by Kurt Faux & Willi Siepmann

In most cases, the maximum exposure of the Surety is the penal sum of the bond. However, there are exceptions when the surety litigates a bond claim and ultimately loses against the claimant.

Offer of Judgment

Under the Nevada Offer of Judgment rules, a claimant may recover attorney’s fees and cost from the date the offer is made if the surety does not accept the offer and then does worse when the claim is ultimately decided on the merits. Trs. of the Plumbers & Pipefitters v. Developers Sur. & Indem. Co., 120 Nev. 56; 84 P.3d 59 (2004). (On appeal by union trustees over denial of attorney fees, judgment was reversed; surety could be ordered to pay attorney fees even if fees award plus judgment, would exceed bond amount because surety engaged in direct litigation over bond.) However, such an award is not mandatory but discretionary.

The Nevada Supreme Court has set forth factors which need to be met to award attorney’s fees pursuant to NRCP 68.  Those factors include:  (1) whether a party’s defense was brought in good faith; (2) whether the Offer of Judgment was reasonable and in good faith in both its timing and amount; and (3) whether the decision to reject the offer was grossly unreasonable or in bad faith.  Beattie v. Thomas, 99 Nev. 579, 668 P.2d 268 (1983).

Additionally, an offer of judgment must be unconditional and for a definite amount in order to be valid for purposes of NRCP 68. Pombo v. Nev. Apartment Ass’n, 113 Nev. 559, 562, 938 P.2d 725, 727 (1997)

Filing for Trial De Novo after an Arbitration Award

Nevada assigns most cases with a value of less than $50,000.00 to arbitration, including cases involving bond claims. The arbitrator’s decision is not binding on either party, and both the plaintiff and the defendant can reject the award by filing a so-called Request for Trial De Novo. If a surety files such a request and does not fare better at the subsequent trial, it exposes itself to a mandatory award of attorney’s fees even in excess of the penal sum under the following circumstances:

• Awards of $20,000 or less. The party, which rejected the award, must beat the arbitration award by 20% or more. Thus, for example, if the arbitrator awarded the claimant $15,000.00, the surety would have to pay the claimant’s attorney’s fees “associated with the proceedings following the request for trial de novo” if ultimately the claimant obtained a judgment for $13,001.00. (The surety could recover its fees and cost if the reverse took place; i.e. if the claimant filed for trial de novo, and then didn’t do 20% better than what the award had been.)

• Awards of $20,000 or more. Here, the party rejecting the award will have to do at least 10% better at the time of trial than after the arbitration hearing.

The Prevailing Party Recovers $20,000 or Less

NRS 18.010.2(a) provides that a court may award attorney’s fees to a prevailing party, “when the prevailing party has not recovered more than $20,000.” Although such an award is discretionary, courts have applied it in bond claim cases, where the penal sum of the bond is often less than 20,000.00.

The Surety has Defended the Case “Without Reasonable Grounds”

NRS 18.010.2(b) provides for an award of attorney’s fees where, among others, a defendant has maintained the defenses “without reasonable ground or to harass the prevailing party.” The provision elaborates: “The court shall liberally construe the provisions of this paragraph in favor of awarding attorney’s fees in all appropriate situations. It is the intent of the Legislature that the court award attorney’s fees pursuant to this paragraph and impose sanctions pursuant to Rule 11 of the Nevada Rules of Civil Procedure in all appropriate situations to punish for and deter frivolous or vexatious claims and defenses because such claims and defenses overburden limited judicial resources, hinder the timely resolution of meritorious claims and increase the costs of engaging in business and providing professional services to the public.” For the surety, this situation typically arises where it has tendered its defense to the bond principal, and where the principal has defended the claim without proper grounds or even frivolously. Often, violations of discovery rules accompany such conduct. The Trs. of the Plumbers & Pipefitters v. Developers Sur. & Indem. Co. Court cited above ruled that both NRS 18.010(a) and (b) were proper grouds for awarding fees to the plaintiff.

The Court Imposes Discovery Sanctions

The Nevada Rules of Civil Procedure (NRCP) provide for court imposed monetary sanctions if a party violates certain discovery rules, such as the failure to answer interrogatories or produce documents, or the failure to answer deposition questions.

Conclusion

A Surety engaged in litigation with a bond claimant should be aware of the potential of ultimately having to pay amounts in excess of a bond penal sum. Where the Surety is represented by its own counsel, it should insist on periodic updates and evaluations concerning its independent surety defenses and the defenses of its bond principal, and if there is a strong possibility or probability of an adverse result, settlement of the claim should be considered. This is even more important in “tender of defense” situations, where additionally the viability of a bond principal to pay an adverse judgment must be taken into account.