We have often discussed payment and performance bonds here at Construction Law Musings, most often in the context of payment bond claims relating to federal and state-owned. construction projects. A late 2020 case out of the Eastern District of Virginia federal court examined what happens after such a claim, in this case, based upon a developer’s subdivision bonds, is made and negotiations commence between the surety and the claimant. Specifically, Fidelity & Deposit Co. of Maryland v. Ramsgate Corp., et. al. looked at claims for indemnity by a surety and the principal/indemnitors in the event that the Surety settled such a claim.
In the Ramsgate case, Surety provided two separate subdivision subcontract bonds to Ramsgate. Pursuant to those bonds and the indemnity clause of its indemnity agreement, the Surety sought reimbursement of its $80,000.00 settlement payment to the local building authority that it paid to resolve what was originally a claim for over $420,000.00 by the City. The project was started in 2002 and after many years of failures to complete (according to the City of Suffolk), the City made its claim for expenses in 2017. Ramsgate claimed that it completed the subdivisions in 2003.
Of course, Ramsgate, and by extension, the Surety argued that any claim against the bond was barred by the statute of limitations due to the passage of time between Ramsgate’s claimed completion date and the making of the claim. The City of Suffolk contested that Ramsgate had in fact completed the subdivisions and that it incurred the expenses claimed. Despite this defense, or possibly because of it, the Surety was able to settle the claim for $80,000.00 and then sought to enforce its indemnity agreement with the defendants. The defendants filed a Motion for Summary Judgment seeking dismissal of the Complaint because, the defendants alleged, the settlement was made in “bad faith” due to the clear and undeniable statute of limitations defense.
The Court disagreed. The Court first found that as a matter of law, the payment of a claim despite the availability of a possible affirmative defense is not bad faith and not in violation of Surety’s right to settle claims. In response to the defendants’ claim that the statute of limitations is a different sort of defense because it is an absolute bar to action, the Court stated that the statute of limitation does not provide a guaranteed defense, particularly under the circumstances of the case before it because:
[A] statute of limitations defense is not a guaranteed defense. Rather, a statute of limitations defense raises two questions: (1) the length of the statute of limitations and (2) when this statute of limitations period accrued, both of which are disputed by the parties.
The parties could neither agree on the time of accrual or the length of the statutory timeframe. The Court then went on to state that Surety had attempted to pass the claim on to the defendants to allow them to make whatever defenses they wanted to make and that the defendants passed up this opportunity. In short, there were enough questions regarding the statute of limitations defense that the Surety was well within its rights to settle the claim and therefore the Court dismissed the Motion for Summary Judgment.
The main takeaways from this case in my mind are these: 1. A bond principal should always take the opportunity to participate strongly in defense of any bond claim, and 2. If any argument can be made that a defense is not iron clad, there is likely no way to make a claim for bad faith should a surety settle the claim.
As always, I recommend that you consult with experienced construction counsel when evaluating your options in a situation such as this. I also commend the entire opinion to your reading.
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