Massachusetts Court Holds Surety Not Responsible For Punitive Damages Assessed Against Its Principal

C&I Steel, LLC v. Travelers Casualty & Surety Co.
70 Mass. App. Ct. 653, 2007 Mass. App. LEXIS (App. Ct. Nov. 6, 2007)

The town of Westford awarded Peabody Construction Company, Inc. (“Peabody”) a contract for construction of a middle school. The project required a payment bond which Peabody obtained from Travelers Casualty and Surety Company (“Travelers”) for the full value of the contract. Peabody, as principal, and Travelers, as surety, jointly and severally bound themselves “to [Westford] to pay for labor, materials and equipment furnished for use in the performance of the [c]onstruction [c]ontract.” The bond set forth that the construction contract incorporated the agreement between Westford and Peabody, including all the contract documents and changes thereto.

Peabody entered into a subcontract with C&I Steel, Inc. (“C&I”) for the structural steel work. The subcontract contained an arbitration provision pursuant to which Peabody and C&I agreed that, at Peabody’s election, all claims, disputes and other matters in question shall be decided in arbitration. Disputes between Peabody and C&I ensued and C&I commenced an action against Peabody, Travelers and the architect (the architect was later dismissed from the action).

Peabody moved to compel arbitration, the court action was stayed and C&I filed a demand for arbitration with the AAA naming Peabody alone as the respondent and asserting only those claims it had against Peabody. C&I’s demand did not name Travelers and Travelers did not seek to participate. The arbitrator issued an award in favor of C&I and against Peabody for compensatory contract damages and punitive damages. C&I moved to confirm the award in the Superior Court, seeking confirmation against Peabody and Travelers. Travelers opposed the motion with respect to the award of punitive damages arguing that a surety is not liable for punitive damages assessed against its principal and that payment for punitive damages is not an obligation it had undertaken in the bond. Travelers also argued that it was not bound by the subcontract’s arbitration provision nor a party to the arbitration proceeding so that the award could not be confirmed as to it. The Superior Court confirmed the award, rejecting Travelers arguments.

Travelers appealed the Superior Court’s decision with respect to punitive damages. (Travelers paid the award’s contract damages during the pendency of the appeal and limited its appeal to the punitive damage issue.) The appellate court held that Travelers was not liable for punitive damages because the terms of the bond did not cover punitive damages, finding that “to conclude that the bond encompassed punitive damages would be to rewrite the agreement Travelers made with Peabody.” The court was clear to note that its finding does not mean that Travelers would be immune from punitive damages for any of its own misdeeds. The court noted that its conclusion was consistent with the Restatement of Suretyship and the holdings of the majority of courts which had considered the issue.

The appellate court also agreed with Travelers position that there was no award against Travelers for the Superior Court to affirm. Travelers was not bound by the subcontract provision providing for arbitration, C&I did not demand arbitration against Travelers nor made claims against Travelers in the arbitration proceedings, and the award said nothing about Travelers. The Court noted that while it had held that in certain circumstances a party may be bound by an award in an arbitration in which it did not participate, that means it is constrained from contesting any issue actually decided in the arbitration, not that an award runs against the nonparticipating party. The appellate court vacated the judgment, remanded to the lower court for modification of the judgment.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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