Pennsylvania Supreme Court Holds That, Absent Express Reservation Of Rights, Release Of Contractor Also Discharges Surety

Kiski Area Sch. Dist. v. Mid-State Surety Corp.
2008 Pa. LEXIS 2260 (Dec. 17, 1988)

Kiski Area School District (“the District”) entered into an agreement with contractor, Lanmark, for the construction and renovation of an elementary school. Mid-State Surety Corporation (“Midstate”) provided a performance bond for the project naming Lanmark as principal and the District as obligee.

The District became dissatisfied with the quality and timeliness of Lanmark’s work, declared it in default, withheld final payment and demanded that Mid-State assume responsibility for the remaining work. The District did not remit the remaining contract balance to Mid-State. Lanmark filed suit against the District seeking payment of the contract balance (the “Lanmark Matter”). The District counterclaimed and joined Mid-State. The District also filed a separate action against Lanmark and Mid-State (“the District Matter”), which was stayed pending resolution of the Lanmark Matter.

At a hearing on the Lanmark Matter, the District and Lanmark reached a settlement, which they placed on the record. The terms of the settlement required the District to pay Lanmark $430,000 and released all claims that Lanmark and/or the District had against each other arising out of the project. Following the hearing, counsel for the parties attempted to negotiate the release language. Lanmark and Mid-State requested that the release contain a provision that the District had released its claims against Mid-State. The District refused, claiming that it had reserved its rights against Mid-State. Because the parties could not agree on the language, the District and Lanmark executed a release limited to the verbatim terms of the release placed on the record at the hearing. The release was silent as to the District’s reservation of rights against Mid-State.

Thereafter, Mid-State moved for summary judgment in the District Matter, arguing that the release discharged Mid-State. The trial court granted the motion, reasoning that the broad, open-ended release of Lanmark discharged Mid-State. The District appealed and the Superior Court reversed, holding that there was a genuine issue of material fact as to whether the District reserved its rights against Mid-State because, although the release contained no express reservation, a reservation might be inferred from extrinsic circumstances, including the District’s declaration that it would not release Mid-State. Mid-State appealed.

On appeal, the Mid-State argued that it was discharged from all obligations once the District and Lanmark reached the settlement of all claims relating to Lanmark’s work, and that the District’s failure to expressly reserve its rights in the release was fatal to the District’s claim. In contrast, the District argued that, under the Restatement (Third) of Suretyship & Guaranty, §39(b)(ii), the language of the release must be evaluated in light of extrinsic evidence, including its refusals to release its claims against Mid-State. The Pennsylvania Supreme Court agreed with Mid-State and endorsed the bright-line rule that any reservation of rights against a surety on a performance bond must be expressly stated in the language of the release of the contractor. Because the release contained no mention of a reservation of rights against Mid-State, the Court held that the District did not effectively reserve its right to seek damages from Mid-State.

Click here for full text opinion provided courtesy of LexisNEXIS.

This entry was posted in Payment bond, Payment dispute and tagged , , . Bookmark the permalink.