Nova Casualty Company v. Turner Construction Company--Appeal from 80th District Court of Harris County
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Motion for Rehearing En Banc Denied as Moot; Opinion of January 11, 2011
Withdrawn; Affirmed and Substitute Opinion filed February 10, 2011.
In The
Fourteenth Court of Appeals
NO. 14-09-00733-CV
NOVA CASUALTY COMPANY, Appellant
V.
TURNER CONSTRUCTION COMPANY, Appellee
On Appeal from the 80th District Court
Harris County, Texas
Trial Court Cause No. 2006-77786
SUBSTITUTE OPINION ON REHEARING
We deny appellant’s motion for rehearing en banc as moot, withdraw our opinion
of January 11, 2011, and issue this substitute opinion on rehearing. In this performance
bond dispute, Nova Casualty Company (―Nova‖), the surety, challenges the summary
judgment granted in favor of Turner Construction Company (―Turner‖), the surety bond
obligee. In three issues, Nova asserts that the trial court erred by (1) granting summary
judgment because Turner failed to terminate the obligor, Box or Container Automation,
Inc. (―BOCA‖), from the underlying contract secured by the performance bond; (2)
granting summary judgment because Turner failed to provide sufficient notice of
BOCA’s default on the underlying contract to enable Nova to exercise its performance
options under the bond; and (3) awarding attorney’s fees and pre-judgment interest to
Turner. We affirm.
BACKGROUND
The City of Houston (the ―City‖) hired Turner as the general contractor to build a
new cargo facility at Bush Intercontinental Airport. The contract between the City and
Turner provided for the assessment of liquidated damages against Turner if Turner were
late in completing the project. In January 2004, Turner subcontracted with BOCA to
fabricate and install a baggage handling system for the new facility. Turner agreed to pay
BOCA a subcontract price of $415,000. This subcontract was time sensitive in that it
required BOCA to install the baggage handling system during a narrow time window
near the end of the entire project. In Article III, the subcontract provided:
Should the progress of the Work of the Project be delayed, disrupted,
hindered, obstructed, or interfered with by any fault or neglect or act or
failure to act of the subcontractor . . . so as to cause any additional cost,
expense, liability or damage to Turner . . . the Subcontractor and its surety
shall and does hereby agree to compensate Turner . . . for and indemnify [it]
against all such costs, expenses, damages and liability.
The subcontract provided in Article XI that BOCA’s failure to fully perform or satisfy
any of its contractual obligations (among other things) constituted a default entitling
Turner to:
the right, in addition to any other rights and remedies provided by this
Agreement and the other Contract Documents or by law, after three (3)
days written notice to [BOCA] mailed or delivered to the last known
address of the latter, (a) to perform and furnish through itself or through
others any such labor or materials for the Work and to deduct the cost
thereof from any monies due or to become due to [BOCA] under this
Agreement, and/or (b) to terminate the employment of [BOCA] for all or
any portion of the Work, enter upon the premises and take possession, for
the purpose of completing the Work, of all materials, equipment, scaffolds,
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tools appliances and other items thereon, all of which [BOCA] hereby
transfers, assigns and sets over to Turner for such purpose, and to employ
any person or persons to complete the Work and provide all the labor,
services, materials, equipment and other items required therefor. . . . [I]f
the unpaid balance of the amount to be paid under this Agreement shall
exceed the cost and expense incurred by Turner in completing the Work,
such excess shall be paid by Turner to [BOCA], but if such cost and
expense shall exceed such unpaid balance, then [BOCA] and its surety, if
any, shall pay the difference to Turner.
(emphasis added). The subcontract additionally required BOCA to obtain and furnish a
performance bond in favor of Turner.
BOCA obtained a performance bond from Nova in the amount of the subcontract
price. The performance bond Nova issued to BOCA was a standard performance bond
known in the surety industry as an A-311 bond. The bond provided the following
remedies available to Turner against Nova in the event that BOCA defaulted on the
subcontract:
NOW, Therefore, the Condition of this Obligation is such that, if [BOCA]
shall promptly and faithfully perform said subcontract, then this obligation
shall be null and void; otherwise it shall remain in full force and effect.
