C & I Steel v. Travelers Cas. and Sur. Co., 06-P-851.

• Decision Date: 06 November 2007
• Docket Number: No. 06-P-851.,06-P-851.
• Citation: 876 N.E.2d 442,70 Mass. App. Ct. 653
• Parties: C & I STEEL, LLC v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA.
• Court: Appeals Court of Massachusetts

876 N.E.2d 442

70 Mass. App. Ct. 653

C & I STEEL, LLC v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA.

No. 06-P-851.

Appeals Court of Massachusetts, Middlesex.

Argued April 2, 2007.

Decided November 6, 2007.

Bradford R. Carver, Boston, for the defendant.

Rory FitzPatrick, Boston (Mark E. Haddad with him) for the plaintiff.

John P. Connelly & Terri L. Pastori, Boston, for Surety & Fidelity Association of America, amicus curiae, submitted a brief.

Present: GRASSO, BROWN, & McHUGH, JJ.

McHUGH, J.

Travelers Casualty and Surety Company of America (Travelers), the surety on a construction payment bond, appeals from a judgment entered after a Superior Court judge confirmed an arbitration award. In confirming the award, the judge ordered entry of judgment against Travelers and Peabody Construction Company, Inc. (Peabody), Travelers' principal, both for contract and for punitive damages. Travelers contends that it was not a party to the arbitration and, as a consequence, there was no award against it to be confirmed. Travelers also contends that its obligations under the payment bond do not include payment of punitive damages.¹ We think Travelers is correct and, therefore, reverse.

1. Background. On January 30, 2002, the town of Westford awarded Peabody a contract for construction of the Westford Middle School at Stony Brook Center (project). The contract and G.L. c. 149, § 29, required a payment bond, which Peabody obtained from Travelers in the penal sum of $22,411,590, the full value of the contract.² Under the terms of the bond, Peabody, as principal, and Travelers, as surety, jointly and severally bound themselves "to the owner [Westford] to pay for labor, materials and equipment furnished for use in the performance of the [c]onstruction [c]ontract." The bond defined the construction contract as the "agreement between the [Town] and [Peabody] . . . including all [c]ontract [d]ocuments and changes thereto."

Peabody thereafter entered into a written subcontract with C & I Steel, Inc. (C & I), for performance of the structural steel work the project required. The subcontract, valued at $1,460,000, contained a broad arbitration clause under which Peabody and C & I agreed that, at Peabody's election, "[a]ll claims, disputes, and other matters in question arising out of, or relating to, this Subcontract, or the breach thereof, shall be decided by arbitration."³

As work under the subcontract proceeded, Peabody and C & I had numerous disputes and disagreements about such things as extra work, backcharges and delay. Ultimately, they reached an impasse. At that point, C & I commenced this action in the Superior Court against Peabody, Travelers, and the architect, Drummey Rosane Anderson, Inc. Four counts of C & I's complaint asserted claims against Peabody for breach of contract, breach of the covenant of good faith and fair dealing, quantum meruit and violation of G.L. c. 93A. Two counts asserted claims against Travelers, one alleging that Travelers was "liable under the payment bond to secure and satisfy payment for the work performed by C & I" and had failed to do so and the second claiming that Travelers's failure to pay C & I amounted to a knowing and wilful violation of G.L. c. 93A.

Invoking the subcontract's arbitration clause, Peabody moved to stay judicial proceedings and compel arbitration. Travelers simultaneously filed a separate motion for a stay of what it described as C & I's premature action pending conclusion of binding arbitration. In its motion, Travelers asserted, among other things, that its liability was derivative of Peabody's. C & I filed a partial opposition, seeking freedom only to proceed with its action against the architect. A Superior Court judge allowed both motions to stay but, in accordance with C & I's request, allowed the action against the architect to proceed.⁴ Significantly, in their motion and opposition papers, Peabody, Travelers and C & I all claimed that the governing arbitration clause was contained in Peabody's subcontract with C & I.

After the stay was in place, C & I filed a demand for arbitration with the American Arbitration Association. The demand named Peabody alone and sought arbitration only of the four claims C & I had asserted against Peabody in the Superior Court complaint, i.e., the claims for breach of contract, breach of the covenant of good faith and fair dealing, quantum meruit and Peabody's alleged violation of G.L. c. 93A. C & I's demand did not name Travelers as a respondent nor did it assert any claims involving Travelers' own alleged acts or omissions.

