"The Bramble Rule:" Md. Contract law Takes a Foothold Nationally

In 2005, the Maryland Court of Appeals, in a case captioned National Union Fire Insurance Company v. Bramble, released a decision that the 45 day response time found in the 1984 AIA A312, as well as other payment bonds, requires that the surety include in its response letter (1) the amounts disputed and (2) the basis for challenging the amount in dispute. The surety company's failure to include other reasons for challenging the amounts resulted in a waiver of those defenses. In 2006, the United Stated District Court for the Eastern District of Virginia followed the reasoning of the Maryland Court of Appeals and found that the surety had waived any defense that was not raised in its response letter.

In October of 2007, the United States District Court for the Middle District of Florida also elected to follow the reasoning of the Maryland Court of Appeals, and set forth what it characterized as the "Bramble Rule:" i.e., if the surety fails to respond within the contractually required time frame, or fails to include a defense in its response, the surety thereafter waives its right to raise any defense not set forth in the response letter.

Certainly, the spread of the Bramble Rule to other States validates Maryland's requirement that surety companies must also comply with the contractual requirements created by their bonds, and will provide contractors with more protection.

For further questions, contact Matt Hjortsberg at (410) 583-2400 or at Hjortsberg@bowie-jensen.com.

Protecting Yourself from an Insolvent Sub-Contractor’s Bonding Company

In a recent 1st Circuit case, a surety bonding company sued a contractor and its principals for indemnification when the surety bonding company paid claims on a bond issued to the contractor for a project involving construction of a parking lot. Although the contractor had required its subcontractor, which performed the work on the parking lot, to provide a bond for the benefit of the contractor, the bonding company that provided the subcontractor’s bond became insolvent and could not pay the contractor’s claim. This triggered protections under the Maine Insurance Guarantee Act, an Act designed to protect policy holders from insolvent insurers, and the contractor was not liable for indemnification to its surety bonding company because the contractor was an obligee on the bond issued to the subcontractor by the insolvent bonding company.

The 1st Circuit held, however, that the principals of the contractor, who had not been named as individual obligees on the subcontractor’s bond, but who had agreed individually to indemnify the surety bonding company, were still liable to the contractor’s bonding company for indemnification. The court noted that the contractor and its principals could have avoided liability under the Maine Insurance Guaranty Association Act if the individual principals had been named as obligees on the subcontractor’s bond.

In Maryland, a similar insurance guarantee act exists - the Maryland Property and Casualty Insurance Guarantee Act - and a similar situation could arise. Therefore, a contractor should make sure that any bonds, provided by a sub-contractor for the benefit of the contractor, name as obligees the contractor, as well as all individuals liable under the contractor’s indemnification agreement with its surety bonding company. If individuals liable under an indemnification agreement are not named as obligees and the sub-contractor’s bonding company becomes insolvent, the Maryland Property and Casualty Insurance Guarantee Act will offer no protections for those individuals because they would not be considered protected third party obligees on the bond.

In sum, a contractor should be certain that the contractor and any individuals liable on an indemnification agreement with the contractor’s surety bonding company are named as obligees on a sub-contractor’s bond issued for the contractor’s benefit.

For more information, please contact Vincent M. Guida, Jr. at 410-583-2400.

Damages for reduced bonding capacity

In a recent California case, a general contractor was awarded damages for the owner's breach of contract. Significantly, however, a portion of the damages award was measured by the general contractor's lost profits resulting from its reduced bonding capacity. The owner had terminated that contractor and then entered into a takeover agreement with the general contractor's bonding company. The bonding company then sued the general contractor. As a consequence of this dispute with its bonding company, the general contractor's bonding capacity was reduced from 3 to 4 million per job and 6 to 7 million in the aggregate to $500,000 per job and $500,000 in the aggregate.

Although it is somewhat unclear from the Court's opinion, it seems that the Court found that the Owner had improperly terminated the general contractor and sought a replacement contractor through the bonding company. This termination was a breach and the Court concluded that the general contractor had put on sufficient evidence to demonstrate that when a contractor is placed in a position of dispute with its own surety it will have significant difficulty acquiring bonds. The general contractor demonstrated its anticipated lost profits through an historical average and projecting its likely profits on the basis of that average.

While this case is decided under California law, the legal principles that form the basis of the opinion are entirely consistent with Maryland law. In short, there is no distinction between California and Maryland law on this subject that would preclude a contractor from making the same argument under Maryland law.

For any questions, contact Matt Hjortsberg. Hjortsberg@bowie-jensen.com - or 410-583-2400.