Whenever [BOCA] shall be, and be declared by [Turner] to be in default
under the subcontract, [Turner] having performed its obligations
thereunder:
(1) [Nova] may promptly remedy the default subject to the
provisions of paragraph 3 herein, or:
(2) [Turner] after reasonable notice to [Nova] may, or [Nova] upon
demand of [Turner] may arrange for the performance of
[BOCA]’s obligation under the subcontract subject to the
provisions of paragraph 3 herein:
(3) The balance of the subcontract price, as defined below, shall be
credited against the reasonable cost of completing performance
of the subcontract. If completed by [Turner], and the reasonable
cost exceeds the balance of the subcontract price, [Nova] shall
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pay to [Turner] such excess, but in no event shall the aggregate
liability of [Nova] exceed the amount of this bond. . . .
The bond also incorporated the terms of the subcontract by reference: ―[BOCA] has by
written agreement dated 1/16/2004 entered into a subcontract with [Turner] . . . , which
subcontract is by reference made a part hereof. . . .‖
Turner made several payments to BOCA without objection under the subcontract.
However, when BOCA was to begin installing the system, Turner sent a series of letters
to BOCA regarding BOCA’s failure to meet its performance deadlines. None of these
letters declared BOCA in default, and Nova was not copied on any of these letters. On
November 9, 2004, Turner invoked Article XI of the subcontract by sending BOCA
written notice giving it three days to cure its deficient performance. Turner elected to
move forward under option (a) of this Article, which, as noted above, entitled Turner ―to
perform and furnish through itself or through others any such labor or materials for the
Work and to deduct the cost thereof from any monies due or to become due to [BOCA]
under this Agreement[.]‖ Turner did not notify Nova that it considered BOCA to be in
default at that time.
On December 15, 2004, Turner notified Nova that BOCA had defaulted on the
subcontract. Specifically, Turner faxed a letter to Nova which provided as follows:
The Principal, [BOCA], due to insufficient funds has not been able to pay
for labor and material necessary to complete this Project. BOCA has
requested that we provide labor and material on their behalf to complete the
Project. This letter, therefore, constitutes notice of default by BOCA, Inc.
per the terms of the bond. We request that you contact us immediately to
review and resolve the non-payment issues for labor and material on this
Project.
(emphasis added). Nova hired a consultant, Forcon International Corporation (―Forcon‖)
to investigate BOCA’s default. Forcon corresponded with Turner to determine whether
BOCA had defaulted and the amount of Nova’s liability, if any, under the surety bond.
Turner communicated with Forcon regarding the actions it took to complete the project,
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including the need to completely re-do much of BOCA’s work that had failed certain
necessary tests.
Nova took no action, instead communicating with Turner through
Forcon that it was continuing to investigate the default. Forcon’s January 25, 2005
internal investigation report disclosed Turner’s estimate of over $800,000 to complete the
project and over $200,000 in liquidated damages owed by Turner to the City as a result of
project delays caused by BOCA’s default.
On January 21, 2005, Nova notified Turner that, until BOCA was terminated from
the project, Nova could not proceed to elect its remedies under the bond; it requested that
Turner fax a copy of the termination letter as soon as possible. In February and March of
2005, Turner sent letters to Nova stating that BOCA’s default caused Turner to incur
costs exceeding the penal sum of the bond and demanding payment under the bond.
Nova did not respond, other than to inform Turner that it was still investigating the
project.
Turner completed the project in July of 2005.
In August 2006, Forcon
concluded that the value of Turner’s claim was over $900,000, more than double the
amount of the penal sum of the performance bond. On November 20, 2006, Nova
rejected Turner’s bond claim, informing Turner that ―a condition precedent‖ for making
the bond claim was that BOCA ―shall be and be declared to be in default.‖ Turner
thereafter sued both Nova and BOCA. Turner obtained an interlocutory default judgment
against BOCA in May 2008.