The arbitration hearing proceeded over two days before a single arbitrator. Peabody, represented by the attorney who had represented both Peabody and Travelers in the Superior Court proceedings, participated fully. Travelers knew of the arbitration but did not seek to participate. Following the hearing, the arbitrator issued an award in favor of C & I and against Peabody, and broke down the award into ten separate elements. Those elements fit into three general categories, i.e., contract damages amounting to $313,439.54, double contract damages, or $626,879.08, for violation of c. 93A and breach of the covenant of good faith and fair dealing, and interest, counsel fees and other sundries totaling $268,950.13. In all, the award amounted to $1,209,268.75.

At that point, C & I returned to Superior Court seeking confirmation of the entire award against both Peabody and Travelers. Peabody filed no opposition. Insofar as is here material, Travelers opposed the motion to the extent that the award contained punitive damages or other derivatives of the arbitrator's conclusion that Peabody had violated the covenant of good faith and fair dealing and G.L. c. 93A. In its opposition, Travelers argued broadly that a surety is not liable for punitive damages assessed against its principal and, more narrowly, that payment for punitive damages was not an obligation it had undertaken in the bond.

A Superior Court judge rejected those arguments and confirmed the entire award against Travelers. Although he acknowledged that the award contained both contract and "bad faith" damages, the judge reasoned that

"[b]y executing the Bond Agreement that incorporated the subcontract, Travelers implicitly agreed to be bound by the arbitration proceedings as required by the arbitration provision in the subcontract. If Travelers sought to avoid liability for its principal's bad faith damages, it could have expressed that limitation in its agreement with Peabody. Travelers correctly relies on the principle that a surety is bound only to the extent of its agreement with Peabody. The conclusion from this premise, however, must be that because its agreement with Peabody did not limit its liability and instead implicitly agreed to arbitration, Travelers must now be bound by the entirety of the arbitration award against its principal, Peabody."

Judgment in the amount of $1,209,268.75 thereupon entered against Travelers and Peabody. See G.L. c. 251, §§ 11, 14; Mass.R.Civ.P. 54(b), 365 Mass. 821 (1974). Travelers paid the contract damages and interest thereon and now appeals, claiming, as it did in Superior Court, that it is not liable for the punitive elements of the judgment.⁵ As noted, we agree.

2. Discussion. Analysis of the appellate issues properly begins with examination of the scope of Travelers' obligation under the terms of the bond. Under Massachusetts law, as under the law of other jurisdictions,

"[a] surety's bond is a contract. It sets the limits of the surety's liability. The fact that [the] bond is required by statute does nothing to alter the settled principles of contract and suretyship law. That this is a statutory bond does not `enlarge the risk' which the bonding company has undertaken. . . . A surety `cannot be holden beyond the fair scope of [its] engagement, as intended by the parties when undertaken.' President of Dedham Bank v. Chickering, 4 Pick. 314, 340 (1826)."

Peerless Ins. Co. v. South Boston Storage & Warehouse, Inc., 397 Mass. 325, 327, 491 N.E.2d 253 (1986). Accord Commonwealth v. Arbella Mut. Ins. Co., 64 Mass. App.Ct. 901, 901, 831 N.E.2d 389 (2005) ("the bond obligation is subject to the terms of the bond itself").

In the absence of ambiguity, interpretation of a contract presents a pure question of law. See Roberts Indus., Inc. v. Spence, 362 Mass. 751, 755, 291 N.E.2d 407 (1973); Sutton Corp. v. Metropolitan Dist. Commn., 423 Mass. 200, 209-210, 667 N.E.2d 838 (1996). In this contract, there is no ambiguity. Travelers' undertaking is set out in the bond's very first paragraph, where Travelers agreed "to pay for labor, materials and equipment furnished for use in the performance of the [c]onstruction [c]ontract." Travelers' agreement is consistent with the terms of G.L. c. 149, § 29, which require awarding authorities on public contracts to obtain a bond to secure payment for labor and materials subcontractors furnish to the project.⁶

By its terms, then, the bond did not cover punitive damages payment of which is payment for punishment, not for "labor, materials and equipment." See Kapp v. Arbella Mut. Ins. Co., 426 Mass. 683, 686, 689 N.E.2d 1347 (1998); Gasior v. Massachusetts Gen. Hosp., 446 Mass. 645, 653, 846 N.E.2d 1133 (2006) ("purpose of punitive damages has been described as punishment and deterrence rather than compensation of an injured party"). To conclude that the bond encompassed punitive damages would be to rewrite the agreement Travelers made with Peabody and to risk diluting through punitive awards to a few subcontractors and materialmen the "security to [all] subcontractors and materialmen on public works," LaBonte v. White Constr. Co., 363 Mass. 41, 45, 292 N.E.2d 352 (1973), that the bond is designed to afford. See New Hampshire Ins. Co. v. Gruhn, 99 Nev. 771, 773, 670 P.2d 941 (1983).

In reaching that conclusion, we join the authors of the Restatement of...