Surety Mistakenly Negates Its Own General Indemnity Agreement

9/6/2016 | Construction Blog

Disputes between entities involved in construction projects often involve a number of different companies with different roles on a project. These different roles, and resulting relationships, inevitably lead to different contracts with competing contractual provisions. For the unsuspecting, this can lead to a battle of forms that may create problems of disastrous proportions. A recent federal court opinion issued in Nevada illustrates the point.

In Western Surety Co. v. S3H, Inc., a project dispute arose between the general contractor and the subcontractor. The general contractor made a claim on the subcontractor’s performance bond to complete the project. Thereafter, a private arbitration proceeding was initiated between the general contractor and the subcontractor to resolve the dispute between them. The surety then agreed to be joined in the arbitration proceeding and the parties executed a private arbitration agreement.

The private arbitration agreement contained a clause which made all the parties, including the surety, responsible for their own attorneys’ fees and costs in litigating the arbitration. This clause was in direct conflict with the general indemnity agreement the surety entered with the subcontractor at a previous point in time. The GIA made, contrary to the arbitration agreement, the indemnitors responsible for the surety’s fees and costs. The outcome? A $748,843.85 mistake.

After the arbitration process was over, the surety brought suit in the federal district court under the General Indemnity Agreement to recover the money it spent to meet its obligations under the performance bond. Among the damages claimed was the nearly $750,000 in fees and costs it spent in the arbitration proceeding. The subcontractor defended by arguing that the surety was not entitled to its fees and costs because the arbitration agreement, which was later in time, revised the GIA and took away the right to recover fees and costs. The Court agreed and sided with the subcontractor.

Agreements with or by a surety are often overlooked as part of construction project disputes. This is particularly true with general indemnity agreements – which can have a very large impact on both how a case is litigated and the ultimate outcome in the legal analysis. Surety companies and those working in the surety claims business should be very cognizant of how easy it is to create “form battles” by oversight and take care to avoid negatively impacting the desired outcome.