Atlantic v. Ulico
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Atlantic Contr acting & Mate rial Co ., v. Ulico Casualty Co., No. 51 , Sept. T erm, 20 03. INSURANCE SURETY BONDS PERFORMANCE & PAYMEN T INDEMNITY GOOD FAITH ROLE OF REASONABLENESS: This case examines the scope of the good faith clau se in an in dem nity ag reem ent, a nd a principa l s ob ligat ion to ind emn ify a surety for payment of a claim that may not be covered by a surety bond. The Cou rt concludes, on the facts of this case, that the surety s payment of the obligee s claim was a reasonable, good faith settlement based on the information made available to it at the time. We hold that the good faith stan dard allows the surety a discretion limited by the bounds of reasonableness, rather than by the bounds of fraud. We also hold that the principal is bound by a reciprocal obligation of good faith and fair dealing, embedded within which is a duty to cooperate, and may not ignore, without peril, the surety s pre-payment requests for information. Althoug h a surety s paym ent may not b e included entirely in labor and materials as co vere d by a payment bond where the repairs made by the obligee to the principal s equipme nt add ma terially to the value o f that particular equipment, in this case the principal failed to inform the surety of the bond coverage issue and, after a diligent investigation and a con siderable am ount of tim e had pas sed, the sure ty reasonably and in good faith paid the obligee ba sed on inf ormation in a Proof o f Claim form indicatin g liab ility. Circuit Co urt for Prince George s County Case # CAL 00-21412 IN THE COURT OF APPEALS OF MARYLAND No. 51 September Term, 2003 ATLANTIC CONTRACTING & MATERIAL COMPANY, INC. v. ULICO CASUALTY COMPANY Bell, C.J. Raker Wilner Cathell Harrell Battaglia Eldridge, John C. (retire d, specially assigned), JJ. Opinion by Harrell, J. Bell, C .J., Battag lia and E ldridge , JJ., Dissent. Filed: March 12, 2004 On 19 September 2000, Ulico Casualty Company ( Ulico ), Respondent here, filed a complain t in the Circu it Court for P rince Geo rge s Cou nty against Petition er, Atlantic Contractin g and Material Com pany, Incorpo rated ( Atla ntic ). The c omplaint w as in response to Atlantic s failure to reimburse Ulico for paymen ts made by U lico to a claimant under a surety bond and indemnity agreement. The surety, Ulico, had issued the performance and payment surety bond ( the bond ) on behalf of Atlantic, as principal, to guarantee Atlantic s performance of its contractual obligations o n a road rep air project. Ulico sought to recover m onies it paid to Clearwater Hydraulics and Driveshaft Services ( Clearwater ) on a claim on the bond, and the attorneys fees it incurred in pursuing indemnification from Atlantic. A non-jury trial was held on 14 December 2001. At the conclusion of the trial, the trial judge took the matter unde r advisement. In a series of subsequent written rulings, the Circuit Court concluded: (a) that only part of the Clearwater claim was covered by the bond and, therefore, Ulico was entitled to reimbursement on ly for that part of the claim; (b) under the language of the indemnity agreement, Ulico was entitled to recover attorneys fees, costs, and expenses; and, (c) an award of $5,750 in attorneys fees, costs, and expenses to Ulico, out of a claim for $16,716.67, was fair and reasonable. Ulico noted a timely appeal, arguing that it had acted in good faith in paying Clearwater s claim and, therefore, the Circuit Court erred when it did not award Ulico the total sum paid on the b ond. In add ition, Ulico arg ued that the Circuit Co urt abused its discretion in not awar ding Ulico the full amount of attorneys fees, costs, and expenses. Atlantic filed a cross-appeal, asserting that Ulico w as not entitled to any part of the amount paid on the bond because the bond did not cover the Clearwater claim. Atlantic also contended that the Proof of C laim form filed by Clearw ater was defective, and that Ulico made the payment to Clearwater as a mere volunteer. The Court of Special Appeals, in a reported opinio n, Ulico Casualty Co. v. Atlantic Contracting and Material Co., 150 Md. App. 676, 822 A.2d 1257 (2 003), reversed the Circuit Court and held that Ulico was entitled to its entire c laim. The intermediate appellate court, with regard to Ulico s claim for attorneys fees, costs, an d expens es, remand ed for reco nsideration in light of its holding as to the error affecting the amount of reimbursement to which Ulico was entitled for paying Clearwater s claim. W e grante d Petitio ner s pe tition fo r writ of certiora ri, Atlantic Contracting v. Ulico, 376 Md. 543, 831 A.2d 3 (200 3), to consider Petitioner s four questions: 1. Do repairs to equipment used on a project constitute labor and materials supplied to that project, so as to fall within the coverage of a construction bond? 2. Was Ulico, who sued Atlantic as indemnitor on a bond, a volunteer when Ulico paid a third party when that third party s bill and claim w ere for repairs to equipment used by the subcontractor defendant, which repairs did not constitute labor and materials in the prose cution of th e work p rovided fo r in said subcontract, as were covered by the bond in question? 3. Was Ulico also a volunteer, when the third party s Proof of Claim on the bond did not allege that the third party had provided labor and materials to the particular subcontract covered by the bond? 4. Under Maryland law, did the circuit court err or abuse its d iscretion in awarding attorneys fees, costs, and expenses to Ulico? 2 We shall affirm the judgment of the Court of Special Appeals. I. A. On 27 June 1997, G ilbert Southern Corpo ration ( Gilbert ), as general contractor, entered into a contract with the North Carolina Department of Transportation to repair a segment of the northbound lanes of Interstate 85 ( the project ). Soon thereafter, Gilbert and Atlantic entered into a subcontract for Atlantic to p erform the concrete p aving work on the project. Ulico issued a performance and payment surety bond on behalf of Atlantic, as principal, in favor of Gilbert, as ob ligee. The b ond gua ranteed A tlantic s perfo rmance o f its duties under the subcontract and its prompt payment to all persons supplying [Atlantic] with labor and materials in the prosecution of the work provided for in [the subcontract between Gilbert and Atlan tic] . . . and [the pr ompt paym ent of] all other obligations incurred by [Atlantic] in connection with su ch work . . . . In connection with the issuance of the bond, Atlantic and its individual owners, John Madden and Thomas Madden, executed a General Agreement of Indemnity and Security ( indemnity agreement ), in favor of Ulico. Clearwater informed Ulico o n 24 June 199 8 that Clearwater h ad billed Atla ntic $21,843.48 for repairs to equipm ent Atlantic w as using in c onnection with the pro ject. Clearwater told Ulico that Atlantic had not paid the bill and that Clearwater was now looking to Ulico, as Atlantic s su rety, for payment. In reply, Ulico se nt Clearw ater a Proof of Claim 3 form with a letter requesting that Clearwater return the form with supporting documentation as verification of its claim. Clearwater s completion of the Proof of Claim form indicated that Atlantic owed Clearwater $21,843 .48 for rep air to equipment used on paving job at I-85 North, G ranville County project, and no credits were due to Atlantic. The unpaid bills s ent by Clearw ater to Atlantic, attach ed to the Proof of Claim form, were three in number: (1) 5 December 1997 in the amount of $8,299.18; (2) 15 May 1998 in the amount of $7,565.36; and (3) 15 May 1998 in the amount of $ 4,834.14 (totaling $20,698 .68). Clearwater transmitted the P roof of Claim fo rm and supporting documents to Ulico on 27 Aug ust 1998. B y then, Atlantic h ad paid to Clearwater the $4,834.14 bill, by check dated 31 July 1998, which was negotiated by Clearwater on 6 August 1998; however no one informed Ulico of th e part payme nt nor doc umented the partial paym ent to Ulico until sometime later. On 31 August 1998, Cherie Rondinelli, the Bonds Claims Manager for Ulico, wro te to John M adden, Pre sident of A tlantic, to inform him that Clearwater alleged it was owed by Atlantic a total of $21,8 43.48 (com prised of th e $20,698 .68 represen ted by the three b ills attached to Clearwater s Proof of Claim form, plus interest at 18 percent through 1 August 1998) on the project and asking him to inform Ulico of the reasons for Atlantic s delay in paying Clearwater. On 3 September 1998, Thomas Madden responded with a terse letter, sent via fac simile transm ission and re gular first-class mail, stating tha t Atlantic had 4 sent Clearwater a check for $4,834.14 in partial payment of Clearwater s bills and that the balance remaining was bein g disputed and must be resolved prior to completion of paymen t. Rondinelli responded with a letter, dated 26 October 1998, posing the following questions: Atlantic continues to state that the balance due is being disputed and will be resolved prior to completion of the project. What is the nature of the dispute? Please provide the surety with documentation of the d ispute and amou nt. Is the project complete, if no, what percentage of the project is complete? When do you expect the project to be complete? In addition, Ulico requested a copy of the $4, 834.14 check that Atlantic purportedly remitted to Clearwater. On 3 December 1998, having received no response from Atlantic, Rondin elli again wrote to Thomas Madden asking for any documentation supporting Atlantic s dispute of Clearwa ter s claim. R ondinelli s letter s tated in part: In order to properly and thoroughly investigate [Clearwater s] claim, it is imperative that the surety rece ive this inform ation. Atlantic s lack of cooperation with Ulico is placing the surety in a difficult position of possibly having to incur a payment loss on this bond due to the lack of documentation and valid defenses. Please consider this as Ulico s SECOND REQUEST for Atlantic to provide the following documentation. 