Great American Ins. Co. v. General Builders, Inc.

• Decision Date: 06 March 1997
• Docket Number: Nos. 27352,27578,s. 27352
• Citation: 113 Nev. 346,934 P.2d 257
• Parties: GREAT AMERICAN INSURANCE COMPANY, An Ohio Corporation, Appellant, v. GENERAL BUILDERS, INC., A Nevada Corporation d/b/a American General Development, Respondent. GREAT AMERICAN INSURANCE COMPANY, An Ohio Corporation, Appellant/Cross-Respondent, v. GENERAL BUILDERS, INC., A Nevada Corporation d/b/a American General Development, Respondent/Cross-Appellant.
• Court: Nevada Supreme Court

Page 257

934 P.2d 257

113 Nev. 346

GREAT AMERICAN INSURANCE COMPANY, An Ohio Corporation, Appellant, v. GENERAL BUILDERS, INC., A Nevada Corporation d/b/a American

General Development, Respondent.

GREAT AMERICAN INSURANCE COMPANY, An Ohio Corporation, Appellant/Cross-Respondent, v. GENERAL BUILDERS, INC., A Nevada Corporation d/b/a American

General Development, Respondent/Cross-Appellant.

Nos. 27352, 27578.

Supreme Court of Nevada.

March 6, 1997.

Lionel, Sawyer & Collins and Richard W. Horton and Madelene C. Amendola, Reno, for Great American Insurance Company.

Bible, Hoy, Trachok & Wadhams and Michael Hoy, Reno, for General Builders Inc.

OPINION

PER CURIAM:

General Builders, Inc. is a Nevada building contractor specializing in the construction of commercial and public works projects. John Sieben is the president and a principal shareholder of General Builders. On May 10, 1994, General Builders was awarded a public works contract to enlarge and remodel the Humboldt General Hospital ("the Hospital") in Winnemucca, Nevada. However, after the Hospital determined that the payment and performance bonds submitted by General Builders as a part of its bid were inadequate, the Hospital gave General Builders ten days from the date of the "Notice of Award" to furnish acceptable payment and performance bonds for the project, or forfeit the contract.

Sieben, knowing that he had to obtain the required surety bonds by May 20, 1994, contacted a number of surety bond brokers including Surety Underwriters, Ltd. Surety Underwriters in turn contacted Pac Coast Bond and Insurance Services ("Pac Coast"), a California agent of Great American Insurance Company ("Great American") authorized to sell Great American bonds. Pac Coast issued the requested bonds as attorney-in-fact for Great American and delivered them to Surety Underwriters who, in turn, notified Sieben that the bonds were ready. Sieben then flew to the southern California office of Surety Underwriters, inspected the bonds, the power of attorney form attached to the bonds, and the Great American corporate seal, paid the $125,000.00 premium, and returned to Nevada with the bonds.

At trial, Great American offered evidence that, under the agency agreement between Pac Coast and Great American, Pac Coast was only authorized to issue bonds with the express prior approval of Great American. In this instance, however, due to confusion at Pac Coast, Pac Coast issued the bonds without seeking approval from Great American. Nevertheless, it is undisputed that Pac Coast's agent, Kim Smith, executed the bonds as attorney-in-fact for Great American, embossed the bonds with Great American's corporate seal, and attached a power of attorney to the bonds executed by Great American which purported to confer on Smith the authority to "execute in behalf of [Great American], as surety, any and all bonds, undertakings and contracts of suretyship, or other written obligations in the nature thereof." ¹

The fact that the bonds were issued without actual authority came to the attention of Bill Jarvis, a "senior bond claim lawyer" in Great American's Seattle, Washington office. On May 19, 1994, Jarvis informed Sieben and the Hospital that the unauthorized bonds would be revoked by Great American. By telephone and in a confirming letter to Sieben, Jarvis emphasized that the bonds were being revoked because the issuing agent lacked authority to issue the bonds and not due to any fault or misconduct of General Builders.

On the same day, May 19, 1994, Jarvis received an internal memorandum from one of the lawyers under his supervision. The letter advised Jarvis that the surety contract between Great American and General Builders was binding because of the apparent authority of Kim Smith. The letter also advised Jarvis that Great American would be liable under the contract unless the contract could be rescinded or unless some other legal basis for avoiding enforcement of the contract could be found.

Great American's revocation of the payment and performance bonds resulted in the Hospital declining to award the construction contract to General Builders. This litigation followed.

General Builders asserted claims for, inter alia, breach of contract and tortious breach of the covenant of good faith and fair dealing. General Builders sought compensatory and punitive damages, as well as attorney's fees and costs. In response to cross-motions for summary judgment, the district court ruled: (1) that a valid contract of surety was formed between Great American and General Builders based on the apparent authority of Great American's agent, Pac Coast; and (2) that a material issue of fact remained as to whether Great American breached the contract of surety when it revoked the bonds.

