125 Wash. App. 907 | Wash. Ct. App. | 2005
¶1 This case requires us to construe a subcontractor’s performance bond. The main question is whether the surety’s liability was conditioned on the obligee’s having declared, before the principal substantially completed the work, that the principal was in default under the subcontract. The trial court answered no, and so do we.
f 3 In February 1998, CSI formed two subcontracts with Action Excavating and Paving, Inc. (Action). One was for offsite work, and the other was for onsite work.
¶4 The offsite subcontract is the one primarily in issue here. It required Action to build a sewer system for $472,290. Action was to start in May and finish in July. The city of Vancouver was to test and approve the work. The offsite subcontract provided in part:
If, in the opinion of the Contractor [CSI], the Subcontractor [Action] . . . fails to carry on the Work in a manner acceptable to the Contractor, then the Contractor shall have the right and may. . . after giving the Subcontractor two (2) days written notice thereof, terminate this Subcontract whereupon the Contractor may take over and complete the performance of the Work by whatever method and means it may deem expedient . . . ,[1 ]
¶5 On April 8, 1998, Insurance Company of the West (ICW) issued a performance bond and a payment bond in exchange for $8,034. In the performance bond, ICW guaranteed to CSI that Action would perform the offsite subcontract.
[A] Action Excavating & Paving, Inc. . . ., hereinafter called Principal, and Insurance Company of the West. . ., hereinafter called Surety, are held and firmly bound unto CSI Con*912 struction Co. . . ., hereinafter called Obligee, in the amount of. . . $472,290 ....
[B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . . , which subcontract is by reference made a part hereof, and is hereinafter referred to as the subcontract,
NOW THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH THAT, if Principal shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.
[C] Whenever Principal shall be, and declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee’s obligations thereunder:
(1) Surety may promptly remedy the default, subject to the provisions of paragraph 3 herein, or;
(2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal’s obligation under the subcontract subject to the provisions of paragraph 3 herein;
(3) The balance of the subcontract price, as defined below, shall be credited against the reasonable cost of completing performance of the subcontract. If completed by the Obligee, and the reasonable cost exceeds the balance of the subcontract price, the Surety shall pay to the Obligee such excess, but in no event shall the aggregate liability of the Surety exceed the amount of this bond. If the Surety arranges completion or remedies the default, that portion of the balance of the subcontract price as may be required to complete the subcontract or remedy the default and to reimburse the Surety for its outlays shall be paid to the Surety at the times and in the manner as said sums would have been payable to Principal had there been no default under the subcontract. The term “balance of the subcontract price,” as used in this paragraph, shall mean the total amount payable by Obligee to Principal under the subcontract and any amendments thereto, less the amounts heretofore properly paid by Obligee under the subcontract.
[D] Any suit under this bond must be instituted before the expiration of two (2) years from date on which final payment under the subcontract falls due.
[E] No right of action shall accrue on this bond to or for the use of any person or corporation other than the Obligee named*913 herein or the heirs, executors, administrators or successors of Obligee.[3 ]
For ease of reference, we have inserted capital letters at the beginning of each major paragraph.
¶6 Action began the offsite work and claimed progress payments that CSI made. By the end of June, however, Action was “seriously behind schedule.”
¶7 “Action continued performing. . . and substantially completed it[s] work on or about October 14, 1998.”
18 Meanwhile, on September 9, 1998, CSI copied ICW on a letter stating that although Action would finish “by . . . September 18,1998,”
¶9 CSI sued ICW, Action, and Action’s owner. ICW answered and denied liability. Action and its owner defaulted.
¶10 A bench trial was held. ICW again took the position that it was not liable because CSI had not formally declared Action in default before Action had substantially completed the work on the offsite subcontract. ICW also contended that CSI had paid Action too much in progress payments, thereby impairing ICW’s security and reducing ICW’s liability. CSI claimed prejudgment interest. CSI also claimed reasonable attorney fees based on the offsite subcontract, which the performance bond incorporated, and on the Olympic Steamship
I
¶12 The first issue is whether ICW is liable on its bond. ICW claims it is not, “because CSI did not declare Action in default before substantial completion of the bonded offsite contract.”
¶13 A bond is a contract that governs the surety’s liability to the obligee.
A
¶14 We turn first to relevant contract principles. A contract, including a bond, should be construed as a whole
¶15 A contract, including a bond, can contain conditions as well as promises. A condition is an event that must occur, or a circumstance that must exist, in order for the promisor to have a duty to perform.
