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2002 CONNECTICUT CONSTRUCTION LAW SECTION REVIEW: BONDS

© 2003, Steven J. O’Neill, Attorney at Law

 

Town of Southington v. Commercial Union Insurance Company, 71 Conn.App. 715, 805 A.2d 76 (2002)

 

The Town of Southington required a subdivision performance bond pursuant to General Statutes Section 8-25 for an 11-lot subdivision.  The bankrupt principal failed to complete the subdivision.  The municipality acquired the subject land at a foreclosure sale. Thereafter the municipality called the bond.  The primary issue presented in this reported case was whether the surety was liable to the municipality under these circumstances.

The court first examined whether the municipality was precluded from calling the bond because it had become a successor developer.  On remand from an earlier appeal, the trial court found that the municipality had acquired the property at a foreclosure sale for the purpose of economic and industrial development and was the successor developer; both bond obligee and principal.  The plaintiff argued that although it had become a successor developer, the intent of the statutory bond was to protect it from the burden of an incomplete subdivision.

The court viewed the clear and unambiguous language of the bond together with the purpose of the statute and held that the plaintiff was entitled to the proceeds of the bond to pay for the work needed to complete the subdivision, which the defendant surety’s original principal had failed to do.  Therefore the plaintiff was not precluded from calling the bond even though it had become a successor developer.

Another argument raised by the defendant was that the municipality violated statutory and regulatory obligations by not requiring itself, as successor developer, to provide a substitute bond.  The court analyzed the applicable statutes and zoning regulations and determined that these issues did not apply to a judgment for a breach of a performance bond.  Further, the language of the statutes (General Statutes §§ 8-26c(b) and (c)) concerning bonds for successor developers is written in permissive terms.  The court held that a municipality does not need to require a successor developer to post a performance bond, particularly where the successor developer is the municipality protected under the original performance bond.

The defendant also assigned error to the trial court’s conclusion that the defendant was not prejudiced by the plaintiff’s failure to give it timely notice of the breach of contract.  The Appellate Court conducted a plenary review and again cited the clear and unambiguous language of the bond to conclude that the bond did not contain a time limitation but rather was, “an open-ended contract written by the defendant.”

Commissioner of Labor v. C.J.M. Services, Inc., et al, 73 Conn. App. 39, 806 A.2d 1105 (2002), certification granted in part by 262 Conn. 921, 812 A.2d 862 (2002)

 

The Commissioner brought suit to collect unpaid wages that were owed to 80 employees of C.J.M.’s subcontractor who had performed asbestos abatement work in various Hartford Public Schools buildings. The trial court granted the defendants’ motion to strike each of the counts of the amended complaint:  count 1) surety liability for labor; count 2) general contractor liability for payment of wages and overtime as an “employer” as defined in General Statutes Section 31-71a(1); and count 3) general contractor liability as a matter of contract law.  On appeal the court held that the Commissioner of Labor is permitted to sue a general contractor and its surety on a General Statutes Section 49-41 payment bond to enforce payment of unpaid prevailing wages and overtime owed to a subcontractor’s employees. 

Pursuant to General Statutes Section 31-72, the Commissioner of Labor has legal authority to bring “any legal action necessary to recover” twice the full amount of wages plus interest, costs and attorney’s fees.  The court interpreted this statute in conjunction with the public works statute, Section 49-41, and the bond enforcement statute, Section 49-42.   The court concluded that, as remedial statutes, each of the three statutes must be construed broadly to protect employees as the legislature intended. 

The court considered the recognition in Dysart Corp. v. Seaboard Surety Co., 240 Conn. 10, 688 A.2d 306 (1997), of the need of general contractors to protect against excessively remote claims.  In Dysart the court disallowed a claim by an endorsee of wage checks of the employees of a subcontractor, on the ground that the claimant failed to prove an assignment.  The Appellate Court distinguished Dysart by noting that the employees themselves would be proper claimants, but might not have the wherewithal to bring effective recovery actions on their own.  Therefore, the court held that the Commissioner was a proper claimant to enforce payment on the bond on behalf of the subcontractor’s employees to be distributed to the to the appropriate persons (employees) pursuant to General Statutes Section 31‑72.

Millgard Corporation v. White Oak Corporation et al, 224 F. Supp.2d 425 (D. Conn. 2002)

 

Plaintiff excavation subcontractor on a state construction project brought suit against the general contractor and surety seeking recovery on the payment bond.  The surety moved for summary judgment and the subcontractor moved to enforce an oral settlement agreement.

Soon after beginning excavation work, Millgard encountered quartz and granite boulders that it claimed constituted conditions differing from those indicated in the subcontract.  After Millgard’s request for an increase in the subcontract price, White Oak submitted a claim to the DOT for an increase in the contract price.  It appears from the opinion that Millgard suspended work.  Over several months the DOT request was mediated by White Oak.  No resolution was reached and eventually Millgard was terminated.

