Colo. Structures, Inc. v. INSURANCE CO. OF WEST

• Court: Washington Court of Appeals
• Writing for the Court: MORGAN, A.C.J.
• Citation: Colo. Structures, Inc. v. INSURANCE CO. OF WEST, 106 P.3d 815, 125 Wash. App. 907 (Wash. App. 2005)
• Decision Date: 15 February 2005
• Docket Number: No. 30201-2-II.
• Parties: COLORADO STRUCTURES, INC., a Colorado corporation, licensed to do business in Washington d/b/a CSI Constr. Company, Respondent/Cross-Appellant, v. INSURANCE COMPANY OF THE WEST, a California corporation, Star Insurance Company, a Michigan corporation, Action Excavating and Paving, Inc., an inactive Oregon corporation, and Marlowe Heinz, personally, Appellants/Cross-Respondents.

106 P.3d 815

125 Wash. App. 907

COLORADO STRUCTURES, INC., a Colorado corporation, licensed to do business in Washington d/b/a CSI Constr. Company, Respondent/Cross-Appellant, v. INSURANCE COMPANY OF THE WEST, a California corporation, Star Insurance Company, a Michigan corporation, Action Excavating and Paving, Inc., an inactive Oregon corporation, and Marlowe Heinz, personally, Appellants/Cross-Respondents.

No. 30201-2-II.

Court of Appeals of Washington, Division 2.

February 15, 2005.

Joseph C. Calmes, Magnus Rune Andersson, c/o Hanson, Baker, Ludlow, Drumheller PS, Bellevue, WA, for Appellants/Cross-Respondent.

Nell Anne Oram, Tigard, OR, Jeffrey Kenneth Hanson, Yazbeck Cloran & Hanson LLC, Portland, OR, for Respondent/Cross-Appellant.

Ford Douglas Ruud, Seattle, WA, for Amicus Curiae Surety Assoc. of America.

MORGAN, A.C.J.

This case requires us to construe a subcontractor's performance bond. The main question is whether the surety's liability was conditioned on the obligee's having declared, before the principal substantially completed the work, that the principal was in default under the subcontract. The trial court answered no, and so do we. We affirm, except that we modify the trial court's award of attorney fees.

Colorado Structures, Inc. (CSI) contracted with Wal-Mart to build a large retail store in Vancouver, Washington. CSI was to finish by September 1998, so that the store could open on October 14, 1998. CSI was subject to significant penalties if the store did not open on time.

In February 1998, CSI formed two subcontracts with Action Excavating and Paving, Inc. (Action). One was for offsite work, and the other was for onsite work.

The offsite subcontract is the one primarily in issue here. It required Action to build a sewer system for $472,290. Action was to start in May and finish in July. The City of Vancouver was to test and approve the work. The offsite subcontract provided in part:

If, in the opinion of the Contractor [CSI], the Subcontractor [Action] . . . fails to carry on the Work in a manner acceptable to the Contractor, then the Contractor shall have the right and may . . . after giving the Subcontractor two (2) days written notice thereof, terminate this Subcontract whereupon the Contractor may take over and complete the performance of the Work by whatever method and means it may deem expedient[.]¹

On April 8, 1998, Insurance Company of the West (ICW) issued a performance bond and a payment bond in exchange for $8,034. In the performance bond, ICW guaranteed to CSI that Action would perform the offsite subcontract.² In the payment bond, ICW guaranteed to CSI that Action would pay the laborers and materialmen on the offsite contract. The performance bond is the one in issue here, and it reads as follows:

[A] Action Excavating & Paving, Inc.. . ., hereinafter called Principal, and Insurance Company of the West . . ., hereinafter called Surety, are held and firmly bound unto CSI Construction Co. . . ., hereinafter called Obligee, in the amount of . . . $472,290. . .

[B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . ., which subcontract is by reference made a part hereof, and is hereinafter referred to as the subcontract,

NOW THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH THAT, if Principal shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

[C] Whenever Principal shall be, and declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee's obligations thereunder:

(1) Surety may promptly remedy the default, subject to the provisions of paragraph 3 herein, or;

(2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal'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 the Obligee, and the reasonable cost exceeds the balance of the subcontract price, the Surety shall pay to the Obligee such excess, but in no event shall the aggregate liability of the Surety exceed the amount of this bond. If the Surety arranges completion or remedies the default, that portion of the balance of the subcontract price as may be required to complete the subcontract or remedy the default and to reimburse the Surety for its outlays shall be paid to the Surety at the times and in the manner as said sums would have been payable to Principal had there been no default under the subcontract. The term "balance of the subcontract price," as used in this paragraph, shall mean the total amount payable by Obligee to Principal under the subcontract and any amendments thereto, less the amounts heretofore properly paid by Obligee under the subcontract.

