Construction Law Insights

Fid. & Deposit Co. of Maryland v. Ramsgate Corp., Inc., 2020 U.S. Dist. LEXIS 171701, 2020 WL 5604823 (E.D. Va. Sep. 18, 2020)

Following years of unsuccessful efforts to finalize approval of a subdivision’s infrastructure permits, a local building authority made a claim against the developer’s construction bond. The authority’s original claim was for $426,179. Following productive negotiations with the bonding company, however, the authority offered to settle for $80,000. On the advice of an outside consultant, the bonding company accepted the offer.

The bonding company then sought reimbursement from the developer pursuant to the bond indemnity agreement, under which the developer agreed to:

  • exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interests, court costs and counsel fees) and from and against any and all such losses and/or expenses which the Surety may sustain and incur: (1) By reason of having executed or procured the execution of the Bonds.

The indemnity clause further provided that:

  • [i]n the event of any payment by the Surety ... the Surety shall be entitled to charge for any and all disbursements made in good faith and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to made such disbursements, whether or not such liability, necessity of expediency existed; and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety.

The developer argued that the bonding company had breached the parties’ agreement by paying the authority’s claim in bad faith, where it had an “absolute defense” to the authority’s bond claim under the statute of limitations. The developer took the position that, because the project for which the bond was issued had been “completed” more than five years earlier, the authority’s claim on the bond was time barred by any applicable statute of limitations. Consequently, the developer argued, the bonding company’s reimbursement claim was a nullity. The Court disagreed.

The Court first found that as a matter of law, paying a claim despite the availability of a possible defense does not establish a surety’s bad faith. The developer argued that a “statute of limitations defense” is different, because it is an “absolute bar” to action, unlike other affirmative defenses. Again, the Court disagreed.

A statute of limitations defense calls for two inquiries: (1) the length of the applicable limitations period and (2) the date the claim accrued—both of which were sharply disputed here. Accordingly, while a statute of limitations may have provided a strong defense, it was not guaranteed, or “absolute.” It follows that the bonding company’s choice to settle the authority’s claim—for significantly less than originally demanded—rather than pursue a possible statute of limitation’s defense, did not indicate “bad faith.” For that reason, the Court awarded judgment to the bonding company.

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