¶16 A condition is classified according to its origin and effect. It can be express, implied in fact, or constructive.
¶17 When a contract provision is both a condition and a promise, the remedies available for its breach vary by whether the breach is “material.” If the breach is “material,” the promisee has an election: He or she may treat the breach as a failure of a condition that excuses further performance and thus terminate the contract,
Any unjustified failure to perform when performance is due is a breach of contract which entitles the injured party to damages. If the breach is slight or insubstantial, it is called a partial breach, for which plaintiff’s damages are restricted to compensation for the defective performance. If the breach is material, it is called a total breach, which gives to the injured party an election to substitute for his contractual rights the remedial right to damages for total failure of performance. He has the alternative election of treating the contract as continuing, however, in which case his damages are limited as for a partial breach.[28 ]
B
¶18 Having reviewed relevant contract principles, we next examine the bond. It incorporates the offsite subcontract by reference,
¶19 By its plain terms, Paragraph A of the bond makes ICW immediately liable to CSI. It states that ICW is “held and firmly bound unto CSI... in the amount of. . . $472,290.”
¶21 When Paragraph C applies, it provides for certain remedies and measures of damage.
¶22 With this background, we turn to ICW’s claim that it is not liable on the bond because CSI failed to declare a “default.” To analyze that claim, we make several inquiries. (1) Did Action materially breach the offsite contract? (2) Did CSI declare Action to be in default under the offsite subcontract? (3) If CSI did not declare Action to be in default, did it fail to fulfill an obligation imposed by law? (4) If CSI did not declare Action to be in default, did it breach a promise made in the offsite subcontract or the bond? (5) If CSI did not declare Action to be in default, did it fail to fulfill a condition included in the offsite subcontract and thereby relieve ICW of its duty to pay under the bond? After making these inquiries, we briefly examine the payment bond and a particular case on which ICW is relying.
1
¶23 Our first inquiry is whether Action materially breached the offsite contract. The trial court so determined, and no one assails that determination in this appeal. Accordingly, we hold that Action materially breached the offsite contract.
2
¶24 Our second inquiry—whether CSI declared Action to be in default under the subcontract—has three parts, (a) When is a principal in default under a subcontract? (b) When does an obligee “declare” a principal to be in default under a subcontract? (c) Did CSI make such a declaration here?
¶25 Turning to (a), we distinguish between “breach” and “default.” Utilizing the concept of “material breach” that we discussed above, the Fifth Circuit explained in L&A Contracting Co. v. Southern Concrete Services, Inc.:
*920 Although the terms “breach” and “default” are sometimes used interchangeably/[38 ] their meanings are distinct in construction suretyship law. Not every breach of a construction contract constitutes a default sufficient to require the surety to step in and remedy it. To constitute a legal default, there must be a (1) material breach or series of material breaches (2) of such magnitude that the obligee is justified in terminating the contract[39 ]
Agreeing with L&A in this respect,
¶26 The answer to (b) follows logically from the answer to (a). If a principal is “in default under the subcontract” when he or she has materially breached the subcontract, thereby permitting but not requiring the obligee to terminate the subcontract, an obligee “declares” a principal to be in default when, having elected to treat the breach as “material,” the obligee announces his or her intent to terminate the subcontract.
¶27 Turning to (c), we observe that even though Action’s breach was material, CSI never elected to treat it as such. Nor did CSI declare an intent to terminate the offsite subcontract. Instead, CSI opted to continue Action’s performance and seek damages at the end. Necessarily then, CSI did not declare Action to be in default under the offsite subcontract.
3
¶28 Our third inquiry is whether CSI, by not declaring Action to be in default, failed to fulfill an obligation imposed by law. As discussed above, the law permits but
4
¶29 Our fourth inquiry is whether CSI, by not declaring Action to be in default, breached a promise made in the offsite subcontract or in the bond. Like the law itself, the subcontract gave CSI the option to declare a default, but it did not obligate CSI to declare a default or terminate the subcontract; as quoted above, it stated only that if Action failed to perform, CSI “may . . . terminate this Subcontract.”
