Under Construction – November 2024

Welcome to the fall edition of Snell & Wilmer’s Under Construction Newsletter. With the crisp fall weather settling in, it is a perfect time to strengthen foundations — both in your projects and your understanding of the ever-evolving landscape of construction law.

In this newsletter, we explore a variety of topics related to current construction trends and legal news that may be relevant and helpful to you and your business. We have curated a selection of articles that include discussions of state-specific issues including an introduction to the newly established Texas Business Courts, a discussion on determining priority between Idaho’s mechanic and materialmen’s liens and competing lenders, and Nevada’s new requirements for residential improvement contracts. We also highlight recent Colorado and Utah Court of Appeals’ decisions raising concerns regarding overstating public project liens and guidance regarding exceptions to barring unlicensed contractors from suing to collect compensation. This edition also covers timely tips regarding mediation preparation and cautions sureties, principals, and indemnitors on the bonds regarding potential exposure beyond the penal sum of bonds. We round out our newsletter summarizing a recent Utah Supreme Court case on post-judgment interest.

We hope you will find our newsletter informative and enlightening. Please let us know if we can address a specific construction issue in a future newsletter. We hope the remaining of 2024 is profitable, busy, and safe for you, your company, and your family!

Best Regards,

Jim Sienicki, Editor

By Richard G. Erickson¹

When presiding recently as mediator in a multi-party construction dispute, one of the contractor’s representatives asked me during a pre-mediation caucus to identify the one thing I needed from them for the mediation to succeed. I said “come prepared.”

By “come prepared,” I meant come prepared to answer every challenge quickly and articulately. Come prepared to admit your own risk and disadvantages. Come prepared to back up every factual allegation with admissible evidence and testimony. Come prepared to support every legal argument with on-point, persuasive authority. Come prepared to negotiate your best-case scenario but accept your bottom line. Come prepared, in other words, to help the mediator do their job actively and aggressively. But make a first impression upon the mediator and the other parties that you did your homework and came with all the tools and information necessary to resolve the dispute. And come prepared for every contingency that will undoubtedly arise.

One commentator, Stephen C. Bennett, in his article Construction Mediation: Best Practices for Success (American Arbitration Assoc. Dispute Res. Journal, Dec. 2019), characterized mediation as one of two types: facilitative or evaluative. In facilitative mediation, the mediator simply inquires about the parties’ strengths and weaknesses and recommends a means of compromise and resolution. In evaluative mediation, on their other hand, the mediator assesses winning and losing arguments and weighs in on the probable result, if the case does not settle. An evaluative mediator evaluates the facts provided by the parties and tells the parties their chances of winning and losing at trial or arbitration. In evaluative mediation, resolving the dispute depends on the mediator’s evaluation of the outcome.

In my experience, a facilitative mediation usually evolves into an evaluative one. Whether facilitative or evaluative, however, idleness kills all mediations. And lack of preparation by the parties assures that mediation will idle, stall, and fail.

In a facilitative mediation, for example, if the parties want to find a means of resolution, the parties must fully brief their strengths and weaknesses before the mediation and not on the day of the mediation. Too many times, the opening hours of mediation are wasted on educating the mediator about the dispute rather than opening with a meaningful discussion of best options to reach an end state.

To help the mediator facilitate a settlement, the parties must endeavor to start intensely and keep the mediator busy with finding creative solutions. That is what the parties are paying the mediator to do. Usually, the more the mediator rests and wanders the halls during deliberations, the less chance the parties have of reaching their goals of compromise and resolution. In addition, parties may make the wrong assumptions about the mediator’s idleness, which may negatively impact the settlement negotiations.

Evaluative mediation also relies upon active input and feedback by the parties to the mediator so the mediator can better explain the harsh reality about winning and losing on the merits. A mediator’s evaluation of the merits may also be dead wrong. So, the parties must be prepared to show why they have the winning case in order to change the mediator’s evaluation of the outcome.

Have your star witness show up to summarize their testimony or put them on a virtual screen so the mediator can assess their demeanor and credibility. Have your expert witness present the methodology that will most persuade the factfinder on the technical merits. Use key exhibits in the same way you would present them to a judge or jury. Show the mediator why the predominant fault of others minimizes or eliminates your liability. Prove to the mediator-evaluator that you have the better position from which to negotiate a winning outcome.

Benjamin Franklin famously said, “By failing to prepare you are preparing to fail.” Dr. Franklin probably did not consider facilitative or evaluative mediation when he said this, but he would agree that if your mediation fails, it is often because you failed to prepare. Preparing a winning case is what the parties are going to do eventually, with or without mediation. It makes total sense, therefore, that comprehensive preparation for mediation will keep the mediator busy and will prevent the mediation from idling to failure.

