PSE Consulting, Inc. v. Frank Mercede & Sons, Inc., (SC 16839).

• Court: Supreme Court of Connecticut
• Writing for the Court: KATZ, J.
• Citation: 838 A.2d 135,267 Conn. 279
• Docket Number: (SC 16839).
• Decision Date: 13 January 2004
• Parties: PSE CONSULTING, INC. v. FRANK MERCEDE AND SONS, INC., ET AL.

267 Conn. 279
838 A.2d 135

PSE CONSULTING, INC.
v.
FRANK MERCEDE AND SONS, INC., ET AL

(SC 16839).

Supreme Court of Connecticut.

Argued September 9, 2003.

Officially released January 13, 2004.

Borden, Norcott, Katz, Palmer and Vertefeuille, Js.

267 Conn. 282

R. Bradley Wolfe, with whom were Mary Anne A. Charron and, on the brief, Durwin P. Jones, for the appellant (defendant National Fire Insurance Company of Hartford)

Raymond A. Garcia, with whom were Frederick E. Hedberg and, on the brief, Jane I. Milas, for the appellee (named defendant).

Matthew M. Horowitz filed a brief for the Surety Association of America as amicus curiae.

Opinion

KATZ, J.

This appeal concerns the rights of a surety, pursuant to an indemnity agreement, to indemnification for payments made in settling a claim against a surety bond. The sole parties in this appeal are National Fire Insurance Company of Hartford (National) and Frank Mercede and Sons, Inc. (Mercede), the two defendants in the underlying action.¹ National, a commercial surety company, appeals² from the judgment of the trial court, rendered after a jury trial, in favor of Mercede on National's cross complaint seeking indemnification and on Mercede's counter cross complaint seeking damages arising from a breach of the implied covenant of good faith and fair dealing.

On appeal, National claims that the trial court improperly: (1) disregarded the terms of an indemnity agreement executed by National and Mercede by instructing the jury that National had the burden of proving, as an element of its claim for indemnification, that its payments to the plaintiff, PSE Consulting, Inc. (PSE); see footnote 1 of this opinion; pursuant to a

267 Conn. 283

payment bond were proper; (2) failed to direct a verdict for National when the jury improperly found that National's payments to PSE had not been made in satisfaction of PSE's claim under the payment bond; (3) instructed the jury concerning the implied covenant of good faith and fair dealing; (4) admitted into evidence an e-mail message protected by the attorney-client privilege, as well as testimony pertaining to a settlement agreement between National and a third party unrelated to this action; (5) submitted Mercede's special defenses of waiver and estoppel to the jury, and refused to direct a verdict for National as to those special defenses, when the jury reasonably could not have found for Mercede; and (6) refused to set aside the verdict when the jury inconsistently had found that National had breached the implied covenant of good faith and fair dealing but not the indemnity agreement. We affirm the judgment of the trial court

The jury reasonably could have found the following facts. In October, 1996, National and Mercede executed a general agreement of indemnity (indemnity agreement), whereby National agreed to issue surety bonds on Mercede's behalf, and Mercede agreed to indemnify National for any expenses that National might incur as a result of issuing those bonds. In May, 1997, Mercede was hired as a general contractor to construct an assisted living facility in Stamford (project). As security for the contract, Mercede furnished the owner of the project with a labor and materials payment bond (payment bond). The payment bond was issued by National, on behalf of Mercede as the principal and in favor of the owner as obligee, whereby National and Mercede agreed to be jointly and severally responsible for the payment of all labor, materials and equipment furnished for use in the construction of the project.

267 Conn. 284

Mercede executed a written subcontract with Dominion Bridge, Inc. (Dominion), for the manufacture and erection of structural steel. Dominion, in turn, entered into an oral sub-subcontract with PSE, whereby PSE agreed to erect steel structures for $1.5 million. This sub-subcontract between Dominion and PSE was never reduced to writing, however, and PSE never executed a formal subcontract with Mercede

PSE began work on the project in November, 1997. Soon thereafter, PSE became concerned about the volume of work that it was performing on the project, and sought further assurance that it would be paid for that work. Consequently, PSE, Dominion and Mercede executed a joint check agreement, whereby Mercede agreed to issue checks made payable jointly to Dominion and PSE in satisfaction of their sub-subcontract. The joint check agreement provided that Mercede would pay for amounts "up to the contract amount [of $1.5 million], plus any extra charges determined and agreed upon subsequent to the date hereof." This joint check agreement also provided for a retainage of 10 percent.³

Between January and August, 1998, PSE continued to work on the project and to submit invoices to Dominion. Dominion then forwarded the invoices to Mercede, and Mercede issued joint checks pursuant to the joint check agreement. A representative of PSE signed a release form upon receipt of each joint check, whereby PSE waived any potential claims it may have had against Mercede. At the time of Mercede's final payment under

267 Conn. 285

the joint check agreement on July 20, 1998, Mercede had made six joint payments totaling $1,323,000.