5
¶30 Our fifth inquiry is whether CSI, by not declaring a default, failed to fulfill a condition to ICW’s liability and thereby relieved ICW of its duty to pay on the bond. As discussed above, Paragraph A of the bond makes ICW liable to CSI. Paragraph B explicitly states that ICW will continue to be bound until Action promptly and faithfully performs. By using the word “otherwise,” Paragraph B explicitly eliminates all other conditions—including a declaration of default by CSI. The preamble to Paragraph C sets forth three events (the principal’s default, the obligee’s
¶31 An examination of ICW’s payment bond confirms these conclusions, for it clearly demonstrates that ICW could have added—but did not add—conditions to Paragraph A of the performance bond. Issued simultaneously with the performance bond, the payment bond states in part:
[A] Action Excavating & Paving, Inc. . . ., hereinafter called Principal, and Insurance Company of the West..., hereinafter called Surety, are held and firmly bound unto CSI Construction Co. . . . , hereinafter called Obligee, for the use and benefit of claimants as hereinbelow defined, in the amount of. . . $472,290____
[B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . ., which subcontract is by reference made a part hereof, and is hereafter referred to as the subcontract. NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall promptly make payment to all claimants as hereinafter defined, for all labor and material used or reasonably required for use in the performance of the subcontract, then this obligation shall be void; otherwise it shall remain in full force and effect, subject, however, to the following conditions . . . .[43 ]
f32 ICW relies heavily on L&A Contracting v. Southern Concrete Services,
¶33 On appeal, the Fifth Circuit failed to analyze the bond’s language.
We turn first to F&D’s appeal. As a surety, F&D’s liability is governed by the terms of its bond with L&A. While Southern is, of course, directly liable for its own breach of contract, the bond in this case imposes liability on F&D for Southern’s breach only if two conditions exist. First, Southern must have been in default of its performance obligations under the subcontract. Second, L&A must have declared Southern to be in default.[49 ]
The Fifth Circuit concluded that because L&A had failed to declare a default, the second of these conditions had failed, thereby relieving F&D of its duty to perform on the bond.
¶35 Concluding our discussion of the first issue, we reject ICW’s claim that it cannot be liable because CSI opted to continue Action’s contract instead of declaring Action to be in default; we agree with the trial court that “CSI gave ICW adequate notice”
¶36 ICW claims that even if it is liable on the performance bond, the trial court ordered it to pay too much. ICW reasons that it had a security interest in the unearned balance on the offsite subcontract; that CSI squandered that balance by making progress payments to Action in excess of the value of Action’s then-completed work; and that its (ICW’s) liability should have been reduced accordingly. ICW also contends that it was improperly made to bear the burden of proving that its security had been impaired.
¶37 In Puyallup Valley Bank v. Mosby,
[I]f the principal’s debt to the creditor is secured by property of the principal, the surety acquires by operation of law a kind of property interest in the collateral securing the primary debt. National Bank v. Equity Investors, 86 Wn.2d 545, 546 P.2d 440 (1976). ... If the creditor impairs the value of the collateral, he discharges the guarantor to the extent of the impairment. Equity Investors, 86 Wn.2d at 556; Langeveld v. L.R.Z.H. Corp., 74 N.J. 45, 376 A.2d 931 (1977); Restatement of Securities (1941).
Whether the creditor has unjustifiably impaired the collateral is a question of fact. Lyons v. Citizens Comm’l Bank, 443 So. 2d 229 (Fla. Dist. Ct. App. 1983). The guarantor seeking discharge has the burden of proving both the existence and the extent of impairment. Lyons v. Citizens Comm’l Bank, supra; Rempa v. LaPorte Prod. Credit Ass’n, 444 N.E.2d 308 (Ind. Ct. App. 1983).[56 ]
¶38 In this case, the trial court determined, “[biased upon the totality of all evidence adduced at trial, [that] ICW failed to prove that CSI unreasonably impaired ICW’s collateral, represented by the subcontract balance owed by
Ill
¶39 CSI claims that it is entitled to prejudgment interest because its damages were liquidated.
IV
¶40 CSI claims that it is entitled to reasonable attorney fees under Olympic Steamship,
¶41 In Olympic Steamship, the Washington Supreme Court held that “[a]n insured who is compelled to assume the burden of legal action to obtain the benefit of its insurance contract is entitled to attorney fees.”
¶42 The first question is whether Olympic Steamship applies when the obligee of a bond sues to obtain its benefits. In Estate of Jordan v. Hartford Accidental & Indemnity Co. ,
¶44 The last question is whether the combined total of damages and attorney fees can exceed the amount of the bond. In McGreevy v. Oregon Mutual Insurance Company ,
¶45 We affirm on all issues except reasonable attorney fees. On that issue, we remand for the trial court to determine and award, without regard to the amount of the
Hunt and Van Deren, JJ., concur.
Reconsideration denied March 25, 2005.
Review granted at 155 Wn.2d 1021 (2005).