Footnotes

1. The views expressed are those of the author, and not those of the firm or his colleagues. 

By Patrick F. Welch

Last year, the Nevada Legislature adopted more rigorous requirements exclusively applicable to Nevada residential improvement contracts involving single-family residences. See Nevada Revised Statutes (“NRS”) 624.970 and Assembly Bill No. 39 (2023 Regular Session Approved: June 2, 2023); see also NRS 624.455 (defining the term, “single family residence.”). This new statutory scheme seeks to establish “a mandatory minimum set of requirements for all such contracts” while furthering the Nevada State Contractors Board’s (“Board”) mission to ensure “the integrity and professionalism of the construction industry, promote quality construction . . . [and] protect the health, safety and welfare of the public.” The Nevada State Board of Contractors webinar can be found, here.

Notably, these new requirements don’t apply to all residential construction projects; rather their application tracks NRS 624.970, which defines “[w]ork concerning a residential improvement” or “work” as any construction, remodeling, repair or improvement performed by a residential contractor to a completed, single-family residence or any activity for the supervision concerning such work.” NRS 624.970.7(d). As such, the statutory requirements do not apply to new residential single-family construction, single-family construction that is not “owner occupied,” multi-family residential construction, or commercial construction of any nature. Id. In essence, its application is largely limited to remodel work.

Nevada licensed residential contractors seeking to undertake improvements at single-family residences and homeowners contemplating a home remodel or improvement need to be aware of these new statutory requirements, how they increase a contractor’s disclosure and transparency obligations to a homeowner, and how they subject contractors to new bonding requirements in some cases. The following list provides a snapshot of some of the more important requirements found in the new statutory scheme:

Residential improvement contracts involving single-family residences must be in writing and include such information as: (a) the name of the residential contractor, the contractor’s address and contractor’s license number and the monetary limit on the contractor’s license; (b) the name and mailing address of the owner of the single-family residence on which the contract work is being performed and the address or legal description of the property (e.g. APN # for the property); (c) the effective date of the contract (e.g. the date on which the last party executes the contract); (d) the estimated completion date for the contract work¹; (e) a description of the contract work²; (f) the contract price, including all applicable taxes; (g) upfront deposits or initial down payment paid by the owner to the contractor shall not exceed $1,000 or 10% of the aggregate contract price, whichever is less³; (h) a statement that the contractor has provided the owner with the notice and informational form required by NRS 624.520 and 624.600; (i) a statement that any changes in the scope of the contract work or the contract price must be made via a written change order signed by the contractor and the owner⁴; (j) if the project includes new work concerning a residential improvement, the contract documents must include a plan and scale drawing showing the shape, size and dimensions of and the specifications for the construction and equipment for the work specified in the contract, and a description of the work to be done, the materials to be used and the equipment to be installed, and the agreed consideration for the work; (k) a schedule of payments showing the precise dollar amount of any progress payment and the stage of construction at which the contractor will be entitled to collect progress payments from the owner during the course of construction under the contract⁵; and (l) if the contract provides for payment of a commission to a salesperson out of the contract price, a statement that the payment must be made on a pro rata basis in proportion to the schedule of payments made to the contractor by the disbursing party in accordance with the provisions of paragraph (k)⁶.

The new statutory scheme also recognizes that the contractor, as the licensed professional, in many cases, has superior construction knowledge as compared to the homeowner. For that reason, NRS 624.970.3 now requires the contractor to include certain provisions in the written contract requiring the homeowner to confirm his/her understanding of the contractual provisions and providing the homeowner with resources aimed at increasing transparency, including: (1) a method whereby the owner may initial provisions of the contract, thereby indicating that those provisions have been read and are understood; (2) a notice located in close proximity to the contract signature lines stating that the owner may contact the Board if assistance is needed to clarify any of the provisions of the contract that the owner does not fully understand, has the right to request a bond for payment and performance if such a bond is not otherwise required pursuant to NRS 624.270, may contact an attorney for an explanation of the owner’s rights under the contract, and may, if the contract was explained in a language other than the language in which the contract is written, ask for a contract that is written in the language in which the contract was explained (e.g. aimed at addressing language barriers for Nevada’s more vulnerable immigrant populations)⁷.

At the time the owner signs the contract, the contractor shall provide the owner a legible copy of all contract documents signed and a written and signed receipt for any money paid by the owner to the contractor for the contract work⁸.

The contractor is required to apply for and obtain all necessary permits required for the contract work⁹.

