Claims Against A Contractor’s License Bond,
Where The Construction Project At Issue Is Out-Of-State,
With Specific References To Nevada And Utah Law.
Among the more unusual license bond claims are the ones where the contractor has a license bond in one state, and where the construction project at issue is in another state. For example, contractor A has a contractor’s license in Nevada, has a bond covering that license, which was issued in compliance with Nevada Revised Statute 624.270, and then works on a construction project in Wyoming, which does not require state-wide licenses and bonds. Something goes wrong on the project, and the general contractor, or a subcontractor or supplier of A asserts a claim against the Nevada bond. How should the surety respond to that claim?
The rather obvious and patently reasonable response would and should be to deny the claim, based on the basic principle that one state’s contractor’s license has no effect in another state and that therefore the bond covering that license also does not cover the out-of-state construction project. However, the denial may well be challenged, and in fact our office has defended three lawsuits dealing with this issue in recent years, with different results. The defense of such a claim is made difficult by the fact that there is no case law dealing with this specific issue – claims against a contractor’s license bond, where the construction bond at issue is out-of-state – and that there is a split of opinions where similar claims are made against DMV auto dealer license bonds. In the following sections, we will address how such a claim should be dealt with in Nevada and in Utah, and how the DMV bond rulings may complicate the issue.
THE NEVADA APPROACH
NRS 624.273 establishes a scheme whereby four categories of claimants can assert claims against a license bond posted with the Nevada State Contractors Board on behalf of contractors licensed by the State of Nevada. By its very opening language, this statute contemplates that only projects in the State of Nevada are covered: “Each bond or deposit required by NRS 624.270 must be in favor of the State of Nevada for the benefit of. . . .” (Emphasis added) The statute then list four categories of potential claimants, and three of those categories refer to a construction contract between the owner of property and the contractor, while the fourth category dealing with unlawful acts of the contractor references “a contract”. They all assume that the project covered by the construction contract will be in Nevada.
The previous section, NRS 624.270 requires such bonds before “issuing a contractor’s license for any applicant,” thereby linking the bond directly to the contractor’s license issued by the State. These contractor’s licenses, however, are valid only in Nevada. Nevada, in turn, has no jurisdiction at all over construction projects in Wyoming or California, and could not enforce its statutes in those states. If the bond principal indeed worked in Wyoming or California, it could not have used its Nevada license there. (1)(footnote)
The purpose of licenses and of license bonds is to protect certain categories of claimants (property owners, laborers, materialmen) who deal with contractors, which use Nevada licenses on Nevada construction projects.
In Day & Night Mfg., Co. v. Fidelity & Cas. Co. of New York, 85 Nev. 227, 228, 452 P.2d 906, 907 (1969), the Court wrote: “Chapter 624 is a contractors’ licensing statute enacted in the public interest to control and supervise the contracting business in this state.” (Emphasis added).
(1)Where a contractor works on a California project, has both a California and a Nevada license and has bonds for both licenses, a claimant may be tempted to assert a claim against both license bonds because the Nevada bond is typically much larger than the California one.
There are two caveats to this general proposition. Where a supplier delivers goods directly to the contractor at his Nevada address, and the contractor then ships those goods to the out-of-state project, the claimant may well have a good claim pursuant to the case of Balboa Ins. Co. v. Southern Distribs. Corp., 101 Nev. 774, 710 P.2d 725, 1985 Nev. LEXIS 504, where the Nevada Supreme Court held that a supplier need not be aware of the specific contract or project for which the material was supplied. Also, Nevada district court judges may not follow the general proposition that Nevada license bonds do not cover out of state project, where the claimant is a Nevada company. In one of our cases, a Nevada supplier of windows sued on the Nevada license bond of a Texas general contractor, where those windows were shipped to New York state and used on a construction project there, where the bond principal was the general contractor. We moved to dismiss that complaint base on two grounds – that the bond claim was improper because the construction project was not in Nevada, and that there was no privity of contract between the supplier and the bond principal. The court granted the dismissal on the privity issue, but rejected the extraterritoriality claim, stating that NRS 624.273.1 (c) protects a suppliers’ right to compensation when they ship material to Nevada contractors, no matter what the ultimate destination of the material is. The court used the Balboa Ins. Co. case to support its decision.
THE UTAH APPROACH
While there is no Utah case, or case from any other jurisdiction dealing with the particular issue here, the Utah statutes requiring the bond and governing bond payouts certainly support the only reasonable position on this issue, namely that claims against Utah contractor’s license bonds must arise from the bond principal’s acts or omissions on Utah construction projects.