1. Atlantic continues to state that the balance due is being disputed and will be resolved prior to the completion of the project. What is the nature of the dispute? 2. Please p rovide the s urety with doc umentatio n of the disp ute and am ount. 3. Is the project complete, if no, what percentage of the project is complete? 4. When do you expect the project to be complete? 5. Please provide the surety with a co mplete acc ounting o f payments A tlantic receive d on thi s projec t . . . . 5 Receiving no response to her 3 December letter, Rondinelli wrote to Thomas Madden again on 29 December 1998. She stated that Ulico had validated Clearwater s claim of $20,698.62" and Atlantic s lack of response and documentation [had] placed [Ulico] in a position of incurring a loss [of $20,698.62]. Rondinelli s letter demanded that Atlantic pay Ulico that sum w ithin 5 wo rking days of receipt of the letter or Ulico would be forced to seek other restitution via its rights un der the inde mnity agreem ent. This lette r was sen t to Atlantic by certified mail. Ulico, on 4 January 1999, delivered its check to Clearwater for $20,698.62, and received in return Clearwater s assignment of its claim against Atlantic and a releas e of U lico fro m all liab ility under th e bond . By a letter of 5 January 1999, which was transmitted to Ulico by facsimile at 4:50 p.m. that day and sent also by certified mail, John Madden responded to Ulico stating that the dispute over Clearwater s bill was predicated on the fact that unauthorized work was performed and billed for and that the invoices Atlantic received from Clearwater totaled $15,864.54, not $20,698.62. Attached to the letter were copies of the disputed invoices and Atlantic s canceled c heck to C learwater, fo r $4,834.14 . Madde n compla ined he had left telephone messages on Rondinelli s voice mail on 11 December 1998 and 5 January 1999 that had not be en returned and directed U lico not to make any paymen t to Clearwater. Subsequently, Atlantic refused to reimburse Ulico. 6 B. As noted abo ve, Ulico f iled a com plaint in the Circuit Court for Prince G eorge s Cou nty. From Atlantic, Ulico sought to recover under the indemnity agreement the $20,69 8.62 it h ad paid Clearw ater, plus interest, a ttorneys f ees, cos ts, and e xpens es. The case was tried to the bench on 14 December 2001. John Madden testified on behalf of Atlantic. Madden stated that Clearwater had not supplied labor or materials for the project for At lantic. Rathe r, Clearwater performe d repair work on s ome hydraulic motors for a CMI concrete belt placer machine that Atlantic was using on the project. Madden testified that the belt placer machine belonged to Atlantic, had a useful life of 10 or 15 years, was not ded icated to the pro ject, and had be en used on sev eral othe r projec ts. Madden further testified that Atlantic paid only $4,834.14 of the total amount billed by Clearwater because the unpaid balance was for materials, mostly pumps, that were not received by Atlantic and which had been obta ined fraudulently by one of Atlantic s former employees in a collaborative scheme with one of Clearwater s employees. The Circ uit C ourt penultim ately n oted that M aryland s appellate courts had not yet specifically addressed in a reported opinion the issue of whether repairs to previously owned equipment constituted labor and materials under a surety bond for payment and performance. Thus, the trial judge relied on federal court decisions addressing the issue in the context of contrac ts on fe deral co nstructio n proje cts. He summarized the federal cases as holding that, repair parts, appliances, and accessories which add materially to the value 7 of the equipm ent and ren der it available for other work [than the project covered by the bond] are not within the coverage of the payment bond. See, e.g ., Continental Cas. Co. v. Clarence L. Boyd, Co., 140 F.2d 115, 116 (10th Cir. 1944) (citations omitted). The trial judge concluded that repairs to equipment used by a subcontractor that materially enhance the value of the equipment by making it available for jobs other than the project covered by the surety bond are not payments within the scope of the bond. By contrast, repairs to a subcontractor s equipment incidental to carrying on the particular project covered by the bond, but which do not add to the value of the equipment, are covered. The Circuit Court found th at the repairs m ade by Clea rwater to Atlantic s equipment added to the value of that equipment. In particular, the court found that Clearwater did not charge for incidental items consumed in completion of the project such as gasoline, oil, filters, etc. Clearwater supplied parts and accessories that added to the value of the machinery, they were not incidental and inexpensive in character and therefore are not covered by the bond. As to the labor charges, Clearwa ter s bills attached to the Proof of C laim form provided to [Ulico] outline $3,234.00 in unpaid labor costs. Such costs aided in the completion of the I-85 project covered by the Bond and therefore are recoverab le by the [Ulico] along with interest at the legal rate of 6% accruing from the date of payment to Clearwater, December 31, 1998, in the amount of $614.46. Fina lly, the Circuit Court held that Ulico s paymen t of the claim made b y Clearwater, although made in good faith, was not entirely included in labor and materials as covered by the bond. Defendant cannot be held liable for all of those costs, only the cost of labor. Ultimate ly, the Circuit Court concluded that, under the indemnity agreement, Ulico was entitled to recover attorneys fees, costs, and expenses only in the amount of $5,750. 8 C. In the Court of Special Appeals, as noted earlier, Ulico argued that the Circuit Court erred in not awa rding Ulico the total sum Ulico paid to Clearwater because Ulico made the payment in the absence of fraud and in good faith. In addition, Ulico asserted that th e Circuit Court erred in not awarding it the full amount of attorneys fees, costs, and expenses incurred in pursuing recovery from Atlantic. In a cross-app eal, Atlantic argued that the Circuit Co urt erred in awarding Ulico any part of the payment made to Clearw ater because Clearw ater s work was not covered by the bond, or because the Proof of Claim form filed by Clearwater was defective, and , in any event, Ulico made the p ayment as a volunteer. The Court of Special Appeals held that under the good faith clause in the indemnity agreeme nt: Ulico was entitled to reimbursement from Atlantic for a claim Ulico paid in good faith, without fraud, regardless of whether Ulico was actually liable for the claim either by virtue of a defense of Atlantic to the claim or by virtue of the claim s being outside the scope of the Bond. Accordingly, once the trial court found that Ulico acted in good faith and without fraud in paying Clearwater s claim, it should have awarded Ulico reim burseme nt for its full payment on the claim. Ulico Cas. C o. v. Atla ntic Co ntractin g and M aterial C o., 150 Md. App. 676, 698, 822 A.2d 1257, 1270 (20 03). Acco rdingly, the interm ediate appe llate court reversed the Circuit Court s judgment and remanded the case 1 ) for the cou rt to award Ulico as d amages th e full amount it paid to Clearwater on the Clearwater claim; and 2) for the court to reconsider Ulico s contra ctual cla im for a ttorneys f ees, cos ts, and e xpens es. 9 II. A. First, we shall reiterate our understanding of the fundamental principles governing surety bond and indemnification relationships. A surety bond is a three-party agreement between a princip al obligo r, an obl igee, an d a sure ty. Gen. Motors Acceptance Corp. v. Daniels, 303 M d. 254, 259 , 492 A.2d 1306, 13 09 (1985 ). In a perform ance bon d context, the surety assures the obligee that if the principal fails to perform its contractual duties, the surety will discharge the duties itself, either by perform ing them or paying the obligee the excess costs of perfor manc e. Id.; United States Fid. & Guar. Co. v. Feibus, 15 F. Supp. 2d 579, 580 (M .D. Pa. 1 998), aff d, 185 F.3d 864 (3d Cir. 1999) (affirmed without reported opinion). In a payment bond, the surety guarantees the principal s duty to the obligee to pay its (the principal s) laborers, subcontr actors, a nd sup pliers. Feibus, 15 F. Supp. 2d at 581 n.2. The liability of a surety is coextensive with that of the princip al. Gen. Bu ilders Supp ly Co. v. MacArthur, 228 