Though the date of termination was disputed, Millgard admitted that the last day it performed work was September 7, 1999.  The surety did not receive written notice until May 10, 2000.  The surety advised Millgard that it denied its claim because it had not been timely presented in accordance with General Statutes Section 49-42(a).  After conceding late notice, Millgard claimed that misleading statements by White Oak led it to believe that it would be returning to work once the DOT agreed to additional payments, thus extending the 180 day notice period. Millgard argued that the surety should be equitably estopped from asserting late notice as a defense.

The court considered a Second Circuit holding that a subcontractor cannot assert an estoppel defense to the one-year requirement for filing a complaint under General Statutes Section 49-42(b) because such a requirement is jurisdictional in nature.  Fisher Skylights, Inc. v. CFC Constr. Ltd. P’ship, 79 F.3d 9, 12 (2d Cir. 1996).  The court noted that although such a holding has not been extended to the claim notice requirement, there is authority that statutory notice requirements are a precondition to recovery on a bond. See, e.g., Barreira Landscaping & Masonry v. Frontier Ins. Co., 47 Conn. Supp. 99, 779 A.2d 244, 247-48 (2000). 

The court then analyzed the elements of equitable estoppel under Connecticut law and under the federal Miller Act.  Although some Miller Act cases have recognized that equitable estoppel may be available under certain circumstances such as where representations are made by sureties, such circumstances did not exist in this case.  Millgard could not show that it changed its position in a manner which caused it prejudice and therefore failed to raise a genuine issue of material fact.  The surety’s motion for summary judgment was granted and the surety was dismissed as a defendant.  The motion to enforce an oral settlement agreement was denied.

DSM, Inc. v. Sentry Select Insurance Company et al, CV010085405S,   2002 WL 652424 (March 22, 2002)

 

Plaintiff subcontractor that performed renovation work on the New Hartford Town Hall sought payment first from the project general contractor and then brought suit to recover from the payment bond pursuant to General Statutes Section 49-42(a).  The defendants moved to strike two counts of the plaintiff's Complaint which alleged breach of the implied covenant of good faith and fair dealing and a CUTPA violation, respectively.  The court denied the motion to strike the plaintiff's claim for bad faith and went on to consider the three alternate grounds proposed by defendants’ motion to strike the CUTPA claim in count three.

The court rejected the argument that a CUIPA claim must be alleged in order to recover for a CUTPA violation, ruling that the action is based on General Statutes Sections 49-41 and 49-42 and citing Mead v. Burns, 199 Conn. 651, 655, 509 A.2d 11 (1986).  Referencing the FTC “cigarette rule” for guidance on determining whether a practice is unfair, the court then ruled that a violation of Section 49-41 may be the basis for a CUTPA claim.  Finally, based on the pleadings, the court rejected defendants’ arguments that count three was insufficient to state a CUTPA claim because it only alleged a single breach of contract.

Acstar Insurance Company v. Door Wizard, LLC et al, CV010511178S, 2002 WL 31375029 (Sept. 27, 2002)

 

This action was initiated by plaintiff surety seeking a prejudgment attachment of real property owned by defendants (“OMG”) due to the claimed breach of an indemnity agreement.  In conjunction with the indemnity agreement, the plaintiff had issued a performance bond for the glasswork at the Timex headquarters in Middlebury.  The court found that OMG had diverted monies paid on the Timex project to other construction projects.  As a consequence of this diversion of funds, OMG was unable to pay the materials suppliers and subcontractors for the Timex project.

The surety monitored the situation and made attempts to remedy the situation by setting up a schedule of payments.  Despite these efforts OMG did not make the promised payments.  In accordance with the indemnity agreement, the surety demanded payment of $250,000 in collateral from the defendants, which was never paid.  The defendant contractor was terminated and Timex called upon the surety to step in.  This resulted in the payment of claims of approximately $200,000 by the surety.  In addition, the surety estimated that it had outstanding invoices, legal fees and punch list costs in the amount of approximately $50,000.

OMG claimed that Acstar acted in bad faith by taking over the project without first evaluating and determining whether defendant had breached its contract with Timex and in setting the amount of the reserve.

The court found that the language of the indemnity agreement allowing the surety to demand collateral was clear and unambiguous.  The actions of Acstar in setting the reserve and the amount of its demand were deemed reasonable.  The court concluded that Acstar’s actions were not in bad faith, but proper under the contract.  In good faith the surety has wide latitude to act to mitigate any damages.  Giving little credibility to the defenses raised by OMG, the court granted the prejudgment remedy and ordered a disclosure of assets by the defendants.

Connecticut Electric Equipment Co., Inc. v. Fidelity and Guaranty Insurance Company et al, CV000274894S, 2002 WL 653312 (March 21, 2002)

 

On this public project the general contractor subcontracted with Carp, which subcontracted with Triple L, which in turn contracted to purchase materials and services from the plaintiff supplier.  As a third-tier subcontractor, the plaintiff (“CEEC”) would not ordinarily be eligible to make a claim on the general contractor’s payment bond.  However, CEEC had entered into a joint payment agreement with Carp and Triple L.  It argued that the joint payment agreement brought it within the class of proper claimants.