2 Clerk’s Papers (CP) at 72 (§ 6(b)(12)).
Cf. 17 Am. Jur. 2d Contractors’ Bonds § 1, at 730 (2004) (performance bond guarantees performance).
2 CP at 82 (capitalization removed).
2 CP at 138.
5 CP at 663 (Finding of Fact 27).
5 CP at 662-63 (Finding of Fact 22).
2 CP at 146-47.
2 CP at 149.
1 CP at 10. Action went out of business and is not party to this appeal.
Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991).
5 CP at 663-65; 4 CP at 522.
Br. of Appellant at 13 (emphasis omitted).
Br. of Appellant at 13 (emphasis omitted).
Joint Admin. Bd. v. Fallon, 89 Wn.2d 90, 94, 569 P.2d 1144 (1977); Walter Concrete Constr. Co. v. Lederle Labs., 99 N.Y.2d 603, 788 N.E.2d 609, 758 N.Y.S.2d 260 (2003).
Fallon, 89 Wn.2d at 94.
McCombs Constr., Inc. v. Barnes, 37 Wn. App. 91, 93, 678 P.2d 837, review denied, 102 Wn.2d 1002 (1984); McIntyre v. Fort Vancouver Plywood Co., 24 Wn. App. 120, 127, 600 P.2d 619 (1979).
Wagner v. Wagner, 95 Wn.2d 94, 101, 621 P.2d 1279 (1980); Allstate Ins. Co. v. Huston, 123 Wn. App. 530, 542 n.29, 94 P.3d 358 (2004).
Am. Natl Fire Ins. Co. v. B&L Trucking & Constr. Co., 134 Wn.2d 413, 428, 951 P.2d 250 (1998); Stouffer & Knight v. Cont’l Cas. Co., 96 Wn. App. 741, 749, 982 P.2d 105 (1999), review denied, 139 Wn.2d 1018 (2000).
Fallon, 89 Wn.2d at 94; accord Estate of Jordan v. Hartford Accident & Indent. Co., 120 Wn.2d 490, 497, 844 P.2d 403 (1991); Natl Bank v. Equity Investors, 86 Wn.2d 545, 555, 546 P.2d 440 (1976).
Ross v. Harding, 64 Wn.2d 231, 236, 391 P.2d 526 (1964).
Stewart v. Chevron Chem. Co., 111 Wn.2d 609, 613, 762 P.2d 1143 (1988) (emphasis omitted) (quoting Restatement (Second) op Contracts § 2 (1981)).
Ross, 64 Wn.2d at 236.
Laurence P. Simpson, Handbook op the Law of Contracts § 144, at 300 (2d ed. 1965) (Simpson on Contracts).
Cartozian & Sons, Inc. v. Ostruske-Murphy, Inc., 64 Wn.2d 1, 5-6, 390 P.2d 548 (1964); Jacks v. Blazer, 39 Wn.2d 277, 285, 235 P.2d 187 (1951); Simpson on Contracts, supra, § 158, at 329.
Pronger v. Old Nat’l Bank, 20 Wash. 618, 626, 56 P. 391 (1899); Wilkinson v. Smith, 31 Wn. App. 1, 13, 639 P.2d 768, review denied, 97 Wn.2d 1023 (1982) (quoting Labor Hall Ass’n v. Danielsen, 24 Wn.2d 75, 81, 163 P.2d 167 (1945)).
Cartozian & Sons, 64 Wn.2d at 5-6 (“any breach will give rise to cause of action for damages”); Restatement (Second) of Contracts § 346 cmt. a, at 110 (1981) (“Every breach of contract gives the injured party a right to damages against the party in breach, unless the contract is not enforceable against that party . ...”); see also Ross, 64 Wn.2d at 236; Tacoma Northpark, L.L.C. v. NW, L.L.C., 123 Wn. App. 73, 79, 96 P.3d 454 (2004) (citing Ross, 64 Wn.2d at 236).
Simpson on Contracts, supra, § 187, at 377; see also Simpson on Contracts § 158, at 329.
2 CP at 82.
2 CP at 82.
2 CP at 82 (capitalization removed; emphasis added).
See Fallon, 89 Wn.2d at 95 (“Generally, a bond is effective when delivered and accepted.”).
We have no occasion to consider or address Paragraph D in this case.
Subparagraph (1) permits ICW to step in and rectify Action’s performance if CSI elects to declare Action in default. Subparagraph (2) permits CSI to arrange substitute performance after reasonable notice to ICW or, alternatively, to demand that ICW arrange such performance. Subparagraph (3) describes measures of damage.
