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Frontier Insurance Company v. Kontos Design & Builders, Inc.

A-2189-03T2 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTORS; BONDS; INDEMNITY—The fact that, under a payment and performance bond, vouchers or evidence of payment are prima facie evidence of both a contractor’s liability and the propriety of payments made by the bonding company does not eliminate the need for the bonding company to act reasonably and in good faith.

In connection with a construction contract to build a church, the contractor obtained construction performance and payment bonds. The bonding company required an indemnification agreement. Under the agreement, the indemnitors agreed “to accept the voucher or other evidence” of payment by the bonding company as prima facie evidence of the propriety thereof. Further, the bonding company had the “exclusive right to determine for itself and the Indemnitors whether any claim or suit brought against the [bonding] Company or the Principal upon any such bond shall be settled or defended and its decision shall be binding and conclusive upon the Indemnitors.” The project was plagued with numerous delays and quality questions. Eventually, the church terminated the construction contract. The church then demanded that the bonding company “either settle or complete the contract pursuant to the performance bond.” The bonding company hired a consultant to investigate the site. A deficiency report resulted and the church’s claim was settled. In addition, the bonding company paid the balance due to various subcontractors and suppliers. The indemnitors (i.e., the contractor and its owner) refused to honor the indemnity agreement and, in the suit that followed, failed to convince the lower court of the validity of its argument. On appeal, the indemnitors argued that the lower court “misconstrued the applicable law, in particular the meaning and significance of ‘prima facie.’” It contended that the lower court had mistakenly concluded that this term meant that the indemnitors “had no right to dispute the payments, regardless of whether or not the payments were made in good faith or were reasonable.” According to Black’s Law Dictionary, “prima facie” means: “At first sight; on the first appearance; on the face of it; so far as can be judged from the first disclosure; presumably; a fact presumed to be true unless disproved by some evidence to the contrary.” Further, under existing law, when a party is “vested with the exercise of discretion under a contract,” it must do so reasonably and with proper motive. Here, the bonding company had the sole discretion to make payments in the event that the contractor failed to fulfill its obligations. The fact that “under the indemnity agreement, vouchers or other evidence of payments constitute[d] prima facie evidence of both [the contractor’s] liability to [the bonding company] and the propriety of payments made, [did] not eliminate the need for [the bonding company] to act reasonably and in good faith.” On the facts, however, the indemnitors lost. The Appellate Division pointed out that the lower court had not, in fact, disregarded the need for the bonding company’s payments to be made in good faith. Instead, according to the Court, the lower court “found no violation of the implied covenant of good faith.” The lower court specifically mentioned the reasonableness of the payment. The Court also rejected the indemnitors’ claim that the bonding company “did not act in good faith when it settled the claims without notifying [them], as it had voluntarily on other occasions, giving [the indemnitors] the opportunity to defend.” Unfortunately, for the indemnitors, such a procedure was not required by the indemnity agreement.

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