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Whiting-Turner Contracting Co. v. Guarantee Co. of North America USA

Court of Appeals of Colorado, Second Division

March 21, 2019

Whiting-Turner Contracting Company, Third-Party Plaintiff-Appellee,
v.
Guarantee Company of North America USA, Third-Party Defendant-Appellant.

          City and County of Denver District Court No. 14CV34166 Honorable Andrew P. McCallin, Judge

          Husch Blackwell LLP, Jeffrey D. Whitney, Jeffrey M. Van der Veer, Denver, Colorado, for Third-Party Plaintiff-Appellee

          Woods & Aitken LLP, Kory D. George, Colin P. Baumchen, Denver, Colorado, for Third-Party Defendant-Appellant

          OPINION

          LIPINSKY, JUDGE

         ¶ 1 Performance bonds, like other forms of surety bonds, are critical to managing the risk inherent in construction projects. If a subcontractor fails to complete its work at a construction site, the surety that underwrote the performance bond assumes responsibility for the subcontractor's obligations. Without performance bonds, a construction project could come to a halt if a single subcontractor walked off the job.

         ¶ 2 Performance bonds specify the actions that will trigger the surety's obligations. In this appeal, a surety, Guarantee Company of North America USA (GCNA), and a general contractor, Whiting-Turner Contracting Company, dispute whether Whiting-Turner triggered GCNA's obligations under a performance bond after a subcontractor, Klempco Construction (2013) Inc., stopped work at Whiting-Turner's construction project. The parties' disagreement centers on whether Whiting-Turner paid GCNA the "Balance of the Contract Price," a key term in the performance bond, thereby satisfying one of the bond's conditions precedent.

         ¶ 3 Following a bench trial, the trial court entered judgment in favor of Whiting-Turner and against GCNA. The trial court found that Whiting-Turner had complied with the condition precedent set forth in section 3.3 of the performance bond and that GCNA had failed to perform its obligations under the bond.

         ¶ 4 On appeal, GCNA contends that the trial court applied the wrong legal standard in determining whether Whiting-Turner complied with section 3.3 of the performance bond, erred in finding that GCNA had waived its argument regarding Whiting-Turner's compliance with section 3.3, erroneously found that Whiting-Turner satisfied the condition precedent in section 3.3, awarded duplicative damages to Whiting-Turner, and improperly awarded attorney fees to Whiting-Turner.

         ¶ 5 We affirm.

         I. Whiting-Turner's Disputes with Klempco and GCNA

         A. Klempco Signs a Subcontract for Work at Whiting-Turner's Project

         ¶ 6 Whiting-Turner served as the general contractor for an office building construction project in Denver (the Project). Whiting-Turner and Klempco entered into an agreement (the Subcontract) for Klempco's construction of an anchor system at the Project's underground parking garage. The anchor system was necessary to keep the sides of the excavated site from collapsing during the initial phases of construction. Klempco's work included the installation of sprayed concrete, known as shotcrete, to support the anchoring system. Whiting-Turner and Klempco agreed to a Subcontract price of $1, 785, 783.00.

         B. GCNA Provides a Performance Bond and a Payment Bond

         ¶ 7 Whiting-Turner required Klempco to furnish a performance bond and a payment bond. (A surety that underwrites a payment bond is obligated to pay the sub-subcontractors if the subcontractor fails to do so.) Klempco obtained the bonds from GCNA. The bonds, which followed American Institute of Architects form A312, incorporated the Subcontract by reference. See 4A Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner & O'Connor on Construction Law § 12:16, Westlaw (database updated June 2018) (explaining that the A312 surety bond is a standard form in the construction industry).

         ¶ 8 Section 3 of the performance bond specified the three conditions precedent that Whiting-Turner would need to satisfy to trigger GCNA's obligations as surety:

• provide notice to Klempco and GCNA that Whiting-Turner was considering declaring Klempco in default (section 3.1);
• declare Klempco in default, terminate the Subcontract, and notify GCNA of these actions (section 3.2); and
• "pay the Balance of the Contract Price in accordance with the terms of the [Subcontract] to [GCNA] or to a contractor selected to perform the [Subcontract]" (section 3.3).

         ¶ 9 The performance bond defined "Balance of the Contract Price" as "[t]he total amount payable by [Whiting-Turner] to [Klempco] under the [Subcontract] after all proper adjustments have been made, . . . reduced by all valid and proper payments made to or on behalf of [Klempco] under the [Subcontract]." (Emphases added.)

         C. Klempco Stops Work at the Project

         ¶ 10 Klempco fell behind schedule almost immediately and stopped paying its sub-subcontractors. Klempco subsequently directed Whiting-Turner to assume responsibility for the shotcrete installation and to work directly with two of Klempco's sub-subcontractors.

         ¶ 11 Whiting-Turner sent Klempco and GCNA a letter declaring Klempco in default under the Subcontract. In the letter, Whiting-Turner stated that Klempco was incapable of completing its work at the Project and "is apparently unable to complete payments to its sub-subcontractors for previously completed work, and by its own admissions is unable to cure such default." Whiting-Turner requested a meeting with Klempco representatives "to discuss the details of Klempco's request that Whiting-Turner take over its work." Whiting-Turner asked GCNA to attend the meeting "to advise Whiting-Turner on how [GCNA] wishes for Whiting-Turner to proceed in connection with the completion of Klempco's work and payment of its vendors."

         ¶ 12 Representatives of Whiting-Turner, Klempco, and GCNA met on April 30, 2014, to discuss, among other issues, Klempco's request that Whiting-Turner take over the shotcrete work and pay Klempco's sub-subcontractors directly. At the meeting, Whiting-Turner and Klempco amended the Subcontract to reduce Klempco's payment by $553, 707.00 - the price of the shotcrete work. Whiting-Turner, Klempco, and GCNA agreed that the shotcrete sub-subcontractor would invoice Whiting-Turner directly.

         ¶ 13 Two days later, Klempco notified Whiting-Turner that, because Whiting-Turner had declared Klempco in default and was refusing to pay Klempco, Klempco would demobilize from the Project. Whiting-Turner asked GCNA how Whiting-Turner should proceed in light of Klempco's decision to leave the Project. GCNA did not respond.

         D. Whiting-Turner Terminates Klempco's Subcontract

         ¶ 14 Whiting-Turner terminated the Subcontract after Klempco failed to cure its default. GCNA did not respond to Whiting-Turner's repeated demands that, in light of the termination of the Subcontract, GCNA honor its obligations under the performance bond and advise Whiting-Turner how GCNA intended to proceed.

         ¶ 15 On June 24, 2014, Whiting-Turner provided GCNA with its calculation of the "Balance of the Contract Price." Whiting-Turner said that it had paid $1, 064, 919.00 of the "Balance of the Contract Price" to Klempco and its sub-subcontractors, leaving a balance of $720, 819.00. Whiting-Turner deducted certain expenses from this balance:

• $256, 897.90 for Whiting-Turner's payments to five unpaid sub-subcontractors who had recorded, or were threatening to record, mechanic's liens against the Project; and
• $553, 707.00 for the shotcrete work for which Whiting-Turner had assumed responsibility.

         These adjustments resulted in a negative "Balance of the ...


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