Claims against Nevada Contractor’s License Bonds in Cases where the Contractor did not Use his License

Periodically, the surety is confronted with claims against a contractor’s license bond, although the contractor did not use his license in circumstances leading up to the claim. These claims fall essentially into three categories:

1. The contractor did not use his license on a particular construction project, but bond claims are asserted nevertheless. Typically these claims are for breaches of contract such as and for failures to pay debts not arising from construction projects, although we have also seen claims arising out of auto accidents or other civil torts.
2. The contractor worked on a construction project out-of-state, but a claim is made against his Nevada license bond.
3. The contractor on a construction project, although his license has been suspended or revoked.

This article will address each such category in some detail.

A. THE CIVIL TORT CLAIMS

The bond principal obtains a loan from a financial institution and fails to repay that loan. The financial institution then asserts a bond claim. Such claims should be denied.

NRS 624.273, the Nevada statute defining proper license bond claims reads in relevant parts:

1.  Each bond or deposit required by NRS 624.270 must be in favor of the State of Nevada for the benefit of any person who:

      (a) As owner of the property to be improved entered into a construction contract with the contractor and is damaged by failure of the contractor to perform the contract or to remove liens filed against the property;

      (b) As an employee of the contractor performed labor on or about the site of the construction covered by the contract;

      (c) As a supplier or materialman furnished materials or equipment for the construction covered by the contract; or

      (d) Is injured by any unlawful act or omission of the contractor in the performance of a contract.

Subsections (a) references “a construction contract” between an owner a contractor for a “property to be improved”, and subsections (b) and (c) reference “the contract” mentioned in (a). The claim must therefore arise from a “construction contract” of “property to be improved”, and a loan agreement unrelated to such a contract does not fit that description.

However, subsection (d) references “a contract” and claimants have tried to distinguish this from the construction contract mentioned in the previous subsection. Claimants have asserted that any breach of contract or civil tort, such as wrongful termination, or even auto accidents fall into this category. Here, a decision of the Nevada Supreme Court in 1969 is helpful. Day & Night Mfg. Co. v. Fidelity & Cas. Co., 85 Nev. 227, 452 P.2d 906. Specifically, NRS 624, the Nevada licensing statute, must state that a particular act is unlawful, as it does with regards to some of the following: Engaging in a business in the capacity of a contractor without a license, Nev. Rev. Stat. § 624.700 (2010); unlawful advertising, Nev. Rev. Stat. § 624.720 (2010); taking a contractor’s examination for another person, Nev. Rev. Stat. § 624.730 (2010); or acting in a joint venture or combination without an additional license, Nev. Rev. State § 624.740 (2010).  Breach of a contract is not considered an “unlawful act or omission” contemplated under Nev. Rev. Stat. § 624.273(1)(d), and otherwise unlawful acts, such as embezzlement unrelated to construction funds, assaults and batteries, or driving under the influence or reckless driving are not considered “unlawful acts” by NRS 624.

A California court of appeals dealt with this issue in Brown v. Surety Company of the Pacific, 122 Cal.App.3d 614 (1981). Brown, who had made a construction loan to a contractor, sued the contractor and its license surety with allegations of fraud and breach of contract because of the contractor’s failure to repay the loan. The contractor, however, did not work on the project for which the loan was given. The court noted that on appeal “the critical issue posed is whether a contractor’s license bond covers any and all misdeeds of a person who also happens to be licensed as a contractor.” In denying the claim, the court found that the contractor was not working as a contractor on the project and was not using its license, and that therefore the claim against its license bond was improper.

B. THE OUT-OF STATE PROJECT CLAIM

We are periodically faced with claims against a Nevada contractor’s license bond, where the bond principal worked on an out-of-state project and therefore did not use its Nevada license while doing so. There are two basic reasons why these claims should be denied, and these reasons also can be used to deny similar claims against license bonds in other states. First, the license bond cannot be separated from the license, and second, adjudicating such a claim would necessarily involve the extraterritorial application of Nevada statutes to the conduct of the bond principal on the out-of-state project.

License bonds are required by statute for a Nevada contractor to obtain a license. NRS 624.270. NRS 624.273 regulates who can assert a bond claim and what the rights and duties of the sureties, who issue the bonds, are. The bonds are “in favor of the State of Nevada”. 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 the Day & Night case, 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) The discussion is the previous section of this article is also applicable here, namely that the bond principal must have used his license on a construction project. He cannot use his license on an out-of-state project.

