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Construction Industry News

Construction Case Study: The Bond Indemnitor


July 10, 2000


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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 Howrey's Construction Practice Group, click here. For more information about books and other legal materials written by James Acret, click here and enter "Acret" in the site search engine. To learn more about topics covered in this article, contact Paul Berning at 415-848-4996 or at paulberning@howrey.com.



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