Surety Case Law Note: Language of the Bond Limited Surety’s Liability to the Stated Penal Sum and to the Annual Term of the Bond
April 9, 2024
In this Surety Today: The Blog post, we consider a Case Law Note addressing the issue of the importance of the terms of the bond. The case is:
PLENARY INFRASTRUCTURE BELLE CHASSE, LLC v. ASPEN AMERICAN INS. CO.,
No. CV 22-2666, 2024 WL 758390, at *1–5 (E.D. La. Feb. 23, 2024)
This case concerns a performance bond for an operation and maintenance contract on a Public-Private bridge replacement project in Louisiana. The Louisiana Department of Transportation and Development (“LA DOTD”) entered into a contract with Plenary Infrastructure Belle Chasse, LLC (“Plenary”) as the private partner/general contractor for the financing, design-build construction, tolling and long-term operations and maintenance for a bridge and tunnel replacement project (“Contract”). Pursuant to the Contract, Plenary was obligated to perform operations and maintenance (“O&M Work”) until the existing bridge and tunnel was decommissioned. Plenary retained DBi Services, LLC (“DBi”), as a subcontractor to perform the O&M Work during construction. Aspen American Insurance Company (“Aspen”) issued Payment and Performance bonds for DBi on the Project in the penal sum amount of $599,400 each. The bonds stated that they were effective from January 21, 2021 to January 20, 2022. The bonds issued by Aspen replaced bonds issued by a different surety after they expired.
DBi ceased operations abruptly and without notice and terminated its employees on the Project. Plenary issued a notice of default to DBi, informed Aspen that DBi was no longer manning the Project and requested that Aspen perform under the Performance Bond (the “Bond”). A few days later, Plenary sent another notice of default and made another demand under the Bond. Aspen began its investigation. A few weeks later, Plenary officially terminated DBi and notified Aspen. Later that month, Plenary provided Aspen with an itemization of its alleged costs incurred as a result of DBi’s default, totaling over $830,000 and offered to settle for $599,400 plus $200,000 for Aspen’s alleged failure to perform. The following month, Aspen notified DBi and Plenary that it would not be renewing the Bonds and the Bonds expired on January 21, 2022.
On January 12, 2022, Plenary made a renewed demand against the Bond and proof of loss for over $2.4 million, which it claimed it had or would incur to complete the total scope of DBi’s work under the five-year O&M Contract. Aspen responded with an offer to tender $118,191.78, but denied the remainder of the claim, explaining that information to substantiate the claim was missing and the documents Plenary provided showed that Plenary was seeking amounts far beyond the Bond’s penal sum and for anticipated costs past the Bond’s expiration date. Plenary subsequently filed suit against Aspen, asserting breach of contract for failure to pay the amount demanded by Plenary under the Bond and bad faith penalties under the Louisiana Insurance Code for the failure to pay. In its breach of contract claim, Plenary argued that, because “Aspen’s obligations were triggered during the Bond Term, Aspen is liable for all costs incurred by Plenary, without regard to whether or not the costs were incurred or anticipated to be incurred prior to January 20, 2022,” the last day before the Bond expired.
Aspen filed a motion for summary judgment asserting that any liability was limited to damages incurred during the term of the Bond and that the penal sum of the Bond was the limit of any liability. The court granted Aspen’s motion.
The court began its analysis by noting that “[a] performance bond, which guarantees that a contractor will perform the contract, is a conventional bond, so the language of the bond itself controls its meaning.” Roy Anderson Corp. v. 225 Baronne Complex, LLC, 280 So. 3d 730, 743 (La. App. 4 Cir. 2019); Stonecipher v. Mitchell, 655 So. 2d 1381, 1389 (La. App. 2 Cir. 1995). Further, the court noted that “[t]he language used in the conventional bond must be deemed to fully express the parties’ intent when the words are clear and explicit and lead to no absurd consequences. Emile M. Babst Co. v. U.S. Fid. & Guar. Co., 497 So. 2d 1358, 1360 (La. 1986). A suretyship may be qualified, conditioned, or limited in any lawful manner, and obligations set forth in a bond are strictly construed in favor of protecting the oblige. La. Civ. Code art. 3040; Stonecipher, 655 So. 2d at 1389; Cont’l Cas. Co. v. Associated Pipe & Supply Co., 447 F.2d 1041, 1051 n.10 (5th Cir. 1971).”
In this case, the Bond stated:
The obligations of the Principal and Surety under these Payment and Performance Bonds must continue in full force and effect, until all materials, equipment, and labor have been provided for the maintenance of the Project’s current annual term only, and all requirements contained in the O&M Contract for the maintenance of the Project have been completed in a timely, thorough, and workmanlike manner, for the current annual term only and furthermore said bonds are subject to an annual renewal or replacement of such Payment and Performance Bonds in accordance with Section 16.08(a) of the O&M Contract. . . . These Payment and Performance Bonds shall be effective from January 21, 2021 to January 20, 2022, unless said bond is released by the Obligee prior thereto, and may be continued by Continuation Certificate by the Principal and Surety.
In light of the applicable law and the terms of the Bond, the court held that the language of the Bond was clear and explicit, lead to no absurd consequences, and no further interpretation was needed to determine the parties’ intent. The court stated, “[t]he Bond clearly sets out limits to the suretyship: that Aspen’s obligations continue for the annual term (January 21, 2021 to January 20, 2022) only, unless the bond is released early by Plenary or if DBi and Aspen extend the Bond.” The Bond was not extended, and Aspen notified Plenary that the Bond would not be renewed. Further, the Bond did not include language obligating Aspen for the entirety of the O&M Contract with DBi or for any costs incurred or anticipated to be incurred in connection with DBi’s obligations to perform after January 20, 2022. As to the penal sum, the court also held that the language of the Bond was clear and explicit that Aspen could only be liable under the bond for costs up to $599,400. The bad faith aspect of the case was not at issue in the motion.
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.viewmysitenow.com) or any member of the Surety and Fidelity Practice Group.