Evaluating the conduct of the bond principal on an out-of-state project would necessarily involve the use of Nevada statutes and case law. NRS 624.273 regulates, among others, who can make a bond claim, and it states the statute of limitation for asserting such a claim. Accordingly, the use of NRS 624.273 would be an extraterritorial use of Nevada law, and there is a strong presumption against such an application. While the Nevada Supreme Court has not specifically addressed this issue, federal courts and courts in other states have done so. The United States Supreme Court addressed this issue in Morrison v. National Australia Bank LTD, 561 U.S. 247 (2010. In the case, foreign investors filed an action in a federal district court against an Australian bank for alleged violations of the Securities and Exchange Act. In affirming the dismissal of the action, the court noted that the securities transaction had occurred in Australia, and held: “It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’ ” EEOC v. Arabian American Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (Aramco).. When a statute gives no clear indication of an extraterritorial application, it has none.” (Emphasis added) Ibid., p. 248 See also, Nevares v. M.L.S, 245 P.3d 719 (Utah, 2015).

While we have not found any cases dealing with claims against a contractor’s license bond, where the contractor worked out of state, other state court have done so in regard to other license bond claims, for example in Ore-Ida Potato Products, Inc. v. United Pacific Insurance Company, 392 P.2d 191 (Idaho, 1964). In Ore-Ida, a potato farmer asserted a claim against a wholesale dealer’s Idaho surety bond, when the dealer failed to pay for two transactions which had occurred between the parties in Oregon. The bond had been required by the Idaho Commissioner of Agriculture. On appeal, the farmer argued that certain phrases of the Idaho statute requiring the bond implied that the statute had extraterritorial effect and therefore applied to the Oregon transactions. The Idaho Supreme Court rejected that argument and held:

“Appellant cannot be permitted the extraterritorial interpretation of I.C. Title 22, ch.13, which it seeks. The bond furnished by a produce dealer under the Act must be measured by the law of Idaho under which it was written, and particularly I.C. § 22–1304. Statutes are intended to apply and be confined in their operation to persons, property and rights which are within the territorial jurisdiction of the law-making power. The Act does not expressly provide for extraterritorial application. In the absence of any extraterritorial phraseology contained in such Act, it cannot be construed to have an extraterritorial effect, on the theory that the legislature so intended. (Emphasis added)”

The other cases involved claims against automobile dealer license bonds. Here, the state courts are split on the issue of the extraterritorial application of the statutes requiring these bonds. In line with the basic presumption against extraterritoriality as delineated above, the more reasoned cases are the ones rejecting such claims. For example, the Supreme Court of Iowa rejected the bond claim of a nonresident purchaser who suffered damages as a result of a casual out-of-state sale by an Iowa licensed automobile dealer. The court noted the general rule against the extraterritorial effect of a statute “unless the intention to have a statute operate beyond the limits of the state or country is clearly expressed or indicated by its language, purpose, subject matter or history”, and cited the Ore-Ida case, among others, in rejecting the plaintiff’s bond claim. State Surety Company v. Lensing, 249 N.W.2d 608, 611 (1977) Similarly, the Colorado Court of Appeal rejected the claim of an out-of-state auto auction company against a Colorado motor vehicle dealer’s Colorado license bond, where the alleged fraudulent acts of the dealer occurred outside of Colorado. The court noted that if the fraud had occurred in Colorado, the bond would have covered the claim. However, because the fraudulent acts occurred outside the state, the bond did not cover it. The court cited the Ore Ida case in support of its finding that unless a statute specifically provides for extraterritoriality, it does not have such an effect.

The courts, which have allowed claims against motor vehicle dealer bonds, have done so for different reasons, and did either not address extraterritoriality or distinguished the case from the basic rule against extraterritoriality. A typical case for that position is Metro Milwaukee Auto Auction v. Coulson, 604 N.W.2d 111 (Minn. App. 2000where the court noted that the dealer committed several acts inside Minnesota to defraud the Wisconsin auctioneer.

C. WORKING ON A SUSPENDED OR REVOKED LICENSE

Bond claims are also sometimes asserted, where a contractor’s license has been suspended or revoked by the State Contractors Board, where the bond is still in effect, and where the contractor continues to work. In cases of suspension, the Board sometimes allows the contractor to continue to complete the project, but where that is not the case and where a license was revoked, the continuing work of the contractor is “unlawful” according to NRS 624. Specifically, NRS 624.    States in relevant parts:

Engaging in business or submitting bid without license unlawful; prosecution; damages; bid submitted in violation of section void.

      1.  It is unlawful for any person or combination of persons to:

      (a) Engage in the business or act in the capacity of a contractor within this State; or

      (b) Submit a bid on a job situated within this State,

without having an active license therefor as provided in this chapter, unless that person or combination of persons is exempted from licensure pursuant to NRS 624.031.

The obvious grounds for denying a bond claim, where the contractor no longer has a valid license, is the previously-stated principle that the license bond goes with the license, and where there has been no use of the license, there cannot be a proper bond claim. However, here, where there is still an active bond, that principle clashes with the language of NRS 624.273.1(d), which reads that the claimant “(d) Is injured by any unlawful act or omission of the contractor in the performance of a contract.” There is no Nevada case law resolving this conflict, and it is foreseeable that most judges would resolve it in favor of the claimant. The solution would be to cancel the bond as quickly as possible after a license has been revoked or suspended, though the surety is not usually alerted to the fact by the Board.