond and Construction Contract must be read together to “ascertain the intent of the parties” as it relates to Hartford’s obligations. The parties agreed in the Performance Bond that Hartford’s obligations to Iron Branch were co-extensive with the obligations Petrucon under the Construction Contract and that the responsibilities of the Surety to Iron Branch shall not be greater than those of the Contractor under the Construction Contract. The Court held that “[b]ecause Iron Branch waived claims for all consequential damages against Petrucon, as well as the damages specifically enumerated, Hartford is also not liable to Iron Branch for consequential damages or those specifically waived under the express terms of the Performance Bond.” The Court did not agree with Iron Branch’s argument that Hartford had increased its liability in the bond given all of the provisions in the bond. The Court noted that it did not “dispute a surety may expand or limit its obligations under the terms of a bond. But Iron Branch fails to show Hartford expanded its liabilities.”
Iron Branch further argued that the contract incorporation only defines performance obligations and has no relation to liabilities. The Court rejected this contention as being against persuasive authority. See Hicks & Warren LLC v. Liberty Mut. Ins. Co., 2011 WL 2436703, at *5; Travelers Cas. & Sur. Co. of Am., 792 N.E.2d at 1016; Vill. of Rosemont v. Lentin Lumber Co., 144 Ill.App.3d 651, 98 Ill.Dec. 470, 494 N.E.2d 592, 603 (1986); Victoria Management, LLC v. Dooleymack Constructors of South Florida, LLC, 2016 WL 9130882, at *1 (Fla. Cir. Ct. Aug. 05, 2016); 400 15th St., LLC v. Promo-Pro, Ltd., 960 N.Y.S.2d 341 (N.Y. Sup. Ct. 2010). The Court also noted that Iron Branch’s interpretation contradicted the common law principle that a surety’s liability is coextensive with its principal as well as the plain language of the Performance Bond – which expressly provided that “the responsibilities of the Surety to the Owner shall not be greater than those of the Contractor under the Construction Contract, and the responsibilities of the Owner to the Surety shall not be greater than those of the Owner under the Construction Contract.” Thus, the Court held that while the Performance Bond allows for the enumerated damages, “it only does so to the extent Petrucon would be liable to Iron Branch under the Construction Contract.” Finally, the Court noted that the term “responsibilities” in the Performance Bond encompasses liabilities.
Although, Iron Branch waived consequential damages, the Court undertook an analysis to determine if the damages sought by Iron Branch were in fact consequential damages. As I noted, the waiver included: damages incurred by [Iron Branch] for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons ….” Hartford argued that all of Iron Branch’s claimed damages are consequential under common law or waived by the Contract Waiver Provision. Under Delaware law consequential damages “are those that result naturally but not necessarily from the wrongful act, because they require the existence of some other contract or relationship … The distinction between direct and consequential damages is the degree to which the damages are a foreseeable and highly probable consequence of a breach.” WSFS Fin. Corp. v. Great Am. Ins. Co., 2019 WL 2323839, at *5 (Del. Super. Ct. May 31, 2019) (also defining direct damages as “those inherent in the breach, Direct damages are the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong. Direct damages compensate the plaintiff for the loss that is conclusively presumed to have been foreseen by the defendant from his wrongful act.”); see also SLH Gen. Contractor, Inc. v. Ambience Inc., 2020 WL 1130325, at *5, n.52 (Del. Com. PL Mar. 4, 2020)(explaining consequential damages are special damages and “defining special damages as ‘those which are the actual, but not the necessary, result of the injury complained of, and which in fact follow it as a natural and proximate consequence in the particular case, that is, by reason of special circumstances or conditions’).
The Court noted that categories of damages that were expressly identified in the waiver were waived. So, the alleged lost rental income was waived. The alleged tenant relocation costs fell within the express waiver of “losses of use, income or profit.” As to Iron Branch’s claim for subcontractor, consulting, and legal costs Hartford argued that the fees for preparing the consultant’s report were not recoverable and that incidental legal costs and fees were not recoverable. The Court found that Iron Branch waived the cost incurred for preparation of the consultant’s report, but issues of material fact existed around the recovery of the legal fees. With respect to Iron Branch’s claim for personnel and management costs, Hartford argued that the costs were barred as “damages incurred by [Iron Branch] … for loss of management or employee productivity or of the services of such persons.” Iron Branch maintained that the costs are a direct damage. The Court found a material dispute of fact. Iron Branch asserted recovery of “additional monthly interest on two loans” as a direct result from the delay to the Project delivery and schedule and a “penal[ty]” from Capital One “for the delay with extension fees and additional extension-related legal fees.” Iron Branch argued these were direct damages. Hartford countered that the costs were expressly barred by the enumerated list of waived damages. The waiver covered damages incurred by Iron Branch for losses of financing. The Court held that Iron Branch’s damages were not damages incurred for “losses of financing,” but were rather damages incurred due to extending its financing and that such damage did not fall within the enumerated list of the waiver. Thus, the court denied summary judgment as to these alleged damages. Iron Branch also sought to recover alleged loss of low-income housing tax credits caused by the default. Hartford argued that the damages were waived as loss of use, profit, and income. Iron Branch maintained the loss of these credits were direct damages. The Court held that the damages were waived by the parties’ waiver of “losses of use, income or profit.”
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.