Md. 320, 326, 179 A.2d 868, 871-72 (1962) (citations omitted). The surety is primarily or jointly liable with th e principal an d, therefore , is immediate ly responsible if the principal fails to p erform . Gen. Moto rs Acce ptance Corp ., 303 Md. at 259, 492 A.2d at 1309. U ltimate lia bility, how ever, is w ith the pr incipal, n ot the su rety. Id. Upon default of the principal, the surety may pay the money and proceed against the principal for inde mnity. Dixon v. Spencer, 59 Md. 246, 248 (1883 ). The bond is the measure of the 10 surety s obligation. In the construction industry, it is standard practice for surety companies to require con tractors for w hom they w rite bonds to execute ind emnity agreem ents by which principals and their individual backers agree to indemnify sureties against any loss they may incur as a resu lt of wr iting bo nds on behalf of prin cipals. See generally The Surety s Indemn ity Agreem ent - Law & Practice (Maril yn Kling er, et al., eds., Am. Bar A ssoc. 2002). The seeming th reshold leg al issue in the present cas e is wheth er Ulico w as entitled to reimbursement for any of C learwater s r epair bills that assertedly were not covered by the bond. Although we reach the same result as the Court of Special Appeals, we conclude that the sweep of its analytical co nstruct, that a su rety, in paying a claim , acting in goo d faith and without fraud, is entitled to indemnity under the indem nity agreement regardless of whether the claim on th e bond is c overed ac tually by the bond, neglects som e important factors that to us seem necessary to the paradigm. To start, the analysis of a surety bond a nd indem nity agreemen t ordinarily shou ld examine the bond s coverage in conjunc tion with liability and good faith unde r the indem nity agreeme nt. A surety bond is a contract and is to be construed as such. John McShain, Inc. v. Eagle Indem. Co., 180 Md. 202, 205, 23 A.2d 669, 670 (1942) (citations omitted). The indemnity agreeme nt and sure ty bond, being written con tracts, must b e construed in accordance with our traditional rules of objective contract interpretation. The interpretation of a written contract is ordinarily a question of law for the court and, theref ore, is subject to de novo review by an app ellate co urt. Wells v. Chevy Chase Bank, 363 Md. 232, 250, 768 11 A.2d 620, 629-30 (2001) (citations omitted). In determining the meaning of contractual language, Maryland courts apply the principle of the objective interpretation of contracts. Sy-Lene of Washington, Inc. v. Starwood Urban Retail II, LLC., 376 Md. 157, 166, 829 A.2d 540, 546 (2003), and cases there cited. Applying objective interpretation principles, the clear and unambiguous language of an agreement will not give way to what the parties thought the agreement mean t or was intende d to me an. Ashton, 354 Md. at 340, 731 A.2d at 444; Adloo v. H.T. Brown Real Estate, Inc., 344 Md. 254, 266, 686 A.2d 298, 304 (1996). Our primary consideration, when interpreting a contract s terms, is the customary, ordinary, and accepted meaning of the language used. Lloyd E. Mitchell, Inc. v. Maryland Cas. Co., 324 Md. 44, 56-57, 595 A.2 d 469, 47 5 (1991) (c itations om itted). The terms of the contract must be interpreted in context, and given their ordinary and usual mean ing. Langston v. Langston, 366 Md. 49 0, 506, 784 A.2d 1086, 1095 (20 01). Contract interpretation involves discerning the terms of the contract itself. Fister v. Allstate Life Ins. Co., 366 Md. 201, 210, 783 A.2d 194, 199 (2001 ) (citations omitted). In an action which presents an issue of coverage under a su rety bond and liability under an indemnity agreeme nt, it is the func tion of the court to interpret the policy and decide whether or not there is coverage. If such a coverage issue depends upon language of the policy which is ambiguous, we will resolve that ambig uity in fav or of th e insure d. St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 M d. 187, 1 94, 438 A.2d 2 82, 286 (1981 ). In the light of the aforegoing precepts, and bearing in mind that the payment bond in the instant 12 case was executed for the purpose o f guarante eing the pe rforman ce of a priv ate contract, it is incumbent upon us to ascertain from the payment bond and indemnity agreement the intention of the parties. Levy v. Glens Falls Indem. Co., 210 Md. 265, 273, 123 A.2d 348, 351 (1956) ( T he cardina l rule in the interp retation of b onds, as in th e interpretation of all written contracts, is to a scertain the intention of the parties and to give effect to that intention if it can be do ne consiste ntly with legal pr inciples. ); see also Lange v. Bd. of Educ., 183 Md. 255, 260, 37 A .2d 317, 320 (194 4); Hosp. for Wo men o f Mary land v. U nited Sta tes Fid. & Guar. Co., 177 Md. 615 , 618, 11 A.2d 45 7, 459 (1940). The coverage of the bond in the present case extended to payment to all persons supplying the Principal with labor and materials in the prosecution of the work provide d for in the subco ntract betw een Atlan tic and Gilbert. Clearwa ter s claim w as for rep air to equipment used o n pavin g job at I -85 N orth, G ranville Coun ty project. In the indemnity agreeme nt, Atlantic promised to indemnify [Ulico] from and against any and all Loss and, to that end, to promptly reimburse [Ulico] for all Loss. The indemnity agreement defines Loss to mean: Any and all damages, costs, charges, and expenses of any kind, sustained or incurred by [Ulico] in c onnection with or as a result of: (1) the furnishing of any Bonds; and (2) the enforcement of this Agreement. Loss shall also include any funds disbursed by [Ulico], or arranged for or guaranteed by [Ulico] for the use and/or benef it of any indemnitor. Atlantic further agreed in the indemnity agreement that (1) originals or photocopies of claim drafts or payment records kept in the ordinary course of business . . . shall be prima facie evidence of the fact and 13 amount of such Loss; and (2) [Ulico] shall be entitled to reimbursement for any disbursements made by it in good faith, under the belief that it was liable, or that such disbursem ent was n ecessary or pru dent. In addition, Atlantic promised to deposit with Ulico on demand any reserve against loss that Ulico required or deemed prudent to establish, w hether on a ccount of actual liability or one which is, or may be asserted against it whether or not [Ulico] has made any payment therefore[ ,] and to gra nt Ulico a se curity interest in certa in pieces of its equipme nt. Atlantic argues that despite the indemnity agreement, the work performed by Clearwater was not covered by the bond because Clearwater provided parts and service for Atlantic s equipment. Atlantic contends that these parts and service repairs made by Clearwater were no t labor and m aterial for the project because the equipment in question was not bought for exclusive use on the project and because the life expectancy of the equipment extended beyo nd that of the project. Based on a review of our cases and persuasive federal pre cedents, w e would conclude , were this th e dispositive issue in the present case, that repairs to equipment that add materially to the life of the equipment and extend the equipment s useful life beyond the life of the project do not constitute labor and materials supplied to the project, so as to fall within the coverage of the bond. We have not directly addressed the issue of w hether repa irs to permanent equipment are labor and materials for an individual project before, but we came close to resolving the issue in the analogous case of Williams Construction Co. v. Construction Equipment, Inc., 253 Md. 60, 251 A.2d 864 (1969). In Williams, the principal, Williams Construction 14 Company ( Williams ), arranged for a payment bond with the surety, Fireman s Fund Insuran ce Co mpan y ( Firem an s Fu nd ) fo r a bridg e projec t. Williams, 253 Md. at 61-62, 251 A.2d at 865. The payment bond for the bridge project provided: [T]he condition o f this obligatio n is such tha t if the [Princ ipal] shall prom ptly make payments to all persons supplying labor and/or material to the Principal and to any Subcontractor of the Principal or any Subcontractor of the Principal in the prosecution of the work provide d for in said Contract * * * then this obligati on sha ll be void . . . . Id. The equipment for the bridge project was leased from a leasing company. The leasing company incurred charges totaling $32,578.02 that were not paid and sued Williams and Fireman s Fund. All of this amount was for equipment rental or for haulage or repair of the leased equipment, except for a charge of $46.95 for carbide bits and covered wire, which appear to have been materials used on the jo b. Williams, 253 Md. at 62 n.3, 251 A.2d at 865 n.3. When the case reached this Court, we concluded that the circuit court should have directed a verdict for Williams and Fireman s Fund with respect to $32,481.07 of the total amount in controversy, this being the aggregate amount of charges for equipment rental and haulage and repair. Williams, 253 Md. at 69, 251 A.2d at 869. In addition, the circuit court should have permitted the case to go to the jury as to the rem aining am ount of $ 46.95, this being the charge for materials delivered to the job site, because it appeared to be conceded that this amount was recoverable under the bond. Williams, 253 Md. at 69-70, 251 A.2d at 869. 