2 CP at 82.
12 Arther Linton Corbin, Corbin on Contracts § 1227, at 530 n.90 (1993) (“An express provision for one remedy in case of breach is not operative as a ‘waiver’ of other remedies that are available at law.”).
17 F.3d 106 (5th Cir. 1994).
See, e.g., Emrich v. Connell, 41 Wn. App. 612, 626-27, 705 P.2d 288 (1985), rev’d on other grounds, 105 Wn.2d 551 (1986).
L&A Contracting Co., 17 F.3d at 110.
We disagree with L&A in other respects, for reasons discussed below.
2 CP at 72 (§ 6(b)(12)) (emphasis added).
Even if we assume Paragraph C is ambiguous in this respect—an assumption we do not think is true—we must construe Paragraph C “in favor of liability of the surety.” Fallon, 89 Wn.2d at 94; Estate of Jordan, 120 Wn.2d at 497; Nat’l Bank, 86 Wn.2d at 555.
2 CP at 83 (capitalization removed; emphasis added).
ICW also relies on cases that have followed L&A. See, e.g., Elm Haven Constr. Ltd. P’ship v. Neri Constr. L.L.C., 376 F3d 96 (2d Cir. 2004); Balfour Beatty
L&A Contracting, 17 F.3d at 108.
L&A Contracting, 17 F.3d at 108.
This same kind of failure caused the California Supreme Court not to follow L&A and its precursor, American Home Assurance Co. v. Larkin General Hospital, Ltd., 593 So. 2d 195 (Fla. 1992), on the matter of delay damages. Cates Constr., Inc., 980 P.2d at 414-15.
L&A Contracting, 17 F.3d at 109 (emphasis added, emphasis removed).
ICW asserts that the bond in L&A was “identical” to the bond here. Br. of Appellant at 17. The opinion in L&A does not show the entire bon<y there in issue—-it fails to quote Paragraphs A and B, for example—but the parts it does show are the same. Accordingly, we assume that ICW’s assertion is true. If the bond in L&A was materially different from the bond here, L&A is distinguishable and has no bearing here.
Accord, Walter Concrete, 788 N.E.2d at 610 (rejecting surety’s assertion that it was not liable because “it had not received a declaration of default which ... was a necessary precursor to its liability under the bond”).
As explained earlier, we agree with L&A insofar as it distinguishes between “breach” and “default.”
5 CP at 664.
Molin v. New Amsterdam Cas. Co., 118 Wash. 208, 212, 203 P. 8 (1922); Parsons v. Pac. Sur. Co., 69 Wash. 595, 597, 125 P. 954 (1912); Lazelle v. Empire State Sun Co., 58 Wash. 589, 592, 109 P. 195 (1910); Denny v. Spurr, 38 Wash. 347, 352, 80 P. 541 (1905).
44 Wn. App. 285, 723 P.2d 2 (1986).
Puyallup Valley Bank, 44 Wn. App. at 287; see also In re Alcock, 50 F.3d 1456, 1462 (9th Cir. 1995); 74 Am. Jur. 2d Suretyship § 126 (2001).
5 CP at 665.
Puyallup Valley Bank, 44 Wn. App. at 287.
See Prier v. Refrigeration Eng’g, 74 Wn.2d 25, 32, 442 P.2d 621 (1968).
Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991).
4 CP at 521.
The offsite contract states:
In the event either party institutes suit in Court... against the other party, or against the surety of such party, in connection with any dispute or matter arising under the Subcontract, the Contractor [CSI] shall be entitled to recover
2 CP at 75 (§ 19).
Olympic S.S., 117 Wn.2d at 54; see also McGreevy v. Or. Mut. Ins. Co., 90 Wn. App. 283, 290, 951 P.2d 798 (1998).
120 Wn.2d 490, 844 P.2d 403 (1993).
107 Wn. App. 713, 30 P.3d 1 (2001).
Axess Int’l Ltd., 107 Wn. App. at 720.
This question may be conceded, as it is not argued by either party. It is mentioned by amicus, however, so we treat it briefly. See Br. of Amicus at 14-15.
Mailloux v. State Farm, Mut. Auto. Ins. Co., 76 Wn. App. 507, 516, 887 P.2d 449 (1995) (citing Olympic S.S., 117 Wn.2d at 53).
Dayton v. Farmers Ins. Group, 124 Wn.2d 277, 280, 876 P.2d 896 (1994).
See Mailloux, 76 Wn. App. at 517-18.
128 Wn.2d 26, 904 P.2d 731 (1995).
McGreevy, 128 Wn.2d 26.