Nova and Turner filed competing motions for summary judgment, as well as
numerous replies and responses and a wealth of documents in support of their respective
positions. Prior to the trial court’s ruling on the summary-judgment motions, the parties
stipulated to the following:
1. Turner did not send written notice of termination to BOCA.
2. The undisputed summary judgment evidence is that BOCA
abandoned the project and subcontract on December 14, 2004. Nova
does not dispute that BOCA abandoned the project on December 14,
2004.
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3. Turner contends that it gave timely notice to Nova. Nova disputes
that timely notice was given. However, Nova acknowledges that
even if Turner had given timely notice, damages to Turner under the
bond, if due, would exceed $415,000.00.
4. Nova contends that prejudice to Nova is presumed due to Turner’s
actions prior to December 15, 2004, but Nova acknowledges that
Nova cannot identify any persons with personal knowledge who
could testify that Nova was prejudiced or harmed by Turner’s
conduct.
On July 14, 2009, the trial court granted Turner’s Motion for Partial Summary Judgment,
as supplemented, and found Nova liable to Turner for breach of the bond.1
This partial summary judgment became final on July 31, 2009, when the trial court
entered its final judgment.
As is relevant here,2 the trial court ordered in its final
1
In finding in favor of Turner, the trial court stated that it considered only the following
pleadings filed by Turner and Nova:
Turner’s Motion for Partial Summary Judgment;
Nova’s Cross-Motion for Summary Judgment and Response to Turner’s Motion for
Partial Summary Judgment;
Turner’s Response to Nova’s Cross-Motion for Summary Judgment and Turner’s
Supplemental Motion for Partial Summary Judgment;
Nova’s Reply in Support of Nova’s Cross-Motion for Summary Judgment and Response
to Turner’s Supplemental Motion for Partial Summary Judgment;
Turner’s Cross Reply to Nova’s Reply in Support of Nova’s Cross-Motion for Summary
Judgment and Turner’s Reply to Nova’s Response to Turner’s Supplemental Motion for
Partial Summary Judgment;
Turner’s Supplemental Response to Nova’s Cross Motion for Summary Judgment;
Nova’s Reply to Turner’s Supplemental Response to Nova’s Cross Motion for Summary
Judgment;
Nova’s Motion for Reconsideration;
Turner’s Response to Nova’s Motion for Reconsideration;
Nova’s Reply in Support of Motion for Reconsideration;
Turner’s Cross-Reply to Nova’s Reply in support of Nova’s Motion for Reconsideration;
and
The parties’ Stipulations[.]
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judgment that Turner recover from Nova (1) $415,000, representing the full penal sum of
the performance bond; (2) attorneys’ fees of $314,000 for services rendered through
judgment; and (3) pre-judgment interest on the attorney’s fees Turner had ―paid . . . to its
attorneys‖ in the amount of $14,564.38. This appeal timely ensued thereafter.
ANALYSIS
A.
Standard of Review and Applicable Law
We review a grant of summary judgment de novo. Provident Life & Accident Ins.
Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003).
The party moving for traditional
summary judgment bears the burden of showing that no genuine issue of material fact
exists and that it is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); see
also Knott, 128 S.W.3d at 216. When both sides have moved for summary judgment, and
the trial court has granted one motion and denied the other, we will review the summary
judgment arguments and evidence presented by both sides and determine all questions
raised therein. See Tex. Mun. Power Agency v. Pub. Util. Comm’n of Tex., 253 S.W.3d
184, 192 (Tex. 2007). In such a situation, we will render the judgment that the trial court
should have rendered. Id.
The construction of a surety agreement is a question of law. Frost Nat’l Bank v.
Burge, 29 S.W.3d 580, 591 (Tex. App.—Houston [14th Dist.] 2000, no pet.). The
liability of the surety is generally determined by the language of the bond. Geters v.
