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(A version of this article appears in the California
Construction Law Reporter, published by the West Group.)
By James E. Acret
Surety
issued a "subcontractor's performance and payment bond"
covering a subcontract to provide landscaping services on
a city and county golf course project. The bond named the
prime contractor as obligee and was for $2,698,787, which
was the subcontract price. Surety sought declaratory relief
that it is not liable under the bond for payroll taxes owed
to the United States and to Hawaii. The District Court found
that the governments were not intended beneficiaries of
the bond and granted surety's motion for summary judgment.
Reversed. Island Insurance Company, Ltd. v. Hawaiian
Foliage & Landscape, Inc., ___ F.3d ___, 2002 DJDAR
4849 (9th Cir. 2002)
The
subcontract required the subcontractor to "pay in full
for all labor, material…, taxes, and other items…"
and further required the subcontractor to "pay any
taxes which may now or hereafter be imposed by the United
States or any state or local government upon wages, salary,
or remuneration." The bond states that subcontractor
shall duly perform the subcontract, and the subcontract
document is incorporated into the bond.
Thus,
the subcontract required the subcontractor to pay its payroll
taxes, and the bond guaranteed that the subcontractor would
do so. Therefore, the federal and state governments were
intended beneficiaries of the surety contract. "Parties
are free, of course, to create surety bonds that do not
insure for tax liabilities. They need only embody their
intentions in the language of their contracts." The
dissent asserted that the bond clearly was meant to protect
the prime contractor and not the governments and that the
governments were incidental beneficiaries.
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©2002 Howrey LLP
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