By Willi Siepmann, Esq. and Kurt Faux, Esq.

The Faux Law Group handles claims against contractor’s license bonds in the states of Nevada, California, Idaho, Wyoming and Utah, and it is in Utah that court rulings have put in doubt some of the most basic principles of suretyship, at least as it pertains to a contractor’s license bond. The problems have arisen in regard to the following questions:

1. Does a contractor’s license bond have extraterritorial application?
2. Are attorney’s fees recoverable from the bond?
3. Does the bond cover claims unrelated to a construction project where the contractor has not used his contractor’s license?
4. Does the license bond apply to claims which occurred before the bond became effective?

While the answer to the first question only indirectly relates to the language of the bond and the administrative rule on which the bond language is based, the last three questions arise solely because of the peculiar bond language. Notably, the bond is a form prepared by the Utah Division of Occupational and Professional Licensing (“DOPL”) based on a statutory mandate from the Utah Legislature. DOPL asserts it has no records regarding the preparation of the bond form or its intended application, and that there is no person at DOPL who has any such information. The bond is statutorily required as a condition of licensing in certain situations to demonstrate the contractor’s financial responsibility to protect the health, safety and welfare of the citizenry of Utah.

The following discussion will dissect the problems and propose potential solutions.

I. DOES A UTAH CONTRACTOR’S LICENSE BOND HAVE EXTRATERRITORIAL EFFECT?

The Faux Law Group recently dealt with a bond claim, where the bond principal, a Utah contractor, entered into a subcontract with a Wyoming general contractor to do work on an elementary school in a southwestern Wyoming school district. The subcontract had clauses that Wyoming law applied and that any dispute should be adjudicated in a Wyoming district court. The Wyoming general contractor was a subsidiary of a Utah contractor. When problems arose with the project and the bond principal was terminated, the Wyoming general contractor sued the principal and the surety in the Utah county where the Wyoming general contractor’s parent company had its place of business, claiming that the Utah contractor’s license bond should cover the Wyoming general contractor’s damages arising from the Wyoming project.

The Wyoming general contractor argued that there was nothing in the bond stating that the bond did not apply to out-of-state projects and that therefore it covered the Wyoming project. Further, the Surety was not party to the Wyoming contract, so its venue and choice-of-law provisions were inapplicable to the bond, and that the Utah lawsuit did not seek to apply Utah laws to the Wyoming dispute. The surety’s position was as follows: 1. Any adjudication in Utah of a dispute arising from the Wyoming project would necessarily involve the application of Utah laws. 2. Utah laws have no extraterritorial effect unless they specifically state that they do. 3. The bond cannot be separated from the Utah license, and the bond principal did not use its Utah license in Wyoming. 4. The Wyoming general contractor and bond principal contracted that Wyoming law applies, which means Utah bond law is inapplicable.

The court found that there were triable issues of fact in denying the Surety’s motion for summary judgment. The case was ultimately settled, but we learned from it that at least one Utah judge is unwilling to grant summary judgment that the Utah bond has no extraterritorial application. 

II. ARE ATTORNEY’S FEES RECOVERABLE FROM A UTAH CONTRACTOR’S LICENSE BOND?

The issue is whether attorney’s fees can be recovered from the bond penal sum in addition to the principal claim amount. The Faux Law Group has been involved in litigation where the apparently valid claim amount was around $9,000, but the claimant’s attorney also demanded payment of his client’s attorney’s fees in excess of $20,000. The bond penal sum was $150,000. Those fees were incurred in previous litigation against the bond principal and not against the surety.

The Utah statutes and administrative rules have no provision for the recovery of attorney’s fees from a contractor’s license bond, but the bond required by DOPL has this sentence regarding attorneys’ fees: “Said bounden Principal shall also pay reasonable attorney’s fees in cases successfully prosecuted or settled against the Principal or Surety if the bond has not been depleted.” (Emphasis added) Neither the Utah Supreme Court nor the Utah Court of Appeals has interpreted that sentence, but it is our position that it means what it says, namely that only the bond principal shall pay attorney’s fees, not the surety. A prior sentence in the same paragraph states that “the above bounden Principal and Surety shall indemnify persons”, but the Surety was obviously omitted from the crucial attorney’s fees sentence.