15 The conclusion reached in Williams relied on our reasoning in State use of Gwyns Falls Quarry Co. v. National Surety Co., 148 Md. 221 , 224-25, 128 A . 916, 917 (1925), where we resolved that renting a steam shov el was not furnishing labor or materials for a particular project under a contractor s bond: The steam shovel leased by the appellant in this case was merely an implement utilized by the lessees in the work for which they were employed. It formed a part of their equipment for the business in which they were reg ularly engaged. The monthly rent accruing to the appellant was payable regardless of the extent to which the steam shovel was actually used or of the place where it was o perated . The appellant s claim is obviously not for labor performed on the highway, since the work in which the leased machine was used on the road was done exclusively by the lessee, and we think it also clear that the use and depreciation of the steam shovel, and its transportation to the appe llant, should not be reg arde d as m ateri als furnished in the con struc tion of th e roa dwa y, within the term s of the contrac tor s bo nd . . . . Relying on this reasoning, we held, in Williams, that charges for equipm ent rentals are not recoverab le under a payment bond as labor a nd ma terials. Williams, 253 Md. at 69-70, 251 A.2d at 869. Just as the leased equipment and its repair was not c ove red b y the payment bond in Williams, it would seem that repairs to Atlantic s equipment in the present case would not be covered. Lik e the steam shovel, A tlantic s concrete b elt placer was merely an implement utilized by Atlan tic in the work for whic h it was em ployed. Atlan tic s concrete belt placer formed a part of its equipment for the business in which it regularly was engaged. The repair bill wa s payable by A tlantic regardle ss of wh ether Atlan tic s concrete belt placer actually was u sed on the project. 16 In federal construction projects, federal courts that have add ressed the sa me issue h eld that repair parts, a ppliances, a nd access ories whic h add ma terially to the value of the equipment and render it available for other work are not within the coverage of the payment bond. Continental Cas. Co. v. Clarence L. Boyd Co., 140 F.2d 115, 116 , (10th Cir. 1944) (citing Maryland Cas. Co. v. Ohio River Gravel Co., 20 F.2d 514 (4th Cir. 1927); United States use of Galliher & Huguely, Inc. v. James Baird Co., 73 F.2d 652 (D .C. Cir. 1934)). In Maryla nd Casu alty, a claim was made under a bond by a garage that provided labor, gas, oil, an engine, and tires for trucks of a contractor working on a state road construction project. All of the items were furnished for trucks that were used on the work of the contractors on the road p roject. Ohio River, 20 F.2d at 518. The Fourth Circuit Court of Appea ls noted that there is a well recognized rule that a bond such as this does not cover machinery and equipment used by the contractor in carrying on the work, or repairs to such machinery and equipment. Id. Despite this general ru le, the Fourth Circuit we nt on to no te that some items used on permanent equipme nt may still come within the scope of the bond. In a particularly well reaso ned passa ge, the Fou rth Circuit an alyzed how repairs and materials for permanent equipment owned by the contractor may or may not be covered by a bond for a specific p roject: It is undoub tedly true that repa irs which a dd materia lly to the value of the equipment and render it available for other work are no more within the protection of the bond than the equipment itself; and one, for instance, who supplies a tire or a motor for a truck is no more entitled to recover under the bond than one who furnishes the truck itself. On the o ther hand, there are repairs of an incidental and inexpensive character, such as most of those 17 embraced in the account seem to have been, which do not in any true sense add to the value o f the equip ment, but are incidental to the carrying on of the work and represent merely ordinary wear and tear or its equivalent. The labor done in making s uch repairs is in reality labor don e in the carrying on of the work, and we think should be treated as such. Thus a blacksmith who sharpens the plows and drills or repairs the carts used in making a n excava tion wou ld undoub tedly be protected in the same way as other laborers, and we see no difference between his case and that of a mechanic who keeps in repair and running condition a fleet of trucks used on the job. The labor of such a one adds to and becomes a part of the finished structure just as truly as does the labor of one who w ields a p ick or sh ovel. And, of course, granting the principle, it can make no difference whether the mechanic doe s the work at the scene of the operation or in his own garage. We think that those items of the account which represent mere incidental repairs upon the trucks used on the job necessary to keep them in running condition for the performance of the work, should have been allowed as being within the protection of the bond. We think, too, that claimant is entitled to recover for the gasoline and oil furn ished f or use in operatin g the tru cks. Id. (citations omitted). If the reasoning employed by the Fourth Circuit were applied to the facts in the present case, it would seem the Circuit Court was correct, as far as it went, because the repairs made by Clearwa ter to Atlantic s equipme nt added to the value of that equipment and, thus, were n ot labo r and m aterials c overed by the bo nd. Nonetheless, Atlantic is not entitled to be d eclared the v ictor in this litigation. Ulico did not know the facts supporting this coverage defense at the time of its settlement of the claim with Clearwater because Atlantic had not informed Ulico timely or adequately of the und erlying facts, though requested to provide such information. While a number of jurisdictions apply a constrained standard of good faith/absence of fraud analysis in determining w hether a sur ety is permitted to e nforce an indemnity 18 agreement against the in demnitor, se veral jurisdictions include in their assessment of the surety s actions in settling or paying a claim in good faith a criterion of reasonableness. Lumbermens Mut. Cas. Ins. Co. v. Darel Group U.S.A., Inc., 253 F. Supp. 2d 578, 585 (S.D.N.Y. 2003) ( New York courts have upheld [indemnity agreement] provisions, and payments made by sureties under such provisions are scrutinized only f or good faith and reasonableness as to amou nt paid. ) (citatio ns omitted); The Hartford v. Tanner, 910 P.2d 872, 881 (Kan. Ct. App. 1996) ( we agree with those cases that hold that the im plied covenant of good faith requires a surety seeking indemnification to show that its conduct was reasonable ); Hawaiian Ins. & Guar. Co., v. Higashi, 675 P.2d 767, 769 (Haw. 1984) ( Even if an indemnitee has a legal right to settle a claim, the settlement must be reasonable and made in good faith. ); J.F. White Engineering Corp. v. General Ins. Co., 351 F.2d 231, 233 (10th Cir. 1965) ( while [th e surety] was n ot required to permit the co ntractor to co mplete the contract, if it believed that in the exercise of reasonable diligence and precaution [the principal] . . . should have been employed to complete the project, the jury should reduce or deny recovery in the amount which it believed could have been saved by so doing ); Nat l Sur. Corp . v. Peoples Milling Co., 57 F. Supp. 281, 283 (W.D. Ky. 1944) ( If the surety or the indemnitee has the legal right to adjust or se ttle the claim, either by reason of the terms of his contract or because o f actions on the part of the indemnitor, it is only necessary that such an adjustment or settlement be a reasonable one and made in goo d faith. ); Luton Mining Co. v. Louisville & N. R. Co., 123 S.W.2d 1055, 1062 (Ky. App. 1938) (surety is 19 justified in settling claim w hen it acted in good f aith and w ith reasonab le prudenc e ); see generally Bruner & O Connor, 3 Co nstruction Law § 1 0:107 (2003) (Reasonableness vs. Good-Faith Stan dards). In the present case , the C ourt of S peci al Appeals w as pe rsua ded by Fidelity & Depos it Co. v. Bristol Steel & Iron Works, Inc., 722 F .2d 116 0 (4th C ir. 1983 ), in concluding that when a good faith standard is applicable to the surety s performance, the only issue is whether fraud w as present. Under this analysis, a bond coverage issue raised by the principal would, therefore, b e irrelevant to the analysis. The effect of this, in those jurisdictions that recognize only a narrowly applied good faith standard, is that the test is not whether the surety was negligent in spending too much mone y in comp leting th e const ruction contrac t, English v. Sentry Indemnity Co., 342 S.W.2d 366, 369 (Tex. Civ. App. 1961), nor if the principal alleged lack of diligence, Continental Casualty Co. v. American Security Corp., 443 F.2d 649 (D.C . Cir. 1970); Engbrock v. Federal Insurance Co., 370 F.2d 784, 787 (5th Cir. 1967), negligent ignorance, Ford v. Aetna Insurance Co., 394 S.W.2d 693 (Tex. Civ. App. 1965), or even a mistak e of law made by the sur ety in mak ing the d