by Robert K. Cox, Senior Partner
Some of the reported cases since our Spring issue that we think you should take note of are described below:
Nevada Supreme Court Rules Economic Loss Doctrine Bars Commercial Owner’s Negligence Claim Against A/E
In Terracon Consultants Western, Inc. v. Mandalay Resort Group, 206 P.3d 81 (Nev. 2009), a commercial property owner sued for breach of contract and for professional negligence against architectural and engineering firms with whom the owner had contracted for design professional services. The owner alleged that the design professionals provided negligent design advice that the owner relied on in making improvements to its commercial real property, causing the property owner economic losses. The Nevada Supreme Court ruled that in Nevada the economic loss doctrine barred the owner’s professional negligence tort claim against the design professionals who had provided services to the owner for development or improvement of the owner’s commercial property when the property owner’s damages were purely financial. In addition to recognizing the distinction between contract and tort, the Nevada Supreme Court further reasoned that one of the purposes of the economic loss doctrine was to shield defendants from unlimited liability for all the economic consequences of a negligent act, particularly in a commercial or professional setting; thus keeping damages reasonably calculable, and within the contemplation of the parties at the time they initially contracted.
Sureties Not Subject To Bad Faith Claims Under Pennsylvania And West Virginia Insurance Statutes
In United States f/b/u of SimplexGrinnell v. Aegis Insurance Company, 2009 WL 90233 (M.D. Pa.), the federal district court for the Middle District of Pennsylvania held that a surety bond did not constitute an insurance policy under Pennsylvania’s Bad Faith Statute, 42 Pa. Cons. Stat. Ann §8371; there being fundamental differences between contracts of insurance and surety agreements. Because of those differences and the statute not expressly addressing surety bonds, when the Pennsylvania Legislature could have done so, the court reasoned the statute did not apply to a surety agreement. With that rationale, the federal court dismissed the claimant subcontractor’s Miller Act payment bond claim for failing to state a claim for which relief could be granted under Pennsylvania’s Bad Faith Statute.
In Southern West Virginia Paving, Inc. v. Elmo Green & Sons, LLC, 2009 WL 1867678 (S.D.W.Va. 2009), the federal district court for the Southern District of West Virginia considered the application of the West Virginia statute and case law barring third party claimants from bringing a private cause of action for unfair claims settlement practice. The West Virginia Code bars third party claimants from bringing a cause of action against any person for an unfair claims settlement practice. In addition, West Virginia case law holds that because of its lack of privity with an insurer, a third party claimant may not bring a common law bad faith claim against an insurer. The West Virginia Code includes “surety” in its list of kinds of insurance.
The federal court read the West Virginia Code and case law to prevent all but an insured from suing an insurer for unfair claims settlement practices. In this case, the Court viewed the subcontractor claiming against the payment bond surety to be a third party making claim against an insurer; that is, a claimant but not a party to the payment bond. As a third-party claimant, the subcontractor could not sue the surety for unfair claims settlement practice under the West Virginia Code, or assert a claim against the surety for common law bad faith.
The Court did note that while precluded from asserting an unfair claims settlement cause of action, the third party claimant could assert an administrative claim against an insurer under the West Virginia Code.
Miller Act Surety Cannot Set-off General Contractor’s Claims From Other Contracts Against Subcontractor’s Bond Claim Despite Contract’s Terms Allowing Set-off
In United States f/u/b/o Acoustical Concepts, Inc. v. Travelers Casualty and Surety Company of America, 2009 WL 2156909 (E.D. Va.) the issue before the federal district court in Virginia was whether a Miller Act payment bond surety was entitled to set off its principal’s (the general contractor’s) claims arising out of an unrelated non-federal construction contract against the subcontractor’s payment bond claim on a federal construction project. The general contractor’s contracts expressly allowed the general contractor to set-off such claims. In this case, the federal court rejected the surety’s claim of set-off against the subcontractor’s Miller Act payment bond claim. The Court wrote: “[t]o allow sureties to interject a set-off defense in a suit on the payment bond, where, as here, neither the Miller Act nor the payment bond refer to such provisions, would result in a situation directly contrary to the Miller Act’s purpose of providing an expeditious remedy to subcontractors on federal construction projects.”
Incorporation Of Contract With Arbitration Clause Into Bond Does Not Necessarily Compel Surety To Arbitrate Disputes
In Dobson Brothers Construction Company v. Ratliff, Inc., 2009 WL 806800 (D. Neb. 2009), the federal district court in Nebraska considered whether a performance bond incorporating the parties’ bonded contract was sufficient to bind the surety to the incorporated contract’s arbitration clause. The federal district court, looking to other decisions of the Eighth Circuit, ruled the surety not bound to arbitrate disputes between the surety and the obligee.
In this case, the general contractor Dobson asserted claims against its subcontractor Ratliff for not completing the subcontract and against Ratliff’s performance bond surety for refusing to pay the general contractor’s costs to complete the subcontract. The Court ordered arbitration between the general contractor and subcontractor per the subcontract’s arbitration clause. The general contractor petitioned the Court, as well, to order arbitration of the general contractor’s claims against the subcontractor’s performance bond surety.
The Court looked to the subcontract’s arbitration clause which provided that disputes “between the Contractor and Subcontractor” must be referred to “a neutral alternative dispute resolution forum for hearing and decision.” The Court interpreted “Contractor” to mean the general contractor Dobson, and “Subcontractor” to mean the subcontractor Ratliff. The Court reasoned that the surety was not a “subcontractor”, but a surety issuing performance and payment bonds for the subcontractor Ratliff, as principal, in favor of the general contractor Dobson, as oblige. The Court found no express language in the prime contract, the Dobson/Ratliff subcontract or the surety’s performance and payment bonds stating that disputes between the contractor and the subcontractor’s surety must be arbitrated. The Court denied the general contractor’s motion to compel arbitration of the general contractor’s disputes with the subcontractor’s surety.
The Court of Appeals of Maryland used like reasoning to reach a similar result in Hartford Accident & Indemnity Company v. Scarlett Harbor Associates Limited Partnership, 346 MD 122 (1997). In this case, the roles were reversed in that the contractor’s performance bond surety sought to compel arbitration of the owner/developer’s claims against the surety based on an arbitration provision in the owner/developer’s contract with the contractor, and that contract being incorporated by reference into the surety’s performance bond.
Like the federal court in Dobson, the Maryland state court looked to the specific language of the parties’ arbitration clause and the bond incorporating by reference that contract. The arbitration clause provided that the owner/developer and contractor agreed to arbitrate their disputes with each other. There were no terms in the contract requiring inclusion of an arbitration clause in any bond the contractor furnished the owner/developer. The bond had no arbitration clause for resolving disputes under the bond. The Court concluded that by incorporating the contract between the owner/developer and contractor with the arbitration clause as written, the surety literally incorporated into its bond the owner/developer’s promise to arbitrate its disputes with the contractor, nothing more. Moreover, the Court found the owner/developer’s acceptance of the bond, proffered by the surety as conforming to the owner/developer’s contract with the contractor, did not amount to an acceptance by the owner/ developer of an offer by the surety to effect an arbitration agreement on the same terms as the owner/developer’s agreement with the contractor to arbitrate disputes.
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The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs. |
