CA Trial Court Re-Affirms Surety’s Right To Settle Contractor’s Affirmative Claim

SMTD Law recently resolved a contentious case for a Surety client which demonstrated the power of a surety’s indemnity agreement.  The project was the rehabilitation and accessibility upgrades at two low-income public housing sites. The Owner terminated the Contractor’s right to proceed when the project was only about 25% complete on the contract completion date.  The Surety arranged for a completion contractor who successfully finished the project under a tender agreement with the Owner.

After the Contractor refused to settle its affirmative claims against the Owner in the ensuing litigation, SMTD Law relied on the assignment and power of attorney provisions in the Surety’s Indemnity Agreement with the Contractor to dismiss the Contractor’s affirmative claims.  In addition, SMTD Law relied on those same provisions to execute the Settlement Agreement on behalf of the Contractor and the other Indemnitor, the owner of the Contractor.

The Agreement Counts

The Contractor challenged the validity of the Settlement Agreement, arguing that nothing in the Indemnity Agreement gave the Surety the power to dismiss the Contractor’s affirmative claims or execute the Settlement Agreement on behalf of the Contractor and the other Indemnitor.  While the Contractor withdrew its objection to the Settlement Agreement on the eve of the hearing, the Court still issued a well-reasoned tentative decision affirming the settlement agreement.

The Court recognized that the express language of the Indemnity Agreement granted the Surety the power of attorney for the Indemnitors and assigned all of the Contractor’s claims to the Surety in the event of a default under the terms of the Indemnity Agreement.  Furthermore, the Court made short work of the Contractor’s claim that it had not defaulted under the Indemnity Agreement, explaining that the Surety had suffered losses on the bonds and that the Indemnitors failed to deposit collateral upon demand, both of which are instances of default.

Surety Case And Point

Recognizing the dearth of California case law specific to sureties, the Court cited Hutton Construction Co., Inc. v. County of Rockland (2d Cir. 1995) 52 F.3d 1191 and Liberty Mut. Ins. Co. v. Aventura Engineering & Const. Corp. (S.D. Fla. 2008) 534 F.Supp.2d 1290 as confirmation that sureties had the right to settle the affirmative claims of their principals.  In both cases, contractors challenged the surety’s decision to settle the contractor’s affirmative claims as part of its settlement with the owner.  The courts also confirmed in both cases that the assignment and power of attorney provisions of the indemnity agreements gave the sureties the right to settle the contractor’s affirmative claims.

Court Ruling

The court explained, that in this case under California law “the indemnity agreement, and not the performance bond, delineates the rights and obligations of a principal and surety.”

SMTD Law’s Ali Salamirad and Joshua Hardy handled this matter.  If you have any questions, feel free to contact Mr. Hardy directly at (949) 537-3800 or [email protected].