isburse ment, Central Surety & Insurance Corp. v. Hinton, 130 S.W.2d 235, 242 (Mo. Ct. App. 1939); instead, the test is whether the surety committed fraud in making payment. We conclude that a good faith standard that protects the surety for every mistake no matter how egregious, that falls short of fraud, is unwis e. The Hartford v. Tanner, 910 P.2d 872, 881 (Kan. Ct. App. 1996) ( Allowing the sure ty s indem nificatio n to be e nforce d, absent fraud, leaves the principal and 20 indemnitor at the m ercy of th e surety s u nreaso nable c onduc t. ) (citatio n omitte d). We conclude rather that a standard of reasonableness als o should b e implied in th e good fa ith analysis of a su rety s actions in de termining w hether it may rec over again st the principa l. In a three-way relationship betwe en a surety, an obligee, and a principal, the reasonab le expectations of all the parties must be effectuated and the surety must act in a reasonab le manner in handling or paying claims. We find the reasoning in City of Portland v. George D. Ward & Associates, Inc., 750 P.2d 171, 175 (Or. Ct. App. 1988), to be persuasive: Parties to an indemnity agreement which subjects the right to compromise a claim against the principal to the sole discretion of the surety must reaso nably expect that comp romise an d payment w ill be made o nly after a reaso nable investigation of the claims, counterclaims and defenses asserted in the underlying action. In order to prove lack of good faith in settling the claim, [the indemnitors] needed only prove that [the surety] acted for dishonest purposes or improper motives. Id. In the present c ase, we do not substitute a reasonab leness stand ard for the g ood faith standard; we simply have equated the two standards, as the court does in City of Portland. We hold that the good faith stan dard allows the surety a discretion limited by the bounds of reasonableness, rather than by the bounds of fraud. We disagree with the Co urt of Specia l Appea ls narrow r eading of the good f aith clause in the indem nity agreemen t here that effectively renders the terms of the bond nugatory and could permit a surety, under circumstances different from thos e in the present case, to be indemnified for payment of claims that may be outside the scope of the bond. We 21 think that, in the present cas e, the factors to be consid ered in dete rmining w hether a sur ety made a reasonable, good f aith settlemen t under the te rms of the bond an d the indem nity agreement are the following: (1) the obligations of the surety as provided by the terms and coverage of the b ond, Commercial Union Insurance Co. v. Melikyan, 430 So. 2d 1217, 1222 (La. Ct. App. 1983); (2) whether the principal has made more than generalized demands that the surety deny the c laim, Glens Falls Indemnity Co. v. Carobine, 36 N.Y.S.2d 253, 255 (N.Y. City Ct. 1942); (3) the coop eration, or lack thereof, by the p rincipal, in dea ling with the sure ty, Id.; (4) the th oroug hness o f the inv estigatio n perfo rmed b y the suret y, Maryland Casualty Co. v. R & L Construction Co., 368 S.W.2 d 134, 1 36 (Te x. Civ. A pp. 196 3). See, e.g., Hinch ey, Surety s Performance Over Protest of Principal: Considerations and Risks, 22 Tort & Ins. L.J. 133 (1986) (enumerating a host of factors considered by courts in determining wh ether the surety has performed or settled in good faith). In the prese nt case, the C ourt of Sp ecial App eals held that the coverage of the bond was irrelevant, and that the terms and cove rage of the bond did not control th e indemn ity agreement. The Court of Special Appeals reasoned that The pertinent language does not say (as it could have said) th at, for the sure ty to be entitled to reimbursement, the expense or cost it incurred must be covered by or within the scope of the Bond. Rather, it says that the surety must have incurred the expense or cost in connection with or as a result of . . . the furnishing of the Bond. In the context in w hich the ph rases in connection with and as a result of a re used, they co nnote w ith relation to or as part of. An expense or cost can be incurred or paid by a surety in connection with . . . the furnishing of or as a result of . . . the furnishing of the bond, notwithstandin g that there will never be a determination whether the claim in fact was with the scope of the bond. 22 Ulico, 150 Md. App. at 693-94, 822 A.2d at1267. We, however, perceive a difference between coverage and liab ility. The words of the bond are not mere surplusage, they must be read in conjunction with the indemnity agreement. We have said th at a bond is to be con strued in connection w ith the contract whose performance it secures. State Highway Admin. v. Transamerica Ins. Co., 278 Md. 690, 700, 367 A.2d 509, 516 (1976) (citing Lange v. Bd. of Educ., 183 Md. 255, 260, 37 A.2d 317, 320 (194 4)). We thin k too that an indemnity ag reement is to be constru ed in conjunction with the bond upon which it is based. Contractual terms cannot be read out of the agreement altogether, and the meaning of a provision is not discerned by rea ding it in isolation, but by recognizing its relation to the other terms of the complete contractual relation ship. See Goldberg v. Goldberg, 290 Md. 204, 213, 428 A.2d 46 9, 475 (1981). In Jones v. Hubbard, 356 Md. 513, 534-35, 740 A.2d 1004, 1016 (1999), we discussed the need for accounting for all the relevant contract provisions: Implied in this [objec tive] test is that the interpre tation of the la nguage is to be of the entire language of the agree ment, not m erely a portion th ereof. Th is implication was demonstrated by the Court of Special Appeals in Shanty Town Assocs., 92 Md. App. 103, 607 A.2d 66 [(1992)]. In that case involving the interpretation of a consent jud gment, the court implied that one needs to read the complete language of a consent judgment to determine its purpose. Thus, to understan d the true meaning of a consent order, the language of the judgment must be read as a whole. Id. at 114, 607 A.2d at 71. The entire judgment all provisions considered should be read as a whole in the light of all the circumstances as well as of the conduct of the parties. Hanson v. Hearn, 521 So. 2d 95 3, 955 (Ala. 1988). When interpreting a consent decree, or any other agreement, w ords must be read in context. The decree must be read as a whole, each of its provisions being interpreted together with its other 23 provisio ns. Westinghouse Air Brake Div. v. United Elect., 294 Pa. Super. 407, 414, 440 A.2d 529, 533 (1982). An interpretation of the judgment that gives meaning according to its entirety is favored over one that makes some part of it mere surplusage. Hanson, 521 So. 2d at 955. Reading the payment bond and indemnity agreement together, if a surety unrea sonably pays for an obligee s w ork that is not covere d under a payment bo nd, then the surety should not be entitled to indemnification from the principal, without further ado, under the good faith provision in the indemnity agreement. In the present case, however, the undisputed facts indicate that th e surety reason ably paid Clea rwater in go od faith. A tlantic did not inform the surety in a timely fashion of its contention , or supportin g facts, that the bond did not cover the work p erformed by Clearw ater. On its face, the co mpleted P roof of C laim indicated that Clearwater s work was part of the project and covered by the bond. Ulico informed Atlantic of the claim and repeatedly asked for clarification in the form o f receipts and information as to why Clearwater s claim should not be paid. Atlantic did not provide adequate informatio n that wou ld indicate to a reasonab le surety that there was an issue w ith the coverage of the p ayment bond as to C learwater s work. M adden s claims about initiating two telephone calls to Ron dinelli that went u nreturned, e ven if believed, were not sufficient under the circumstances to render Ulico s conduct unreasonable or lacking in good faith. Not only does the surety have to act with reasonableness and good faith, the principal is bound by a reciprocal obligation of good faith and fair dealing. Kransco v. American Empire Surplus Lines Ins. Co., 2 P.3d 1 , 11 (Cal. 2000) (in sure r and insu red a re bo und by a reciprocal obligation of good faith and fair dealing). Embedded in this obligation is a duty 24 to cooperate in timely fashion with the su rety in processin g and con sidering an y claim. Atlantic may not ignore Ulico s reasonable requests, over a period of months, for information as to why Clea rwater s claim should not be paid and then expect to assert an effective bond coverage defense after the claim is paid. The surety is not omniscient, and cannot be expected to refuse claims on grounds about which it has not been informed adequately by the principal. If Atlantic believed the payment bond did not cover the work performed by Clearwater, as it apparen tly thought, then it should have informed Ulico w hen requ ested to do so. The likeliest source fro m which the surety may ob tain reliable information about the nature of the wo rk perform ed and its rela tion to the bo nd is from the principa l. Its efforts to learn if such information existed having been frus trated, Ulico m ade a reaso nable, goo d faith payment