Eagle Ins. Co., 834 S.W.2d 49, 50 (Tex. 1992). Surety agreements are strictly construed,
and sureties are bound only by the precise terms of the contract that they have secured.
See Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991). With these principles
in mind, we turn to the issues presented by Nova.
2
The trial court entered a final default judgment against BOCA and awarded Turner damages in
its judgment, as well. The trial court also ordered Nova to pay Turner’s appellate attorneys’ fees if Nova
unsuccessfully appealed. Finally, the trial court ordered pre-judgment interest on the amount of the penal
sum of the bond.
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B.
Turner Was Not Required to Terminate BOCA to Trigger Nova’s
Performance Obligations
In its first issue, Nova asserts that ―[b]oth the performance bond and the
subcontract required that Turner terminate BOCA from the subcontract before Turner
could recover on the bond.‖ We disagree. First, the performance bond itself does not
provide that Turner must ―terminate‖ BOCA. Rather, as excerpted above, the bond states
that if BOCA is in default and Turner declares it in default under the subcontract, Nova’s
obligations under the bond are triggered.3 The parties stipulated that BOCA abandoned
the project on December 14, 2004. Further, Nova does not dispute that the day after
BOCA abandoned the project, Turner notified it that BOCA had defaulted on the
subcontract.
Thus, based on the plain language of the performance bond, Nova’s
obligations under the bond were triggered when Turner notified it that BOCA was in
default.
Nova contends, however, that under the subcontract, Turner could recover from
BOCA or Nova any costs in excess of the unpaid balance of the subcontract price only if
Turner first terminated BOCA. However, Turner’s remedies in Article XI, excerpted
above, were available to Turner in addition to any other rights and remedies provided by
3
Nova agrees that the performance bond does not explicitly require termination before its
obligations under the bond were triggered. However, it relies on out-of-state authority for its proposition
that we should imply such a requirement into the bond at issue here. See, e.g., L&A Contracting Co. v. S.
Concrete Servs., Inc., 17 F.3d 106, 111 (5th Cir. 1994) (determining, in a case from Mississippi, that a
principal’s ―declaration of default sufficient to invoke the surety’s obligations under the bond must be
made in clear, direct, and unequivocal language‖). The L&A court went on to state: ―The declaration
must inform the surety that the principal has committed a material breach or series of material breaches of
the subcontract, that the obligee regards the subcontract as terminated, and that the surety must
immediately commence performing under the terms of its bond.‖ Id. Here, as noted above, Turner
specifically notified Nova of BOCA’s default ―per the terms of the bond.‖ Turner further requested that
Nova immediately contact Turner to resolve payment issues for labor and material on the project. We
conclude that the facts of this case are significantly different from the facts of L&A, in that the obligee in
L&A never provided notice to the surety that the principal was in ―default.‖ See id. (explaining that none
of the correspondence sent to the principal and surety contained the word ―default,‖ nor was an
unequivocal declaration of default contained in any of the correspondence). Furthermore, Texas courts do
not imply terms into unambiguous contracts for which the parties have not bargained. See Wolf Hollow I,
L.P. v. El Paso Mktg, L.P., —S.W.3d—, No. 14-09-00118-CV, 2010 WL 4262048, at *5 (Tex. App.—
Houston [14th Dist.] Oct. 28, 2010, no pet. h.) (citing Tenneco, Inc. v. Enter. Prods. Co, 925 S.W.2d 640,
646 (Tex. 1996)).
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the subcontract or under the common law. As noted supra, Article III of the subcontract
requires BOCA and its surety to compensate Turner for any ―costs, expenses, damages,
and liability‖ caused by BOCA’s delay in completion of the project. Clearly, BOCA’s
abandonment of the project delayed the project and caused Turner to incur costs and
expenses.
Further, the performance bond provides that Turner, after reasonable notice to
Nova may arrange for the performance of BOCA’s obligations under the subcontract. In
such a case, the bond provides, ―If completed by [Turner], and the reasonable cost
exceeds the balance of the subcontract price, [Nova] shall pay to [Turner] such
excess. . . .‖ (emphasis added).
