Opinion ID: 1427999
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Heading: Liability for Damages Caused by Contractor's Delay

Text: Transamerica does not dispute that, under the construction contract, Cates is liable to Talbot for damages of $2,596,600 (representing lost equity) caused by Cates's failure to complete the condominium project by June 1, 1990. At issue, however, is whether Transamerica is liable under the performance bond for those so-called delay damages. Transamerica disputes liability because the bond, in its view, did not guarantee Cates's prompt performance but merely assured completion of the condominium project in the event of Cates's default. The issue is one of contract interpretation. Performance bonds, like all contracts of surety, are construed with reference to the same rules that govern interpretation of other types of contracts. ( Roberts v. Security T. & S. Bank (1925) 196 Cal. 557, 566, 238 P. 673, overruled on another ground in Peter Kiewit Sons' Co. v. Pasadena City Junior College Dist. (1963) 59 Cal.2d 241, 245, 28 Cal.Rptr. 714, 379 P.2d 18; Civ.Code, § 2837.) To ascertain the nature and extent of Transamerica's liability, we look first to the express terms of the performance bond. ( Roberts v. Security T. & S. Bank, supra, 196 Cal. at p. 564, 238 P. 673.) Properly undertaken, construction of a performance bond `does not mean that words are to be distorted out of their natural meaning, or that, by implication, something can be read into the contract that it will not reasonably bear; but it means that the contract shall be fairly construed with a view to effect the object for which it was given and to accomplish the purpose for which it was designed.' ( Id. ) at p. 566, 238 P. 673, citing Sather Banking Co. v. Briggs Co. (1903) 138 Cal. 724, 730, 72 P. 352); see Bloom v. Bender (1957) 48 Cal.2d 793, 803, 313 P.2d 568; Pacific Employers Ins. Co. v. City of Berkeley (1984) 158 Cal.App.3d 145, 152, 204 Cal.Rptr. 387; Southern Cal. First Nat. Bank v. Olsen (1974) 41 Cal. App.3d 234, 241, 116 Cal.Rptr. 4.) It long has been settled in California that where a bond incorporates another contract by an express reference thereto, the bond and the contract should be read together and construed fairly and reasonably as a whole according to the intention of the parties. ( Roberts v. Security T. & S. Bank, supra, 196 Cal. at p. 566, 238 P. 673; see Airlines Reporting Corp. v. United States Fidelity & Guaranty Co. (1995) 31 Cal.App.4th 1458, 1462, 37 Cal.Rptr.2d 563.) To ascertain the nature and extent of the liability to which the surety has bound itself, courts must examine the language of the undertaking by the light of the [construction] agreement, faithful performance of the terms of which it guarantees. ( Roberts v. Security T. & S. Bank, supra, 196 Cal. at pp. 566-567, 238 P. 673; see Ryan v. Shannahan (1930) 209 Cal. 98, 102, 285 P. 1045; Pacific Employers Ins. Co. v. City of Berkeley, supra, 158 Cal.App.3d at pp. 150-151, 204 Cal.Rptr. 387.) As a general rule, [t]he obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal.... (Civ.Code, § 2809.) In this case, the construction contract between Cates and Talbot explicitly contemplated that all time limits specified therein were of the essence of the Contract. That time was a critical factor was further evidenced in a contractual clause specifying, among other things, that no course of conduct or dealings between the parties, nor express or implied acceptance of alterations or additions to the Work ... shall be the basis for any ... change in the Contract Time. The contract further stipulated that, upon Talbot's request, Cates was required to obtain a performance bond in the full amount of the contract sum ($3.9 million) as security for the faithful performance of the Contract Documents. The performance bond given by Transamerica stated in clear terms that Cates (as principal) and Transamerica (as surety) agreed to be held and firmly bound unto Talbot (as obligee) in the amount of $3.9 million, for the payment whereof Cates and Transamerica agreed to bind themselves jointly and severally by the bond. The bond, which expressly referred to the contract between Cates and Talbot and by reference made [it] a part [t]hereof, declared that the condition of the obligation assumed by Transamerica is such that, if [Cates] shall promptly and faithfully perform said Contract, then this obligation shall be null and void; otherwise it shall remain in full force and effect. (Italics added.) The bond further provided: Whenever [Cates] shall be, and declared by [Talbot] to be in default under the Contract, [Talbot] having performed [Talbot]'s obligations thereunder, [Transamerica] may promptly remedy the default, or shall promptly [¶] 1) Complete the Contract in accordance with its terms and conditions, or [¶] 2) Obtain a bid or bids for completing the Contract in accordance with its