The district court rejected Great American's pre-trial motion to preclude jury instructions on punitive damages. Great American brought the motion on the premise that, as a matter of law, General Builders was not entitled to punitive damages for tortious breach of the covenant of good faith and fair dealing as no special relationship existed between General Builders and Great American. The district court also ruled that Great American was not entitled to argue rescission of the contract of surety because Great American had not pleaded rescission as an affirmative defense to breach of contract.

At the close of the evidence at trial, the district court granted General Builders' motion for a directed verdict on its breach of contract claim, and sua sponte, directed a verdict in favor of General Builders' claim of tortious breach of the covenant of good faith and fair dealing. The case was submitted to the jury for a determination of damages. The jury returned a verdict awarding General Builders $947,566.00 in compensatory damages and $2.5 million in punitive damages. Following entry of the judgment, Great American timely appealed to this court. ²

General Builder's motion for partial summary judgment on the issue of contract formation

Summary judgment is only appropriate when, after a review of the record viewed in a light most favorable to the non-moving party, there remain no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Butler v. Bogdanovich, 101 Nev. 449, 451, 705 P.2d 662, 663 (1985). All of the nonmovant's statements must be accepted as true, and a district court may not pass on the credibility of affidavits. Sawyer v. Sugarless Shops, 106 Nev. 265, 267, 792 P.2d 14, 15 (1990). This court's review of an order granting summary judgment is de novo. Tore, Ltd. v. Church, 105 Nev. 183, 185, 772 P.2d 1281, 1282 (1989).

In a contract of surety, one party, the surety, binds itself to answer for the debt, default or miscarriage of another, the principal obligor. First Virginia Bank--Colonial v. Baker, 225 Va. 72, 301 S.E.2d 8, 10 (1983). "The surety contract is formed at the time the surety's offer is accepted by the principal." Trident Corp. v. Reliance Ins. Co., 350 Pa.Super. 142, 504 A.2d 285, 290 (1986). In Nevada, the surety's obligation to the obligee may take the form of a surety bond. See NRS 691B.020 (authorizing issuance of corporate bonds). ³

In the present case, it is undisputed that Kim Smith of Pac Coast did not have actual authority to enter into the surety contract with General Builders on behalf of Great American. It is also undisputed that Great American had provided Smith and Pac Coast with Great American's corporate seal and unconditional Power of Attorney representing their authority to enter into surety contracts on behalf of Great American and to issue Great American bonds. The district court, therefore, granted General Builders' motion for partial summary judgment on the issue of contract formation on the ground that Great American had clothed Smith and Pac Coast with apparent authority to execute the surety contract as Great American's agent-in-fact. ⁴ Great American contends that the district court erred in concluding that the parties had formed a contract of surety as a matter of law because a question of fact exists as to whether General Builders' reliance on Pac Coast's apparent authority was reasonable.

A party claiming apparent authority of an agent as a basis for contract formation must prove (1) that he subjectively believed that the agent had authority to act for the principal and (2) that his subjective belief in the agent's authority was objectively reasonable. Smith v. Hansen, Hansen & Johnson, 63 Wash.App. 355, 818 P.2d 1127, 1135 (1991). Apparent authority is, in essence, an application of equitable estoppel, of which reasonable reliance is a necessary element. Ellis v. Nelson, 68 Nev. 410, 418, 233 P.2d 1072, 1076 (1951); see also Cheqer, Inc. v. Painters & Decorators Joint Committee, 98 Nev. 609, 614, 655 P.2d 996, 998-99 (1982) (elements of estoppel). As previously noted by this court, "the party who claims reliance must not have closed his eyes to warnings or inconsistent circumstances." Tsouras v. Southwest Plumbing and Heating, 94 Nev. 748, 751, 587 P.2d 1321, 1322 (1978). Apparent authority, including a third party's reasonable reliance on such authority, is a question of fact. Smith, 818 P.2d at 1133.

Great American enumerates a number of facts that it contends makes General Builders' reliance on Pac Coast's apparent authority unreasonable. ⁵ According to Great American, these facts were sufficient to put General Builders on inquiry notice, requiring General Builders to contact Great American directly to verify the validity of the surety contract rather than relying on Pac Coast's power of attorney and other indicia of authority. We conclude that in light of Pac Coast's power of attorney, provided by Great American, which represented Smith and Pac Coast as agents-in-fact with authority to enter into precisely the type of surety contract at issue in this case, the facts cited by Great American are not sufficient to raise a...