Dominion filed for bankruptcy in September, 1998. Shortly thereafter, PSE sent a letter to Mercede, stating that Dominion still owed PSE more than $600,000, and demanding that Mercede immediately pay this "undisputed" amount, "plus interest, and excluding other claims for delays, etc. that will be coming shortly." Mercede refused to make any further payments without confirmation from Dominion as to the validity of PSE's claim.

On October 13, 1998, PSE formally notified National of its claim for $1,123,551 against the payment bond. National thereafter assigned the claim to Laurence P. Jortner, surety claims analyst for National's parent corporation, CNA Surety. On November 2, 1998, Jortner sent a letter to PSE, in response to the claim, communicating National's position that "a number of bona fide or otherwise unresolved disputes exist between your company and either [Mercede] or Dominion," and that much of PSE's claim was "likely to be subject to reasonable defenses by [Mercede] or [National]." Jortner also requested that PSE submit further documentation in support of its claim. PSE complied with this request shortly thereafter.

National took no further action until February, 1999, when Jortner met with several representatives of Mercede to discuss defenses to the claim. At this meeting, Mercede's representatives told Jortner that they were disputing the claim in its entirety, including PSE's claims for payment for extra work and for the $150,000 retainage.

Additionally, in February, 1999, Jortner was contacted by Robert Dunn, counsel for PSE. On February 13, Dunn sent a letter to Jortner, and a copy of that letter to the insurance commissioner, claiming that

267 Conn. 286

National had breached its obligations under paragraph six of the payment bond to pay undisputed amounts and to explain the basis for any disputed amounts within forty-five days of the receipt of a claim.⁴ Jortner immediately responded that National was conducting a detailed investigation, and that, "[a]s of now, [PSE's] claim is fully disputed by [Mercede] and [National] believes that [Mercede] has provided it with, at [a] minimum, bona fide legal defenses regarding [PSE's] claim." PSE subsequently filed a formal complaint with the insurance commissioner.

Soon thereafter, National shifted its position on the PSE claim. In May, 1999, Jortner again met with representatives of Mercede. This time, Jortner suggested that either National or Mercede make a payment to PSE in the amount of $177,000 ÔÇö representing the $150,000 retainage plus a $27,000 balance remaining on the original contract. Mercede agreed to pay the $27,000 remaining balance, but maintained that it would not pay the $150,000 retainage because the project owner had not yet paid that amount to Mercede. Mercede continued to dispute PSE's claims for payment for extra work.

In August, 1999, PSE filed the original complaint in the underlying action against Mercede and National, seeking damages from Mercede for breach of contract, and claiming that National had acted in bad faith and had committed violations of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes ž 42-110a

267 Conn. 287

et seq. Unbeknownst to Mercede, National's counsel contacted PSE's counsel to discuss the possibility of a settlement of PSE's bad faith and CUTPA claims against National. National and PSE, however, did not reach an agreement at that time.

In September, 2000, almost two years after PSE initially had filed its formal notice of a claim against the payment bond, National conducted its independent investigation of the claim. At that time, Jortner enlisted Raymond Lemming, National's in-house chief engineer, to evaluate the fair market value of PSE's work on the project. Lemming concluded that PSE's work had a fair market value of approximately $927,913. That value was based, however, on PSE's work under the base contract and did not include PSE's claimed extra work.

Thereafter, National persistently attempted to settle PSE's claims. In April, 2001, Jortner attended a settlement meeting with counsel for National and counsel for PSE. No representatives of Mercede were present at this meeting. In October, 2001, National made a payment to PSE in the amount of $200,000. According to Jortner, this payment represented the $150,000 retainage plus an additional $50,000, constituting three years of interest at 10 percent. The payment was made at the time of Jortner's deposition, and Mercede, who had no prior knowledge of the settlement negotiations, objected to the payment.

On October 31, 2001, Jortner wrote a letter to Mercede, demanding that Mercede reimburse National for the $200,000 payment and either comply with the settlement of the remainder of PSE's claims, or deposit...