[D] Any suit under this bond must be instituted before the expiration of two (2) years from date on which final payment under the subcontract falls due.

[E] No right of action shall accrue on this bond to or for the use of any person or corporation other than the Obligee named herein or the heirs, executors, administrators or successors of Obligee.³

For ease of reference, we have inserted capital letters at the beginning of each major paragraph.

Action began the offsite work and claimed progress payments that CSI made. By the end of June, however, Action was "seriously behind schedule."⁴ CSI decided not to terminate Action's contract, but instead to help Action perform. CSI supplemented Action's crews and took other steps intended to minimize expense and delay.

"Action continued performing . . . and substantially completed it[s] work on or about October 14, 1998."⁵ The City allowed Wal-Mart to open the same day. The City required, however, that CSI put money into escrow to insure that defects in Action's work would be repaired. CSI ultimately paid an additional $417,172 "to complete and repair Action's Off-site work."⁶

Meanwhile, on September 9, 1998, CSI copied ICW on a letter stating that although Action would finish "by . . . September 18, 1998,"⁷ it would leave many defective and incomplete items. On September 18, 1998, CSI notified ICW that the City had rejected some of Action's work, that CSI was still supplementing Action's crews, and that CSI would "be looking to the ICW Group for compensation of costs which exceed Action Excavating's subcontract agreement and change orders."⁸ On October 9, 1998, CSI notified ICW that the cost of supplementing Action's performance would exceed the remaining balance on the offsite subcontract, and that CSI would be asking ICW to pay the difference. On November 25, 1998, CSI declared that Action was in default and demanded that ICW pay as provided in the performance bond. ICW refused to pay because CSI had not formally declared Action to be in default before Action had substantially completed the work.

CSI sued ICW, Action, and Action's owner. ICW answered and denied liability. Action and its owner defaulted.⁹ The trial court denied ICW's motion for summary judgment, and this court denied discretionary review.

A bench trial was held. ICW again took the position that it was not liable because CSI had not formally declared Action in default before Action had substantially completed the work on the offsite subcontract. ICW also contended that CSI had paid Action too much in progress payments, thereby impairing ICW's security and reducing ICW's liability. CSI claimed prejudgment interest. CSI also claimed reasonable attorney fees based on the offsite subcontract, which the performance bond incorporated, and on the Olympic Steamship¹⁰ case. The trial court ruled that "Action was in material breach" of the offsite subcontract; that CSI had not been required to formally declare a "default"; that CSI had given ICW "adequate notice" of Action's problems; that CSI had not "unreasonably impaired ICW's collateral"; that CSI had incurred damages of $417,172; and that CSI could not claim prejudgment interest because its damages had not been "liquidated" until trial.¹¹ The trial court granted reasonable attorney fees to CSI under the subcontract, which the bond incorporated, but ruled that the combination of damages and fees could not exceed the amount of the bond. The trial court denied CSI's claim for reasonable attorney fees under the Olympic Steamship¹² case. The trial court entered judgment for $417,172, plus reasonable attorney fees of $55,118, for a total of $472,290.

ICW appeals, and CSI cross-appeals. ICW claims (1) that it is not liable on its bond, and (2) that even if it is, it is not liable for as much as the trial court assessed. CSI claims that it is entitled (1) to prejudgment interest, and (2) to reasonable attorney fees under Olympic Steamship even if such fees exceed the amount of the bond.

I.

The first issue is whether ICW is liable on its bond. ICW claims it is not, "because CSI did not declare Action in default before substantial completion of the bonded offsite contract."¹³ According to ICW, its "liability on its bond was conditioned on a declaration of default from CSI," CSI did not make such a declaration, and thus ICW cannot now be liable.¹⁴ CSI responds in part that it declared Action to be in default. A bond is a contract that governs the surety's liability to the obligee.¹⁵ It is interpreted using general principles of contract construction and performance.¹⁶ Here then we (A) review relevant contract principles, (B) examine the bond's terms, and (C) apply the results to ICW's claim.

A.

We turn first to relevant contract principles. A contract, including a bond, should be construed as a whole¹⁷ and, if reasonably possible, in a way that effectuates all of its provisions.¹⁸ If unambiguous, it should be construed in accordance with the parties' plain intent.¹⁹ If...