Case Law Summaries

Global Environmental Technologies, Inc. v. F&E Mechanical, Inc.

• Opinion Date: July 20, 2000
• Real Property Law
• E-Mail

CONSTRUCTION; PERFORMANCE BONDS—A contractor is entitled to recover from its subcontractor’s bonding company the interest it incurs when borrowing money to fund take-over construction costs.

A construction contractor engaged a subcontractor to do excavation and site preparation. As part of the subcontract, the excavator was obligated to supply payment and performance bonds. The excavator had problems meeting the terms of the subcontract and those problems increased over time. “It fell increasingly behind schedule, was late in paying its own subcontractors and suppliers and requested additional advances… .” The contractor periodically notified the bonding company of the problems and of the advances, but the bonding company made no response to those notifications. Eventually, the contractor terminated its subcontractor and notified the bonding company of that termination. In doing so, it told the bonding company that if it wished to arrange to have another contractor complete the job, it needed to move promptly. Even though representatives of the bonding company visited the site to document the conditions, the bonding company made no direct response to the various communications from the contractor. The contractor then proceeded to complete the subcontract on a time and material basis. In the suit that followed, the bonding company argued, among other things, that it did not have to honor the bond because of the contractor’s failure to disclose certain information, more particularly that the failure was a breach of the covenant of good faith and fair dealing that is implied in every contract. The Court found that argument to be misplaced. The covenant is applicable to the performance and enforcement of the contract that parties have already entered into, not to the formation of that contract. “There cannot be an implied covenant to a contract not yet in existence.” The bonding company also objected to a post-verdict decision to award the contractor prejudgment interest. The Court, however, characterized the award as one that “was premised on evidence that [the contractor] had to borrow funds to finance its take-over of [the subcontractor’s] contract responsibilities and within its motion it sought to be compensated for the additional cost of that borrowing.” The contractor demonstrated that it had paid interest on a line of credit that it maintained and included a calculation of the interest charges it had incurred. Consequently, the award was affirmed.

Copyright ©2003. Meislik & Meislik. All rights reserved.