of the claim ba sed on the informa tion that was supplied to it by Clearw ater. Glens Falls Indem nity Co. v. Carobine, 36 N.Y .S.2d 253 (N.Y. C ity Ct. 1942) is the most analogou s case to the p resent one w e were ab le to locate. In Carobine, the principal failed to co-operate with a surety company that payed a tax claim to the obligee, the government s collector of internal revenue, on some bonded wine. T he prin cipal, a corporation, made various ge neralized cla ims as to w hy it was not liab le for the tax. T he City Court of New York fo und that the surety could o nly have contested the case on the basis of information supplied by the corporate principal. The court further found that the principal spoke to the surety only in generalities and it can hardly be said that payment by the [ sure ty] in the circumstances disclosed at the time was a voluntary one. Carobine, 36 N.Y.S.2d at 25 255. Ultimately, the court held that there was no justification for [the surety s] refusal to pay the government s claim valid on its face when the principal . . . gave it no substantial basis upon which to resist payment. Id. (citation omitted). Likewise, in the present case, we are unable to say that payment unde r the circumstances disclosed a t the time U lico paid C learwater s c laim was a nything but a reasonab le good faith payment. Ulico s claim payment to Clearwater resulted from Atlantic s failure to coo perate timely in Ulico s investigation. As the Circuit Court noted, [Ulico] having not received any additional information from [Atlantic], discharged the debt owed to Clearwater . . . . Although [Ulico] made sev eral requests for information from [Atlantic], no written docum entation was sent until Janu ary 5, 2000 after [Atlantic] had received notice that [Ulico] had paid Clearwater s claim. The repeated correspondence from Ulico to Atlantic requesting in formation or docu mentation evidence s the surety s diligent investig ation of the ma tter. See, e.g., Banque Nationale de Paris S.A. v. Ins. Co. of North America, 896 F. Supp. 163, 165 (S.D.N.Y. 1995) (summary judgment granted in favor of surety where it was undisputed that surety investigated and evaluated [the principal s] alleged defenses before settlin g ); United States v. D Bar D Enterprises, Inc., 772 F. Supp. 1167, 1170 (D. Nev. 1991) (parties may expect surety to settle only after investigation of claims, counterclaims, and po ssible defenses); Continental Cas. Co. v. American Sec. Corp., 443 F.2d 649 , 650 (D.C . Cir. 1970) (u pholding summa ry judgment f or surety where 26 uncontradicted affidavits stated that all claims had been paid by surety in good faith after investigation ). The reasonable behavior required of a surety acting in good faith is not mean t to foster reluctance on a sure ty s part to satisfy bond claims. We agree with the court in General Accident Insurance Co. of America v. Merritt-Meridian Construction Corp., 975 F. Supp. 511, 516 (S.D.N.Y. 1997), which explained: Sureties enjoy such discretion to settle claims because of the important function they serve in the c onstruction industry, and be cause the e conomic incentives motivating them are a sufficient safeguard against payment of invalid claims. The many parties to a typical construction contract owners, general contractors, subcon tractors and sub-subcontractors look to sureties to provide assurance that defaults by any of the myriad other parties involved will not resu lt in a loss to them . Courts have recognized that as a practical matter the suppliers and small contractors on large construction projects need reasonab ly prompt payment for their work and materials in order for them to remain solven t and sta y in busin ess. (citations omitted). Th e surety in the present case acted diligently and reasonably based on the informatio n available to it. The reaso nableness requireme nt is meant o nly to filter the most egregious, careless, or inattentive cond uct, short of fraud, of a surety; such as making a payment on a bond that the surety clearly knows or should know is not covered by the bond. Had the surety in the present case been told in a timely fashion b y the principa l the details of why Clearw ater s claim was not covered by the bond and the documentation provided that illustrated such a defense , a reasonab le and diligen t surety might no t have ma de paymen t. Atlantic renews its argument from the Court of Special Appeals that the Proof of Claim form submitted by Clearwater was defective and, therefore, co uld not sup port a claim 27 by Ulico for r eimburse ment of th e paid claim under the indem nity agreemen t, Atlantic repeats its assertion that because Clearwater specified in the Proof of Claim that its work was done in performance of its contract with Atlantic, and not in performance of the subcontract between Atlantic an d Gilbert, there was no payment obligatio n by U lico a s Atl antic s surety. We agree with the Court o f Special Appea ls that the Proof of Claim form was not defective. As the intermediate appellate court observed, the completed Proof of Claim stated that the w ork d one by Clearwater was for repair to equipment used on paving job at I-85 North, Granville County project, which is the project in question. It was reasonable for Ulico to assume that the equipment used on paving job at I-85 North, Granville County project was the construction project it had bonded for Atlantic. After receiving the Proof of Claim, Cherie Rondinelli, the Bonds Claims Manager for Ulico, wrote to John Madden at Atlantic to inf orm him that Clearwater was alleging it was owed $21,842.48 on the project and asking him to inform Ulico of Atlantic s reasons for delaying payment to Clearwater. On 3 September 1998, Thomas Madden responded with a letter stating that Atlantic had sent Clearwater a check for $4,834.14 in partial payment of Clearwater s bill and that the balance ($15,864.54) was being disputed and must be resolved prior to completion of p ayment. In Atlantic s letter, Thomas Madd en refers to the above ref erenced p roject wh ich is Project No. 8. 1370303 I-85 NBL from south rest area to north of Vance County Line ACM Job No. 556 , Letter No . 174. In ad dition, the sub ject of the letter is the paymen t bond in question. Atlantic s letter, a t least implicitly, if not ex plicitly, assumes th at Clearwater s 28 claim is covered by the bond, and it was reaso nable for U lico to conclude that Clearw ater s claim was covered. B. Fina lly, we turn to the question regarding attorneys fees, costs, and expenses. In Maryland, following the Am erican Ru le, a prevailin g party ordinarily is no t entitled to recover attorneys fees as part o f com pensat ory dam ages. Hess Constr. Co. v. Bd. of Educ., 341 Md. 155, 159, 669 A.2d 1352, 1354 (1996) (citations omitted). Litigation expenses, however, may be awarded where the parties con tract pro vides f or fees and co sts. Allfirst Bank v. Dep t of Health & Mental Hygiene, 140 Md. App. 334, 373, 780 A.2d 440, 463 (2001) (citation omitted). A contractual obligation to pay attorneys fee s generally is valid and enforc eable in Marylan d. Qualified Builders, Inc. v. Equitable Trust Co., 273 Md. 579, 584, 331 A.2 d 293, 29 6 (1975); Noyes A ir Conditioning Contractors, Inc. v. Wilson Towers Ltd. P ship, 122 Md. App. 283, 294, 712 A.2d 126, 131 (1998). Absent misconduct or fraud, overreaching, misrepresentation, or other grounds for voiding the contract, a contractual provision for awarding attorneys fees may be e nforce d. Noyes, 122 Md. App. at 294, 712 A.2d at 131. Where an award of attorneys fe es is called fo r by the contrac t in question, the trial court will examine the fee request for reasonableness, even in the absence of a contractual term specifying that the fees be reasonable. Rauch v . McCa ll, 134 Md. App. 624, 638, 761 A.2d 76, 84 (200 0). The reasonableness of attorneys fees is generally a factual 29 determination within the sound dis cretion of th e trial judge an d will not be overturned unless clearly erroneous. Reisterstown Plaza Assocs. v. Gen. Nutrition Ctr., Inc., 89 Md. App. 232, 248, 597 A.2d 1049, 1057 (1991) (citations om itted); Danziger v. Danziger, 208 Md. 469, 474, 118 A.2d 653, 656 (1955) (an award of attorneys fees will not be disturbed unless the trial court acted arbitrarily or its judgment was c learly wrong). The burden is on the party seeking recovery to provide the evidence necessary for the fact finder to evaluate the reasonableness of the fees. Maxima Corp. v. 6933 Arlington Dev. Ltd. P ship , 100 M d. App . 