Footnotes

1. The date of completion should be specified and updated by written change order as may be needed to reflect the true date of completion as the work progresses.

2. The scope of work with sufficient detail should be updated as needed by written change order.

3. A contractor may collect an upfront deposit or initial down payment exceeding the above-referenced limit if it files a Residential Improvement Bond for the Protection of Consumers with a bond penal sum of $100,000 or if the contractor is granted relief from posting a bond by the Board pursuant to subsection 5 of NRS 624.270. A contractor may want to consult with a Nevada licensed surety bond producer who is experienced in the Nevada surety and construction market to obtain the correct statutory bond.

4. The statutory scheme provides that a change order is not enforceable against the owner who is contracting for work concerning a residential improvement unless the change order sets forth all changes in the work scope and price of the work and the changes are accepted by the owner in a written change order. A contractor may want to ensure that the change order describes the work in sufficient detail and states the change in price for that work.

5. The schedule of payments must not provide for the contractor to receive, nor may the contractor actually receive, payments in excess of 100% of the value of the contract work performed on the project at any time, excluding finance charges, except for an initial down payment or deposit. The provisions of paragraph (k) do not apply if the contractor has furnished a bond for payment and performance covering full performance and completion of the contract and the cost of the bond is included in the price of the project. A contractor may want to consult with a Nevada licensed surety bond producer who is experienced in the Nevada surety and construction market to obtain the correct payment and performance bond forms.

6. The statute affirmatively provides a homeowner with the unilateral right to modify the terms of the written contract (so long as the modification is reasonable) to ensure the contract complies with the provisions of NRS 624.970.2, other than the provisions of paragraph (g), and all applicable regulations adopted by the Board. NRS 624.977.1(a). Moreover, a written contract that requires a party to waive any right provided by Ch. 624 or any regulations adopted pursuant thereto or that relieves a person of an obligation or liability imposed by Ch. 624 or those regulations is void. NRS 624.970.5.

7. Nevada State Board of Contractors Webinar found, here.

8. All written information provided in the contract must be printed in at least 10-point bold type. The contract, receipt and other documents referenced in this subsection may be delivered to the owner by electronic means.  A contractor may want to consult with an experienced construction law attorney on the drafting of a written contract and to develop a template that meets the statutory requirements.

9. The contractor and owner may want to discuss any required permits as early as possible upon executing their written contract to ensure that permits are timely applied for and received so that the estimated date of completion can be met.

By Adam J. Greenup and Conor G. Bateman

It has been approximately two months since the newly established Texas business court system began accepting its first filings on September 1, 2024. This article provides a brief introductory overview of this new court system for complex commercial disputes exceeding $5 million or $10 million in certain circumstances. Certain construction and real estate litigation matters could be subject to this new court structure, although cases involving liens may be excluded unless all parties and the presiding judge agree the business court can adjudicate the lien claim.

What are the Texas Business Courts?

In June 2023, the Texas Legislature followed nearly thirty other states and established a statutory business court system by adopting Chapter 25A of the Texas Government Code. These courts were created with the dual intention of providing specialized courts to adjudicate complex business disputes while also relieving the strained dockets of existing civil district courts.

Texas’ business court system is structured around eleven divisions throughout the state and a new intermediate appellate court – the Fifteenth Court of Appeals. The five largest divisions have two trial courts and began hearing cases on September 1, 2024. The remaining six divisions will have one trial court and will not begin hearing cases until 2025. In addition to hearing appeals from courts in each of the divisions, the Fifteenth Court of Appeals will also be the exclusive court for all appeals involving challenges to the constitutionality of state laws. 

Who are the Judges?

One perceived advantage of this new court system is the inclusion of experienced judges with experience adjudicating complex commercial cases. Although state judges in Texas are elected by voters, the enabling legislation empowered the Texas Governor to appoint judges to each business court division and the Fifteenth Court of Appeals.

These appointed judges will not face an election until November 2026. This was one of several points in a challenge to the constitutionality of these new courts raised by Dallas County earlier this year. On August 23, 2024, the Texas Supreme Court denied Dallas County’s challenges, upholding the constitutionality of the business courts and the Fifteenth Court of Appeals.

What are the Jurisdictional Limits of the Business Courts?

Texas business courts have the same authority and powers of a district court with whom they also share concurrent jurisdiction over the following types of cases:

Additionally, the Texas Business Courts are unique from its counterparts in other states for two primary reasons. First, cases filed in a district court may be removed to a business court through agreement by the parties or within 30 days of any party learning facts establishing the Business Court’s jurisdiction. Second, parties involved in certain actions before a business court retain the right to a jury trial.