The court held that a valid joint payment agreement is not the type of direct contractual relationship required by General Statutes Section 49-41.  Connecticut courts regularly consult federal precedents under the Miller Act to determine the scope of Connecticut Little Miller Act.  Blakeslee Arpaia Chapman, Inc. v. E.I. Constructors, Inc., 239 Conn. 708, 716, 687 A.2d 506 (1997).  The court noted a series of Connecticut Superior Court cases which followed the logic of the United States Supreme Court decision in J.W. Bateson Co. v. Board of Trustees, 434 U.S. 586, 98 S.Ct. 873, 55 L.Ed.2d 50 (1978).  The protections of the payment bond are limited in extent. 

Plaintiff also argued that when the language of the bond itself creates more protection than the baseline protection of the statute, recovery should be allowed.  However, unlike the bond language at issue in Northeast Waste Systems, Inc. v. Connecticut Abatement Technologies, Inc., Superior Court, Judicial District of New Haven at New Haven. Docket No. 419727 (May 31, 2000) (Alander, J.), this bond defined claimants as, “one having a direct contract with the Principal or with a sub-contractor of the Principal . . .”  The court held that based on this specific bond language, the plaintiff was not a proper claimant.

Connecticut Electric Equipment Co., Inc. v. Fidelity and Guaranty Insurance Company et al, CV000274893S, 2002 WL 652117 (March 25, 2002)

 

This opinion arises out of a suit by a supplier to a subcontractor seeking recovery from the contractor, subcontractor and surety on a public project with a General Statutes Section 49-41 payment bond.  The plaintiff (“CEEC”) timely served its General Statutes Section 49-42 notice of claim, but incorrectly named the subcontractor (“Green Mountain”) by using the name of another business entity at the same address (“Triple L”).  (Evidence was presented that Triple L and Green Mountain were operated by the same individuals out of the second floor of a residence.)  The surety and contractor each acknowledged actual receipt of the notice of claim in writing to plaintiff, indicating their awareness of the outstanding balance and the specific project at issue.

The defendant contractor filed a motion to dismiss, claiming that due to the failure to name the party for whom the work was performed and materials supplied pursuant to General Statutes Section 49-42(a), the court lacked subject matter jurisdiction.  The court analyzed whether such a deviation from the strict compliance with statutory notice requirements was fatal to the claim.  The court cited Okee Industries, Inc. v. National Grange Mutual Ins. Co., 225 Conn. 367, 375, 623 A.2d 483 (1993), for the principle that the remedial nature of state and federal payment bond statutes requires a standard of substantial performance rather than strict compliance when construing the contents of notice requirements.  The court concluded that the error of naming the incorrect corporation when both the surety and general contractor timely received and acknowledged otherwise proper notice was a, “minor technical deviation.”  The motion to dismiss was denied.

Connecticut Electric Equipment Co., Inc. v. Fidelity and Guaranty Insurance Company et al, CV000274893S, 2002 WL 31502066 (October 24, 2002)

 

At trial of this matter the court found that the plaintiff supplier (“CEEC”) provided materials and services to subcontractor (“Green Mountain”) on a public project for the Town of Plainville.  CEEC, Green Mountain and the general contractor (“Butler”) also entered into a joint payment agreement whereby Butler agreed to pay for the electrical materials on the project by issuing joint checks to Green Mountain and CEEC.  The court found that CEEC provided electrical materials and services to the project but that Green Mountain failed to pay an outstanding balance.

CEEC alleged that it was a second tier subcontractor in privity with first tier subcontractor, Green Mountain. Seeking to revive arguments from the earlier unsuccessful motion to dismiss, the defendants contended that CEEC contracted with an entity (“Triple L”) that was not related to the project and, therefore, did not fall within the statutory definition of second tier subcontractor.  The court weighed the Section 49-42(a) limitation to direct contractual relationships with the project contractor or first tier subcontractors, against the weight of precedent that these laws are remedial and intended to protect those who provide labor and material on public projects.  The court found that invoicing Triple L instead of Green Mountain was clerical error and awarded judgment in favor of CEEC in the amount of $14,092.29 plus prejudgment interest. 

The court was unable to conclude that defendants’ denial of liability and defense interposed to the claim was without substantial basis in fact or law and therefore declined to award CEEC attorney’s fees.  The court also dismissed count one, CEEC’s quantum meruit claim against Butler.

In Section IV of the opinion the court considered the issue of whether notice provided pursuant to General Statutes Section 49-42 is sufficient to satisfy the notice requirements of General Statutes Section 49-41a(b).  In this case there was no evidence that CEEC provided a Section 49-41a(b) notice to Green Mountain.  Without deciding whether a subcontractor could satisfy the notice requirements of both sections with one letter, the court found that as a sub-subcontractor, CEEC did not provide any statutory notice to the subcontractor, Green Mountain, and dismissed the Section 49-41a(b) count.