The provisions governing this type of bond are part of Chapter 55 of Title 58 of the Utah Code Annotated, named the Utah Construction Trades Licensing Act. All of the sections of that chapter pertain to the licensing of Utah construction companies, and by their very nature, the statutes governing the licensure and the licenses themselves are effective only in the State of Utah. For example, Utah Code Ann. 58-55-301(1)(a) reads: “A person engaged in the construction trades licensed under this chapter, as a contractor regulated under this chapter, as an alarm business or company, or as an alarm company agent, shall become licensed under this chapter before engaging in that trade or contracting activity in this state unless specifically exempted from licensure under Section 58-1-37 or 58-55-305.” (Emphasis added)
The Bond is intimately linked to that license. It is required by statute in order for a contractor to be licensed. (Utah Code Ann. 58-55-306(1)(b)). Thus any claim against the Bond must arise out of the conduct of the bond principal on a construction project where the contractor used its license, and because the license is a Utah license, the bond principal could not have used that license on an out-of-state project.
The license bond itself contains this most significant language: “NOW THERFORE, if the above bonded Principal shall obtain said licensure to do business as a contractor under the provisions of THE UTAH CONSTRUCTION TRADES LICENSING ACT providing for the regulation and control of the business of contracting, as provided by Utah Code Ann Title 58, Chapter 55…”. We see here once more that license and bond are linked and inseparable. More significantly, the contractor must have done business as a contractor “under the provisions of THE UTAH CONSTRUCTION TRADES LICENSING ACT” for a potential bond claim to arise, and he can only do that business in Utah, because The Utah Construction Trades Licensing Act is only in effect in Utah.
Claims against the bond are evaluated based on interpretations of certain provisions of the Utah Construction Trades Licensing Act. They require a showing of “unlawful or unprofessional conduct” in violation of Utah statutes. However, those Utah statutes have no effect outside of Utah and certainly do not govern a construction project out-of-state.
THE ORE-IDA CASE
A case often cited in the context of extraterritorial claims against license bonds is Ore-Ida Potato Products, Inc. v. United Pacific Ins. Co., 87 Idaho 185, 392 P.2d 191. In that case, a produce dealer licensed and bonded in the State of Idaho made two purchases of potatoes in Oregon for which he failed to pay. It was undisputed that both transactions took place entirely within the State of Oregon, and that if the transactions had occurred in Idaho, the surety on the dealer’s bond would have been liable. The claimant argued that words in the Idaho statute requiring the bonds, such as any person, any dealer or broker, every dealer, etc. gave the bond extraterritorial effect. The Idaho court held the surety not liable because the alleged fraud occurred in Oregon, and the Idaho statute requiring the bond had no extraterritorial effect.
THE DMV BOND DISPUTE
There is a significant dispute among state courts over the extraterritorial liability of DMV bonds. The courts denying such coverage general refer to the fact that the state statutes requiring the auto dealer bonds have no effect outside the state, unless the statute specifically incorporates such an effect. The principle was stated by the United States Supreme Court as follows in Sandberg v. McDonald, 248 U.S. 185 (1918): “Legislation is presumptively territorial and confined to limits over which the law-making power has jurisdiction.” The following cases have adopted that position: Peerless Ins. Co. v. Clark, 487 P.2d 574 (Colo. App. 1971; State Surety Co. v. Lensing, 249 N.W.2d 608 (Iowa 1977)
Other cases take the opposite position – that unless the statute specifically states that the bond is confined to transactions within the state, it may also be used to compensate claimants for out-of-state transactions. Among these cases are: Metro Milwaukee Auto Auction v. Coulson, 604 N.W.2d 111, (Minn. App. 2000); Maryland Cas. Co. v. Cunningham, 173 So. 506 (Ala. 1937); Mawyer v. Lumbermens Mutual Ins. Co., 962 P.2d 323 (Colo. App. 1998)
However, there is a clear distinction between the facts in most contractor’s license bond cases and the Ore Ida and DMV cases, as the former typically deal with a stationary and geographically definable construction project, whereas in the Ore Ida and DMV cases movable objects (potatoes and automobiles) were at issue.
Any attempts to recover from a contractor’s license bond for work on out-of-state projects should be rejected as being contrary to the state statutory schemes governing the contractor’s licenses and license bonds, with the possible exception where supplies are delivered to the contractor and where the ultimate destination of those supplies is unknown. If the rejected claim goes to litigation, there is, however, no guarantee that the state court judge will accept the surety’s argument.