III. DOES THE BOND COVER CLAIMS WHERE THE PRINCIPAL DID NOT USE ITS LICENSE?

The surety position is that the license to which the bond is linked must be used in order for bond coverage to be implicated.  I This position is tested by two cases which the Faux Law Group is defending in Utah. In the first case, the bond principal failed to pay its own attorney for attorneys’ fees and costs incurred.  The law firm sued its client, the bond principal, and the surety for recovery of these attorneys’ fees and costs. In the second case, the plaintiff, a former contractor itself, sued the principal and its surety to recover allegedly unpaid bills from a couple of projects, and an unpaid loan unrelated to any specific construction project. All these transactions took place before the license bond was issued.  

The central surety defense in both cases is that the principal did not use its license when the law firm worked for it and when the loan was obtained, and that therefore the bond does not cover those claims. In other words, the bond covers only claims related to construction work of the principal, when the principal uses its license. The courts appear inclined to hold that the bond covers any failure of the principal to meet its financial obligations even if (i) the contractor’s license is not used, and (ii) the claim is unrelated to a construction project (section IV. below addresses bond retroactivity).

While the license bonds in Nevada and California have language concerning proper bond claimants that is fairly straightforward and quite easy to interpret, the language of the Utah bond has room to be desired.  As to who can make a bond claim, the bond, whose language was prepared by DOPL, states the following:

Utah Administrative Rule 156-55a-602(2) states the bond covers the following:

In the pending cases mentioned above, the claimants argued that the phrase “including the failure of the licensee to pay its obligations” applies to any financial obligations and not just to obligations incurred while working as a contractor and using its license. Using this argument, unpaid loans, attorney’s fees, credit card bills, medical bills, mortgage bills would be covered. We argued that only obligations incurred while working as a contractor and using the license are covered, and that one cannot separate the bond from the license. However, the lower courts appear to be receptive – or at least not dismiss outright – the argument that the bond is clear and there is only one reasonable interpretation of the phrase, namely that all financial obligations of the principal are covered whether the contractor license was used or not!

IV. DOES THE BOND APPLY TO CLAIMS WHICH AROSE BEFORE THE BOND WAS ISSUED?

The bond does not specifically mention an effective date. The Utah license bond has dates at the top right of the bond and at the bottom of the bond above the signature lines and sometimes these dates are different. Accordingly, some claimants assert that the bond covers claims which arose before the bond was issued. The argument is that because the bond does not state that it becomes effective on a specific date or that it only covers claims arising after the date of issuance, it therefore covers all claims related to unpaid financial obligations, including those which arose before the date of issuance. Again, the lower courts are not dismissing this claim outright. If this is indeed determined to be the law in Utah, then underwriters better find out what unpaid obligations a contractor already has before underwriting the bond and adjust the amount of the bond premium and the demand for collateral accordingly. We obviously disagree with the interpretation that the bond applies retroactively and have provided case law from other jurisdictions supporting this position. Since the bond is linked to the license, the bond cannot be effective at least until the license is effective. Opposing attorneys contest these arguments and contrary case law by simply asserting that the bond language does not support those arguments or contrary court decisions.  There is no legislative or administrative history clarifying the terms of the bond or administrative rule.

V. LESSONS TO BE LEARNED

Adjusting contractor license bond claims in Utah involves issues not typically faced in other states, and much of that can be attributed to the peculiar language of the state mandated language of the Utah contractor’s license bond. We are initiating a process for DOPL to review the propriety of the current bond.

Pending bond changes, how then should the surety deal with these issues? We believe that the best way to do so is to follow the basic rules of suretyship by maintaining and asserting these defenses: 1. Attorney’s fees are not recoverable from the bond. 2. The bond only covers claims which arose within the State of Utah. 3. The bond only covers claims where the principal used its license. 4. The bond only covers claims which arose after the bond was issued. Any subsequent compromise would take into consideration the nature and the amount of the claim, the penal sum of the bond, the forum where the claim is or would be litigated, and the cost of defending against the bond claim.