441, 45 4, 641 A .2d 977 , 983 (1 994). See also Friolo v. Frankel, 373 Md. 501, 527, 819 A.2d 354, 370 (2003) (setting forth standards f or the award of attorneys fees). In the present case, the trial court properly concluded that, under the terms of the indemnity agreeme nt, Atlantic was obligated by contract to pay Ulico the sums it incurred to enforce th e agreem ent, which included its attorneys fees, costs, and ex penses. Ind emnity agreeme nts of this kind are interpreted generally to entitle th e surety to recover fees, costs, and ex penses incurre d in enf orcing them. See Fid. & Deposit Co., 722 F.2d at 1166. As the C ourt of Sp ecial App eals aptly put it: When a contract entitles a party to recover attorney s fees, the trial court must examine the fee request to determine whether it is reasonab le, even in the absence of a provision requiring that the f ee requ est be re asonab le. Rauch v. McCa ll, 134 Md. App. 624, 638, 761 A.2d 76 (2000). In this case, the trial court s decision on the issue of reasonableness necessarily w as affected by its decision, in error, that Ulico only was entitled to reimbursement for part of the monies it paid to Clearwater. Accordingly, the reasonableness of the sums sought by Ulico for attorneys fees, costs, and expenses must be reconsidered 30 in light of our decisio n that Ulico is entitled to full re imbursem ent of its payment to Clearwa ter. Ulico, 150 Md. App. at 700-01, 822 A.2d at 1271. Equally apt, the intermediate appellate court, because it had decided to reverse and remand the case, encouraged the trial judge on remand to reconsider Ulico s prayer for attorneys fees, costs, and expenses on the inferred basis that the earlier award may have been predicated on a proportionality relationship to the limited recovery afforded under the indemnity agreement. We shall affirm the Court of Special Appeals, and remand the case to the Circuit Court 1) to award Ulico as damages the full amount it paid to C learwater; 1 and 2) to reconsider Ulico s contractual claim for attorneys fees, costs, and expenses in light of its entitlement to the full indemnification claim. JUDGMENT OF THE COURT O F S P E C I A L A P P E A LS AFFIRMED; COSTS TO BE PAID BY PETITIONER. 1 Though ou r disposition (similar to that of the intermed iate appellate c ourt) of this case would se em to have the effect of Clearwater recovering twice for the $4,834.14 paid on account of its 15 M ay 1998 bill, once by Atlantic in Augu st 1998 an d again by U lico in January 1999, our judgment should not be read to mean that Atlantic or Ulico may not be able, all other thing s being eq ual, to proce ed against C learwater to correct tha t windfall. Clearwater, in signing the Ulico release, represented that the sum of $20,698.62 is justly due and owing by contract to [Clearwa ter] and that [Clearwater] has not released or discharged the same or any part hereof, that there are no counterclaims or set-of fs to said accou nt . . . . As is now apparent, Clearwater s claim, at that time, had been reduced by Atlantic s payment of $4,834 .14 on acc ount of the 15 Ma y 1998 bill. 31 IN THE COURT OF APPEALS OF MARYLAND No. 51 September Term, 2003 ATLANTIC CONTRACTING & MATERIAL COMPANY, INC. V. ULICO CASUALTY COMPANY Bell, C.J. Raker Wilner Cathell Harrell Battaglia Eldridg e, John C. (retire d, specially assigned), JJ. Dissen ting Op inion b y Battaglia , J., which B ell, C.J. and E ldridge, J., Join Filed: March 12, 2004 The majority gets it right in this case almost. I cannot qu arrel with the majority s conclusion that the repa irs made b y Clearwate r to Atlantic s e quipmen t added to the value of that equipment and, thus, were not labor and materials covered by the bond. Majority slip op. at 18. Nor do I dispu te the majority s holding that a surety s duty of good faith requires it to act rea sonab ly in settling or paying claims. Id. at 19. I even agree with the majority that the record does n ot estab lish, as a matter of law, that the payment by Ulico (the sure ty) to Clearwater (the obligee) over the objection of Atlantic (the principal) was made in bad faith or was unreas onable . Where the majority falters, however, is in deciding that the paymen t was re asonab le, per se. The traditional definition of a surety is someone who contracts to answer for the debt or defau lt of ano ther. E DWARD G. G ALLAGHER, T HE L AW OF S URETYS HIP 1 (2d. ed. 2000) (hereinafter Gallagh er ); SNM L Cor p. v. Bank of North Carolina, 254 S.E.2d 274 (N.C. App. 1979). Defined more narrowly, a surety is a person who binds himself for the payment of a sum o f mon ey, or for the performance of something else, for another who is already bound for such payment or performance. SNML Corp., 254 S.E.2 d at 279. A surety relationship involves three parties: (1) the principal, the one for whose account the contract is made, whose debt or default is the subject of the transaction ; (2) the oblige e, the one to whom the debt or obligation runs ; and (3) the surety, the one who agrees that the debt or obligation running from the principa l to the [obligee] shall be performed [or paid], and who undertakes on his own part to perform [or pay] it if the principal does not. ARTHUR A. S TEARNS, L AW OF S URETYS HIP § 1.4 (5 th ed. 1951); G allagher at 1. T ypically, in such an arrangem ent, the surety only suffers a loss if the principal does not perfo rm its obligation to the obligee and then is u nable to reimburse the surety for pa yments that the surety made to the obligee . Gallager a t 1. A surety also suffers loss , howev er, when it fails to exercise good faith in paying an obligee s claim that falls outside the terms of the bond agreem ent. See The Hartford v. Tanner, 910 P.2d 872, 877 (Kan. C t. App. 199 6); City of Portland v. George D. Ward & Assoc., Inc., 750 P.2d 171, 17 4 (Or. App. 198 8). Most courts agree that sureties should not be reimbu rsed for claim payments unless the payments were made in g ood faith. T his is so for tw o reasons. F irst, the indem nity agreeme nts that often accompany bonds usually provide that reimbu rsement is av ailable only if the surety paid the o bligee s claim in good faith. Gallagher at 488. Second, in the absence of such a g ood faith provision, co urts have h eld that the su rety s duty to exercise good faith arises from an implied covenant of good faith and fair dealing, which is inherent in all contracts. Id. at 534; Tanner, 910 P.2d at 878 ( The obligation of good faith and fair dealing on the part of the surety is implied and in a sense sup erimpose d on the en tire surety contract. ); City of Portland, 750 P.2d at 175 (stating that, although the indemnity agreement contained no good faith clause, the surety was bound by its implied covenant of good faith to exercise its discretion in compro mising the claim ). Although courts gen erally agree that sureties are entitled to be reimbursed for claims paid in good faith, they are sha rply divided as to what it me ans to exerc ise good f aith. A number of courts h ave conc luded that a surety has brea ched its duty of good faith only when -2- the surety acte d with a n impro per mo tive. See Gallagher at 491 (describing the majority view and citing cases in which courts have adopted it). That is, in order for the principa l to show that the surety paid a claim to the obligee in bad faith, the principal must present evidence demonstrating that the surety acted fraudu lently or w ith ill-will. See, e.g., PSE Consulting, Inc. v. Frank Mercede & Sons, Inc., 838 A.2d 135, 152 (Conn. 2 004); Fidelity and Deposit Co. of Maryland v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160 , 1165 (4 th Cir. 1983); Engbrock v. Federal Ins. Co., 370 F.2d 784, 78 7 (5 th Cir. 1967) . As one c ourt explained, [g]ross negligence or bad judgment is insufficient to amount to bad faith. U.S. Fidelity & Guar. Co. v. Feibus, 15 F. S upp.2d 579, 58 7 (M.D .Pa. 199 8), aff d 185 F.3d 864 (3 rd Cir. 1999). Other courts have a ssigned a diffe rent me aning to good faith., one that evaluates a surety s payment according to a standard of reasonableness. These courts have concluded that, even if there is no evidence of fraud or ill-will, the surety has fallen short of its goodfaith duty by unreasonably or negligen tly paying an obligee s claim on the b ond. Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co., 47 Cal. A pp. 4 th 464, 483 (1996) (C al. Ct. App. 19 96) ( [T]h e covena nt of goo d faith can be breached for objectively unre asonable conduct, regardless of the actor s mo tive. ); Tanner, 910 P.2d at 880; City of Portland, 750 P.2d at 174; see Gallagher at 493. Therefore, as the court in City of Portland reflected, to show b ad faith under this sta ndard, the p rincipal [ne ed] only prove that [the surety] failed to make a reasonable investigation of the validity of the claims against them or to consider -3- reasonab ly the viability of their counterclaims and defenses, not that [the surety] acted for dishonest purposes or improper motives. 