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Following is the second of an occasional series of case
studies by James Acret, well-known author of books on construction
law. The case studies will examine issues that can arise
on construction projects.
By James Acret
Chester
couldn't help feeling satisfied with himself. He had a successful
medical practice, a home in Brentwood and a lovely wife.
His children were in private schools. And he had a knack
for business. He conceived the idea of organizing some fellow
practitioners into a partnership to build a medical building.
He
introduced his idea to Clyde, a knowledgeable real estate
broker. An appropriate site was available at a good price.
Clyde emphasized the need for a reputable, experienced and
bondable contractor. He recommended a lawyer who had put
together some similar deals.
Chester
held regular meetings with his four physician partners.
It was exciting to deal with planners, architects, and contractors.
One thing they didn't have to worry about was tenants: Chester
and his partners would occupy most of the medical suites
themselves.
Chester
insisted that the selected contractor provide a performance
bond issued by a reputable insurance company. This way,
he was told, even if the contractor went broke, the bonding
company would be there to protect him. The contract was
awarded to Lowball Construction, and the bond was written
by Gigantic Indemnity.
Chester
walked the job almost every morning and enjoyed a hearty
relationship with the men he learned to call "foremans."
He sometimes ran into Darryl on the jobsite. Darryl was
an old-time construction guy who seemed to have some kind
of financial interest in the contract.
The
new building was beautiful. Lowball was, of course, a few
weeks behind schedule, but then he was probably entitled
to some extensions of time. The doctors just couldn't resist
ordering special cabinets, counters, closets and plumbing
fixtures.
Then
the rains came. The building leaked from every conceivable
place. Water came under the doors, over the windows, down
the pipes, through the ventilators and through the masonry
into the underground parking. Lowball and his subcontractors
couldn't stem the tide. Chester employed a forensic architect
who said the leaks resulted from poor workmanship.
Darryl
showed up walking the job, looking at leaks. Darryl took
a hard line: Everything was built according to plan. The
architect was to blame. Chester played his best card: He
said he would be forced to call in the bonding company.
At that point Darryl dropped a bombshell. "I am the
bonding company," he said.
The
whole story came out in depositions. For practical purposes,
Darryl, indeed, was the bonding company. He was a retired
contractor who made good money by providing bonding capacity
to contractors who didn't have the financial strength to
get a bond on their own. Sure, the performance bond was
issued by Gigantic Indemnity, but Darryl was their "indemnitor".
("Indemnitor" meant somebody who posted collateral
with a bonding company in order to induce them to write
a bond.) Any money that Gigantic might spend fixing the
building would be Darryl's money, so Darryl, as indemnitor,
was in charge. Darryl was fond of saying that this was his
wife's retirement money. He would fight to the death to
save that money.
So
that's the way it went. Chester eventually got a judgment.
Gigantic paid off (using the retirement money, of course),
and the leaks were fixed. Chester's partners were pretty
unhappy. They couldn't collect their attorney fees and,
they found, California law does not permit punitive damages
against a bonding company for failure to perform in good
faith.
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To learn more about Thelen Reid's Construction and Government Contracts Department, click here. For more information about books and other legal materials written by James Acret, click here and enter "Acret" in the Search Products Field. To learn more about topics covered in this article, contact Paul Berning at (415) 369-7229 or at pwberning@thelen.com.
©2000
Thelen Reid Brown Raysman & Steiner LLP
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