Thus, strictly construing the surety agreement and
considering the precise language of the subcontract, we conclude that the trial court
properly granted summary judgment to Turner on this basis. See Vastine, 808 S.W.2d at
464. We overrule Nova’s first issue.
C.
Turner Provided Reasonable Notice of BOCA’s Default to Nova
In its second issue, Nova contends that summary judgment was improper because
Turner failed to give Nova notice of BOCA’s default sufficient to enable Nova to
exercise its performance options under the bond. Specifically, Nova argues that, because
Turner had already made arrangements for the performance of some of BOCA’s
contractual obligations before it notified Nova that BOCA was in default, Turner failed to
comply with the plain terms of the performance bond, thereby rendering the bond null
and void.
Nova agrees that it is bound by both the bond and the language of the underlying
contract between BOCA and Turner. See id. Here, the contract gave Turner two options
upon BOCA’s default: (1) to step in and supplement BOCA’s work and deduct any
expenses from the amount owed under the contract; or (2) terminate the contract and take
over the project. Turner initially chose to supplement BOCA’s work in an effort to keep
the project moving forward so that it could complete the entire contract with the City in a
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timely fashion. This option is expressly contemplated and permitted under the plain
language of the contract between BOCA and Turner. Nova was presumably aware of this
subcontract option when it entered into the performance bond, which explicitly
incorporated the subcontract into its terms. See, e.g., In re Lyon Fin’l Servs., Inc., 257
S.W.3d 228, 232 (Tex. 2008) (orig. proceeding) (stating that a party who signs an
agreement is presumed to know its contents, as well as the contents of documents
incorporated by reference). We disagree that Turner’s exercise of one of its options
under the subcontract—secured by and incorporated into the performance bond—
rendered the bond null and void.4
Further, the parties stipulated that BOCA abandoned the project on December 14,
2004. Turner notified Nova that BOCA had defaulted per the terms of the bond the next
day. ―After a declaration of default, the relationship [between sureties, principals, and
obligees] changes dramatically, and the surety owes immediate duties to the obligee.‖
L&A Contracting Co. v. S. Concrete Servs.,Inc., 17 F.3d 106, 111 (5th Cir. 1994). Rather
than notifying Turner that it planned to promptly remedy the default as provided by the
performance bond, Nova hired Forcon to investigate the default.
Nova complains in this issue that, because Turner undertook completing the
project itself, Nova was denied the opportunity to mitigate damages, which rendered the
4
Nova cites several out-of-state cases for the proposition that an obligee materially breaches the
terms of a performance bond by failing to give a surety sufficient notice of the principal’s default to
enable the surety to select its performance options. See L&A Contracting Co., 17 F.3d at 111; Elm Haven
Constr. L.P. v. Neri Constr. LLC, 376 F.3d 96, 101 (2d Cir. 2004); Hunt Constr. Group Inc. v. Nat’l
Wrecking Corp., 542 F. Supp. 2d 87, 95–96 (D.D.C. 2008) (mem. op.). Not only are none of these cases
controlling precedent, but they are all easily distinguishable. For example, in L&A Contracting, the
obligee never properly notified the surety that the principal was in default under the terms of the
performance bond. L&A Contracting Co., 17 F.3d at 111. The court in Elm Haven relied on L&A
Contracting and another Second Circuit case in which the language of the performance bond required that
the obligee terminate the principal as a condition precedent to the sureties’ obligations under the bond to
determine that termination of the principal was required. Elm Haven, 376 F.3d at 100 (citing U.S. Fid. &
Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 57 (2d Cir. 2004) (requiring termination of principal
as condition precedent to sureties’ obligations under bond) and L&A Contracting, 17 F.3d at 111). In
Hunt Construction, the principal failed to notify the surety that the principal was in default until after it
had completed the work required under the subcontract. See Hunt Constr. Group, 542 F. Supp. 2d at 89,
91–92.
