Construction Industry Update: Eighth Circuit U.S. Court of Appeals Rules that Surety Must Pay Attorney Fees, Costs, and Interest Awarded to Subcontractors in Arbitration with General Contractor
In Owners Insurance Company v. Fidelity and Deposit Company of Maryland, 41 F.4th 956 (8th Cir. 2022), the Eighth Circuit U.S. Court of Appeals ruled in favor of two subcontractors who obtained arbitration awards against the general contractor. BCC Partners, LLC was the owner of a private luxury-apartment construction project in St. Louis, and it hired Ben F. Blanton Construction, Inc. to build the apartments. Blanton furnished a payment bond from Fidelity and Deposit Company of Maryland (F&D). Blanton hired Stark Truss Company, Inc. and Lindberg Waterproofing, Inc. as subcontractors to perform some of the project work.
Disputes between Blanton and the two subcontractors arose, which led to an arbitration between them. The arbitrators found in favor of the subcontractors and awarded them damages, costs, attorney fees, and interest. Blanton filed for bankruptcy without paying any of the arbitration award. F&D tendered payment to the subcontractors for the damages and some interest, but it refused to pay the amounts awarded for costs, attorney fees, and the full amount of interest because it argued the payment bond did not require it to do so. The dispute headed to the U.S. District Court for the Eastern District of Missouri, which sided with F&D by ruling that the payment bond did not require F&D to pay costs, attorney fees, and the full amount of interest. The subcontractors appealed to the Eighth Circuit.
The Eighth Circuit reversed the District Court, and concluded that the payment-bond phrase “‘sums as may be justly due’ includes all amounts that a subcontractor would be entitled to receive under its contract with Blanton,” thereby obligating F&D to pay the costs, attorney fees, and full interest awarded. The Court noted that the portion of the payment bond describing F&D’s obligations becoming “void if Blanton ‘promptly’ pays its subcontractors” was not the relevant bond provision to resolve the dispute. Instead, the relevant provision was the “paragraph that discusses what happens when a subcontractor ‘has not been paid in full,’” which provided in relevant part that “every claimant as herein defined, who has not been paid in full, may sue on this bond for the use of such claimant, prosecute the suit to final judgment for such sum or sums as may be justly due claimant, and have execution thereon.” The Court interpreted the “sums as may be justly due” language as not limited to paying only for labor and materials, and it reasoned that if F&D wanted to limit its obligations to those items then “it would have said so” in the bond.
Even though the Court was interpreting a private payment bond, the Court found federal Miller Act cases governing payment bonds for federal construction projects relevant to resolving the dispute. The Court noted that the phrase “‘sum or sums as may be justly due’ appears to derive from the Miller Act, a federal law that requires government contractors on certain federal projects to provide payment bonds for the protection of those supplying labor and material for the project,” and that it was “freighted with a legal meaning acquired over the years in contexts like the present one.” The Court surveyed Miller Act cases addressing the same dispute, and found that “courts consistently held that, though the Miller Act did not explicitly provide for the recovery of attorneys' fees or interest, subcontractors were nonetheless entitled to those items if the underlying contract between the subcontractor and the general contractor permitted their recovery.” The Court explained that F&D “selected language loaded with meaning in the world of construction bonds. That meaning may have arisen in a public-bond context, but we think it's a fair inference that the parties' deliberate use of that language in a private bond carried with it that language's meaning in its original setting. The phrase ‘sums justly due’ had become a term of art. If the parties intended F&D's obligation to be different from what it would be in the public-bond context, then we think they would not have agreed to a phrase with an established legal meaning but would have chosen different language altogether.” Because the terms of the subcontract determine if costs, attorney fees, and full interest are “expenses ‘justly due’ a subcontractor,” whether a given subcontractor is entitled to such recovery “will ‘vary with the facts and circumstances of individual cases’ depending on the terms of the subcontract.”
The main takeaway from this case is that use of the phrase “sums justly due” or similar language in a private payment bond may likely be interpreted according to case law interpreting the same language in the federal Miller Act context. As this case shows, such interpretation may cause the payment bond to cover payment of the claimant’s attorney fees, costs, and full interest, depending on the terms of the subcontract. One fact of this case must be noted: each of the bond claimants had a subcontract directly with the bond principal. This was an important fact to the outcome of the case because the Court noted that Miller Act cases “consistently held that, though the Miller Act did not explicitly provide for the recovery of attorneys' fees or interest, subcontractors were nonetheless entitled to those items if the underlying contract between the subcontractor and the general contractor permitted their recovery.” (emphasis added). If the bond claimant does not have a subcontract directly with the bond principal, such as lower tier subcontractors who do not hold subcontracts directly with the general contractor, the result may be different because, under those facts, enforcing the terms of the claimant’s subcontract (or purchase order) against the general contractor, who is not a party to the subcontract (or purchase order), to allow recovery of attorney fees, costs, and full interest may not qualify as “sums justly due.”