terms and conditions, and ... arrange for a contract between such bidder and [Talbot], and make available as Work progresses ... sufficient funds to pay the cost of completion less the balance of the contract price; but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof [$3.9 million]. (Italics added.) Taken together as a whole, the bond and underlying construction contract are fairly and reasonably read as requiring Transamerica to answer for damages suffered by Talbot as a direct result of Cates's failure to promptly and faithfully perform the contract. Although the bond did not explicitly mention the subject of delay damages, Transamerica knew from the construction contract, which had been made a part of the bond, that time was of the essence of the contract and that the bond's purpose was to provide security for the faithful performance of the contract in the event of Cates's default. The bond itself made clear that Transamerica's obligation would become null and void only if Cates were to promptly and faithfully perform said Contract. And notably, the bond specifically called for Transamerica, if the default was not remedied, to either complete or arrange for completion of the contract in accordance with its terms and conditions  without providing for any exceptions. From such language the parties reasonably could expect that failure to complete the project by the agreed deadline would affect Transamerica's liability to Talbot under the bond. [4] Finally, the bond's reference to other costs and damages for which the Surety may be liable hereunder also reflected an understanding that the bond contemplated Transamerica's liability for damages. Courts in California have not hesitated to find sureties contractually liable for damages attributable to their principals' delay in performing construction contracts. ( E.g., Bird v. American Surety Co. (1917) 175 Cal. 625, 631, 166 P. 1009; Tally v. Ganahl (1907) 151 Cal. 418, 424, 90 P. 1049; Pacific Employers Ins. Co. v. City of Berkeley, supra, 158 Cal.App.3d at pp. 150-152, 204 Cal.Rptr. 387 [surety liable for liquidated damages which included amounts occasioned by a principal's delay]; Amerson v. Christman (1968) 261 Cal. App.2d 811, 825, 68 Cal.Rptr. 378; accord, Downingtown Area School Dist. v. International Fidelity Ins. Co. (Pa. Commw.Ct.1996) 671 A.2d 782, 786 [finding that similar bond language may support surety's liability for delay damages].) Transamerica, however, argues we should adopt the reasoning in American Home Assur. Co. v. Larkin Gen. Hosp. (Fla.1992) 593 So.2d 195 ( American Home ), which held that a surety could not be held liable for delay damages unless the bond explicitly so provides. In American Home, the Florida Supreme Court expressed the view that the usual purpose of a performance bond is only to ensure the completion of the construction contract upon the contractor's default. (593 So.2d at p. 198.) In light of that perceived limited purpose, the court construed bond language that obligated the surety to either complete the project or pay the reasonable costs of completion as clearly explaining] that the performance bond merely guaranteed the completion of the construction contract and nothing more. ( Ibid. [rejecting analysis of Amerson v. Christman, supra, 261 Cal.App.2d 811, 68 Cal.Rptr. 378].) Even assuming, for purposes of argument, that the performance bond in American Home contained language substantially similar to the bond at issue here, we are not persuaded. The Florida court appears to have viewed the purpose of a performance bond narrowly and to have determined the surety's obligations without reference to the underlying construction contract. [5] While that may reflect the rule in Florida (cf. L & A Contracting Co. v. Southern Concrete Services, Inc. (5th Cir.1994) 17 F.3d 106, 112, fn. 23 [commenting that American Home did not turn on the language of the particular bond, but rather stated what was obviously intended to be a general proposition of law]), firmly established California precedent holds otherwise. ( Ryan v. Shannahan, supra, 209 Cal. at p. 102, 285 P. 1045; Roberts v. Security T. & S. Bank, supra, 196 Cal. at pp. 566-567, 238 P. 673; Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal.App.4th at p. 1462, 37 Cal.Rptr.2d 563; Pacific Employers Ins. Co. v. City of Berkeley, supra, 158 Cal.App.3d at pp. 150-151, 204 Cal.Rptr. 387.) Transamerica further suggests that if Talbot had wanted a guarantee covering Cates's delay, then it could and should have used another available standard form of bond expressly stating that the surety would pay damages caused by delayed performance or nonperformance of the Contractor. (See Am. Inst. Architects, AIA doc. No. A312.) Here, however, the terms of the bond and the incorporated construction contract reflected such a guarantee. That the precise language of the foregoing form was not used is of no consequence. [6]