What are the Business Court Rules Governing Actions?

The primary purpose of the Business Court is to provide efficient and timely resolution of complex business disputes. In order to achieve this goal, the Texas Business Court has established succinct set of local rules that differ significantly from the rules governing most district courts.

The most significant differences between Texas Business Courts and Texas District Courts include new certifications and disclosure obligations of the parties, in addition to prescribed limits on the form and length of pleadings. 

Click here to view a copy of the local rules of the Texas Business Court.

Business Courts May Only Address Mechanic’s Liens in Limited Circumstances

The Texas Legislature excluded certain actions from the jurisdiction of the business courts including cases involving foreclosures of liens on real or personal property and statutory mechanic’s liens pursuant to Chapter 53 of the Texas Property Code. However, the court maintains supplemental jurisdiction over mechanic’s lien claims if the parties and presiding judge agree the lien claim should proceed in the business court. If the parties cannot agree, the claim may proceed in a court of original jurisdiction concurrently with any related claims pending in the business court.

The supplemental jurisdiction of business courts could be invoked by parties to mechanic’s lien claims if they agree a business court is the most efficient venue for these disputes, particularly if a mechanic’s lien claim is intertwined with breach of contract and other claims that exceed the amount in controversy requirement. This option should be considered on significant claims considering the specialized nature of business courts and the background and experience of the business court judiciary.

Should Litigants Consider Availing Themselves to the Jurisdiction of Texas Business Courts?

It is too early to know definitively whether these courts will become the preferred venue over their district court counterparts, although early reports indicate that these courts have the potential to meet their mission to provide fair, efficient, and timely resolution of complex business disputes. In fact, their potential for cutting in half the amount of time typically involved in these types of actions is so appealing that many Texas-based companies are considering mandating jurisdiction in the forum selection clauses of their major contracts and transactions.

By Tara Martens Miller

Idaho’s Mechanic and Materialmen’s lien statute can be found at Title 45, Chapter 5 of Idaho Code. If a contractor, materialman or covered professional timely files a compliant lien against real property for unpaid labor or materials, the claimant must foreclose on the lien within 6 months of the recordation of the lien in the County records where the project is located. The commencement of the lien foreclosure action begins with the filing of a lawsuit in the County where the project is located. In addition, typically, a Lis Pendens is also recorded in the County records to provide notice to all potential buyers, investors or subsequent lenders of the pending foreclosure. 

Because the purpose of the lien statutes in Idaho is to protect contractors, materialmen and covered professionals who contribute to the improvement of the real property, these parties should become knowledgeable regarding how the priorities of competing liens are determined by Idaho courts. Ultimately, the priority of competing liens will be determined by the court. Useful information may be gained in advance of providing construction services or materials to a project or before filing a foreclosure action by obtaining and reviewing a Litigation Guaranty issued by a title company selected by the claimant. The Litigation Guaranty details all ownership interest(s), mortgage(s), deed(s) of trust, and competing and subsequent liens, and provides the claimant with the necessary parties to the foreclosure action. 

The Idaho Code provision that addresses the determination of priority is § 45-506. This provision establishes the priority of liens with regard to other claims against the real property at issue. Importantly, it provides that mechanic and materialmen liens have priority over any subsequent mortgage or other encumbrance that attaches to the property after the commencement of work or the furnishing of materials. 

In addition, the statute specifies that the liens relate back to the date when the first work or materials were provided to the improvement of the real property. The relation back doctrine makes clear that the lien has priority if and from the time the specific lien claimant began to provide labor or materials to the improvement, and not from the time when the specific lien claimant records the lien. A risk for lenders may be that because Idaho is not a pre-lien state, it may not be obvious in the field precisely what was the date of commencement of labor or materials.

The legislative intent, case law, and judicial interpretation in Idaho consistently provide strong protection to the contractors, professionals, and suppliers who provide improvements to real property. Stakeholders in the construction industry will be in the position to better navigate the legal landscape and appreciate the protections afforded by Idaho’s lien statutes with a full understanding of the statutes, protections, and judicial interpretations.

Idaho Code § 45-506 also presents distinct challenges for lenders. Lenders should implement a careful approach to protect its security interest and priority, including, but not limited to site inspection, due diligence, lien waivers and monitoring of the site. In addition, lenders in Idaho should clearly communicate with their borrowers, through the entire term of the project and gain a full and complete understanding of the relation-back doctrine to protect the lender’s security interest from liens that may relate back to a time preceding the loan. 

