Construction Manager Sued For Failure To Ensure Quality Of Contractor’s Work Could Not Sue Contractor’s Surety For Indemnity Or Contribution

Carolina Casualty Insurance Company, et al. v. R.L. Brown & Associates, Inc., et al.
No. 1:04-CV-3537-GET, 2006 U.S. Dist. LEXIS 5261 (N.D. Ga. January 25, 2006)

In Carolina Casualty Insurance Company, et al. v. R.L. Brown & Associates, Inc., et al., No. 1:04-CV-3537-GET, 2006 U.S. Dist. LEXIS 5261 (N.D. Ga. January 25, 2006), a dispute arose between a surety that had provided a performance bond on a public works project and the project’s program manager. After the owner declared the general contractor in default for defective work, the surety finished the underlying contract under the terms of the performance bond. The owner sought additional damages from the surety. In an agreement settling those claims for additional damages, the owner assigned to the surety all of its own claims against third parties arising out of the defective construction and supervision of the project.

The surety thereafter commenced an action against, among other parties, the program manager, asserting breach of contract and tort claims. The surety sought damages arising from the program manager’s alleged breach of its purported duty to ensure the quality of the general contractor’s work before paying the general contractor. The program manager, in turn, asserted a counterclaim against the surety for contribution and indemnity, contending that the surety was, as the guarantor of the general contractor, liable for any damages arising out of the general contractor’s defective work.

The surety moved for dismissal of the counterclaim for failure to state a cognizable theory of liability. It argued that the scope of its obligations was strictly defined by the language of the performance bond and that it could not be held liable to the program manager as a matter of law under contract or tort theory. The United States District Court for the Northern District of Georgia agreed.

Applying Georgia law, the court first concluded that that the program manager had no legal basis to assert contractual indemnity. There was no contract between the surety and the program manager, and there was no intent expressed in the performance bond to benefit the program manager. Although the underlying contract was incorporated by reference into the performance bond, since surety contracts are interpreted strictly and in favor of the surety under Georgia law, the court found that the scope of the surety’s obligations could not be extended by implication beyond those expressly set forth in the performance bond, which benefited the owner only.

The court also found no basis in tort to permit a contribution or indemnity claim to go forward. Under Georgia law, unless the performance bond explicitly provides for third party liability coverage, third parties seeking to assert vicarious liability claims against the agent of a general contractor for wrongdoing can look only to third party insurance coverage, if any.