750 P.2d at 175. The parties in the present case entere d into an indem nity agreemen t in which A tlantic promised to reimburse Ulico for any and all disbursements made by it in good faith, under the belief that it was liable, or that su ch disburse ment wa s necessary or p rudent. T his provision serves as the source of Ulico s duty to exercise good faith in paying C learwater s claim. In determin ing the me aning of good fait h in this context, the m ajority correctly embraced the latter of the two views described above, stating the duty of good faith allows the surety a discretion limited by the bounds of reasonableness, rather than the bounds of fraud. Majority slip op. at 21 (em phasis added). The trial judge in this case, how ever, did not apply this standard of good faith. The judge s order stated: Because [Atlan tic] failed to pro ve fraud o n the part of [Ulico], it is clear that [Ulico ] has prove n its case and is entitled to stan d upon th e letter of the [ indemnity agreem ent]. As the majority explains, however, Atlantic did not have to prove frau d to show bad faith and avoid having to reimburse Ulico; rather, the question of bad faith turned on whether Ulico s pa yment to Clea rwater w as reasona ble. Majo rity slip op. at 21. U p to this poin t in the an alysis, I sha re the m ajority s vie ws. The majority s analysis goes awry, however, when it fails to delegate the determination of the reasonableness of Ulico s payment to the fact-finder. Instead of remanding this case for such a fact-finding, the majority assumes the role of fact-finder and -4- finds that the surety s payment here was reasonable as a matter of law. This appro ach is flawed for three reasons: the question of reasonableness is for the fact-finder; the circumstances in this case do not establish that Ulico s payment was reasonable; and, the majority s holding will allow courts to enforce indemnity agreements where the surety has paid a c laim un reason ably. First, appellate co urts should not make determinations of reasonableness because, as this Court has observed, such questions generally fall within the province of the fact-finder. Murphy v. 24th Street Cadillac Corp., 353 Md. 480 , 494, 727 A.2d 9 15, 922 (1999). Appellate courts ordinarily do not determine reasonab leness beca use the trier of fact is in the best position to account[] for the circumstances of the individual case and the credibility of the witnesses and evidence presented at trial. Id.; Informed Physician v. Blue Cross, 350 Md. 308, 332, 711 A.2d 1330, 13 42 (1998 ) ( [W]h at will constitu te reasonable efforts under a contract expressly or im plied ly calling f or them is largely a question of fact in each particular case . . . . ) (quoting Allview Acres v. Howard, 229 Md. 238, 244, 182 A.2d 793, 796 (1962)); Wilson v. M orris, 317 Md. 284, 295, 563 A.2d 392, 397 (1989) (stating that the issue of reasonableness wa s a questio n of fact f or the jury ); see Lynx, Inc. v. Ordnance Products, Inc., 273 Md. 1, 13, 327 A.2d 502, 512 (1974) (stating that what constitutes a reasonab le time is ordinarily a question[ ] of fact based upon all the surrounding circumstances ). In the specific context of this case where the goo d faith of a surety is determined by the reasona bleness of its payment of a bond cla im courts have assigned the -5- reasonableness inquiry to the trier o f fact. See Tanner, 910 P.2d at 880 (exp laining that, in previous appellate proceedings in the case, the court had remanded the case because the reasonableness of the payments made by [the surety] is a fact question that must be litigated ); City of Portland, 750 P.2d at 175 (review ing a whether sufficient evidence supported the jury s determination of good faith under a reasonab leness standard). Because this Court and other courts disfavor th e practice of appellate co urts declaring what is reasonab le, this case sho uld be sent back to the trial court for a fact-finder s assessment of Ulico s good faith under the reasonableness standard. The majority also is wrong because the facts of this case do little to establish that Ulico acted reasonably in satisfying Clearwater s claim. The majority points out that several factors have guided courts outside of Maryland in determining whether a surety made a reasonable, good faith settlement under the terms of the bond and the inde mnity agr eemen t. Majority slip op. at 22. The majority s list of relevant factors includes: (1) the obligations of the surety as provided by the terms and coverage of the bond, (2) whether the principal has made more than generalized demands that the surety deny the claim, (3) the cooperation, or lack thereof, by the principal, in dealing with the surety, [and] (4) the thoroughness of the investigation performed by the surety. Id. (citation s omitte d). Although all of these factors are relevant, the majority s analysis places much too much emphasis on just one of these factors, the principal s lack of cooperation with the sure ty. The majority states: Atlantic did not provide adequate information that would -6- indicate to a reasonable surety that there was an issue with the coverage of the payment bond as to Clearw ater s work . Majority slip op. at 24. The majority followed the reasoning of the state trial court decision in Glens Falls Indem. Co. v. Carobine, 36 N.Y.S.2d 253 (N.Y. City Ct. 1942). The surety in that case m oved for summ ary judgmen t in its suit against the principal who refused to reimburse a bond claim that the s uret y had satisf ied. Id. at 254. Although the claim was not covered by the terms of the bond agreement and should not have been paid, the trial court granted the surety s motion solely on the ground that the principal objected to the bond payment with nothing more than generalities, w hich gav e [th e sur ety] no substantial basis upon which to resist payment. Id. at 255. In the present case, Atlantic s communication to Ulico was not so general. Altlantic informed Ulico by letter that $4,834.14 had been paid already and that the remaining bills from Clearwater were being dispute d and m ust be re solved prior to c omple tion of p ayment. The reasonableness inquiry, however, should involve more than an assessment of the principal s cooperatio n with the surety. The surety also has a responsibility to understand the terms and coverage of the bond agreement and carefully inves tigate the natu re of the claim from all available so urces, includ ing the oblig ee. Should the surety then learn for certain that a particular claim is not cover ed by the bon d yet pays it noneth eless, the payment, in my view, could not pass the rea sonablen ess test. In the instant c ase, Atlantic w as not the on ly source from which Ulico could have obtained information about the coverage of Clearwater s claim. Clearwa ter, itself, had kn owledg e of the spe cifics of its co ntract with A tlantic and the -7- work it completed on Atlantic s machinery. The information provided by Clearwater in the Proof of Claim form and billing statements, by no means, establishes that its charges to Atlantic were covered by the surety bond. In fact, because of the na ture of the work described in Clea rwater s bills to A tlantic (i.e ., substantial repairs to durable machinery), the docume nts should have alerted Ulico that Clearwater was not entitled to payment under the bond agreement for labor and materials, a document that Ulico relied upon at trial. As an entity engaged in the business of insuring construction contracts, Ulico should have considered that such substantial repairs to durable machinery might add to the value of that equipment and, thus, fall outside the coverage of the bond. A reasonable surety well might have investigated Clearwater s claim with greater scrutiny before paying th e claim . In Tanner, the court held that the reasonableness of a surety s payment de pends in part on the th oroughn ess with w hich it investigated each bond claim. 910 P.2d at 880-81. The court recognized that the surety s investigation is standard practice in the industry. Id. Affirmin g the trial cour t s factual finding that the surety s payments were unreason able, the court was pers uad ed b y the fact that the surety did not conduct a thorough investigation but rather simply paid the claims and sought indemnification. Id. Evidence in the present case raises similar questions abou t the surety s claim investigation. After the in itial request for a Proof o f Claim f orm, Ulico did not con sult Clearwater to learn more about the nature of the service provided to Atlantic. When -8- Atlantic s President allegedly did attempt to contact Ulico by telep hone, the su rety neglected to return th e mess ages. Considering these circumstances, a trier of fact could conclude that Ulico s efforts to investigate the Clearwater claim were less than thorough. Fina lly, not only is the majority conclusion regarding reasonableness incorrect, the preceden t established b y that conclusio n could lead to unjust enf orcemen t of unreas onable surety paymen ts. If Ulico s payments were reasonable under the present circumstances, the same could be said of a surety who pays the claim even though the principal is, for some other reason, unable to communicate promptly with the surety. Such a situation might arise where the principal is conducting business overseas or where the principal has not received the surety s notification of the obligee claim. The majority s holdin g gives bro ad license to sureties to settle claims o nly on the basis that they have not received detailed instructions from the principal. No longer must sureties seek clarification from sources other than the principal or concern themselve s with the specific terms of the bond agreements. A finder of fact might very well determine that sureties should be held to a much higher standard of conduct than what the majority dictates is reasonable. I would reverse the judgement of the Court of Special Appeals and remand this case for an application of the appropriate standard and so that a fact-finder, not appellate judges, can determine whether Ulico s payment of the Clearwater claim was reasonable. Chief Judge B ell and Judg e Eldridge authorize m e to state that the y join in this dissent. -9- -10-
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