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bond unenforceable. However, Nova’s options under the bond were to promptly remedy
the default or, upon demand of Turner, to arrange for the performance of BOCA’s
contractual obligations. Nova gave no indication to Turner that it intended to ―promptly
remedy‖ BOCA’s default.
Further, instead of demanding that Nova arrange for
performance of BOCA’s obligations, Turner arranged for performance of BOCA’s
obligations itself, which the plain language of the bond permitted Turner to do.5
Under these circumstances, we conclude that Turner provided Nova reasonable
notice of BOCA’s default. Accordingly, we overrule Nova’s second issue.
D.
Attorney’s Fees and Pre-judgment Interest
In its third and final issue, Nova argues that (a) Turner was not entitled to
attorney’s fees because summary judgment was improper and (b) the trial court
erroneously awarded pre-judgment interest on attorney’s fees paid by Turner before
judgment. We have determined that the trial court properly granted summary judgment
to Turner on its claims against Nova. Thus, we consider only whether the trial court
erred in awarding pre-judgment interest on the awarded attorney’s fees Turner paid prior
to the entry of judgment.6
There appears to be a split of authority among the Courts of Appeals regarding the
award of pre-judgment interest on attorney’s fees paid before judgment. See Carbona v.
CH Med., Inc., 266 S.W.3d 675, 688 (Tex. App.—Dallas 2008, no pet.) (pre-judgment
interest cannot be recovered on attorney’s fees under any circumstances); Williams v.
Colthurst, 253 S.W.3d 353, 362 (Tex. App.—Eastland 2008, no pet.) (allowing award of
5
Whether any of the costs Turner incurred prior to notifying Nova that BOCA was in default
under the terms of the bond were recoverable from the bond funds or whether Turner’s costs in
completing BOCA’s contractual obligations were reasonable are not issues before this court. Moreover,
the parties stipulated that, even if Turner had given timely notice, damages to Turner under the bond, if
due, would exceed the penal sum of the bond.
6
We note that Nova erroneously relies on Texas Finance Code section 304.102 for its proposition
that pre-judgment interest accrues only on the amount of ―judgment.‖ Tex. Fin. Code Ann. § 304.102
(West Supp. 2009). This section of the Finance Code explicitly applies only to cases involving wrongful
death, personal injury, or property damage. Id. Thus, it is inapplicable in this breach of contract case.
11
pre-judgment interest on fees paid prior to judgment in a breach of lease case); A.V.I.,
Inc. v. Heathington, 842 S.W.2d 712, 717 (Tex. App.—Amarillo 1992, writ denied)
(permitting recovery of pre-judgment interest on fees actually paid prior to judgment in
DTPA case). This court has previously observed in an unpublished opinion that ―if [the
plaintiff] had paid her attorney prior to the trial court’s judgment, she would be entitled to
pre-judgment interest on that amount.‖ Life Ins. Co. of N. Am. v. Kilhafner, No. 14-9600850-CV, 1998 WL 340288, at *5 (Tex. App.—Houston [14th Dist.] Jun. 18, 1998, no
pet.) (not designated for publication). More recently, we have stated that an award of
equitable pre-judgment interest on attorney’s fees is within the trial court’s discretion.
See Kurtz v. Kurtz, No. 14-08-00351-CV, 2010 WL 1293769, at *11 (Tex. App.—
Houston [14th Dist.] Apr. 16, 2010, no pet.) (mem. op.). In light of this authority, we
cannot say the trial court abused its discretion in awarding pre-judgment interest on
attorney’s fees that Turner had already paid prior to the trial court’s entry of judgment.
We therefore overrule Nova’s third and final issue.
For the foregoing reasons, we affirm the trial court’s judgment.
/s/
Adele Hedges
Chief Justice
Panel consists of Chief Justice Hedges, Justice Jamison, and Senior Justice Mirabal.*
*
Senior Justice Margaret Garner Mirabal sitting by assignment.
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