By: Tyson J. Prisbrey and Mark O. Morris

Utah law provides that a contractor may not seek “collection of compensation” in court for any work that requires a license if, at the time the contractor entered into the contract, the contractor was not licensed. The Utah Supreme Court has laid out four exceptions to this bar, one of which is if the owner possesses skill or expertise in the field of work being provided, then the contractor may maintain a lawsuit to seek compensation. While no Utah court has definitively established the level of skill or expertise that the owner needs to possess to trigger this exception, the Utah Court of Appeals in R4 Constructors v. InBalance Yoga provided some guidance.

The facts in R4 Constructors are relatively common and straight forward: InBalance Yoga hired R4 Constructors to build a yoga studio, terminated the contract with R4, and refused to pay R4 because of disputes over the quality of the work. R4 filed suit and one of InBalance’s defenses was R4’s lack of a contractor’s license at the time of entering into the contract. R4 argued that as the owner, InBalance’s principal acted as a general contractor in building two of her homes, that she built two additional homes, and that she was in charge of the schedule on this project. Thus, R4 argued, InBalance possessed sufficient “skill or expertise in the field of work” that triggered this exception to the statutory bar on unlicensed contractors seeking compensation. R4 moved for summary judgment urging that this exception applied, which the district court granted. InBalance appealed. 

The Court of Appeals reversed the trial court, holding that R4 did not satisfy the exception as a matter of law. Importantly, Utah courts have not determined what constitutes “skill or expertise in the field” to qualify for the exception. Here, the Court of Appeals found that the record was clear that InBalance’s principal possessed some skills or expertise in the field given that, under the contract, she performed her own supervision of R4’s work, she controlled the schedule, and she had previously acted as her own general contractor in building her own homes. The Court noted, however, that a factual question still remained as to whether the principal possessed sufficient skill or expertise. Because a jury could reasonably find that she did or did not have the requisite skill, the Court found that summary judgment was inappropriate.

While the R4 Constructors Court did not set the boundaries for this exception, and now a jury is going to make the call, an owner’s supervisory involvement in the project and prior experience in acting as a general contractor could be sufficient to allow an unlicensed contractor to maintain a lawsuit for its compensation in Utah.

By Laurie Choi, Amanda E. McKinlay, and James Snow

On August 1, 2024, a division of the Colorado Court of Appeals issued an opinion regarding the nature of delay damages asserted in a verified statement of claim, the Colorado statutory lien system for constructions services provided in public works projects. This opinion may have significant repercussions on construction industry professionals working in Colorado. In the case Ralph L. Wadsworth Construction Company LLC v. Regional Rail Partners et al, 2024CIA78 (case number 22CA2154), a subcontractor (Wadsworth) on a public project under prime contractor (Regional Rail) asserted claims for non-payment through a verified statement of claim (“VSOC”) pursuant to C.R.S. §§ 38-26-101-110. A VSOC requires a public entity to withhold the amount at issue from payment to the prime contractor until the underlying dispute is resolved, and is often considered similar to mechanic’s lien claims, but for public projects.

Under the portion of the Colorado Public Works Act that governs the substance of a VSOC, the claiming party may only assert a claim for the amount due and unpaid for “furnished labor, materials, sustenance, or other supplies used or consumed by a contractor or … subcontractor in or about the performance of the work contracted to be done or that supplies laborers, rental machinery, tools, or equipment to the extent used in the prosecution of the work.” C.R.S. § 38-26-107(1)). If it is later found in judicial proceedings that a claim alleged “an amount greater than the amount due without a reasonable possibility that the amount claimed is due and with the knowledge that the amount claimed is greater than the amount due”, then the claiming party “shall forfeit all rights to the amount claimed” and becomes liable for the costs and attorneys’ fees of the defending party. C.R.S. § 38-26-110.

Therefore, under C.R.S. § 38-26-110, a party submitting a VSOC is barred from claiming an amount “greater than the amount due.” Looking at case law in the context of private mechanic’s liens, the Court stated that “due” is defined as “’[i]mmediately enforceable’ or ‘[o]wing or payable; constituting a debt.’” Wadsworth, 2024 COA 78, at ¶ 27 (quoting Byerly v. Bank of Colo., 2013 COA 35, ¶ 41). The Court further explained: “[i]n other words, an amount is not ‘due’ if it will only be owed upon some contingency or after the satisfaction of a condition precedent.” Id.

In the underlying dispute, Wadsworth had expressly stated that the vast majority of the amounts it claimed were due under its VSOC were for unliquidated delay damages, amounts “for lost profits, contractual mark-ups, and nonrental equipment costs” and “extended overhead” costs due to alleged delays caused by Regional Rail. Id. at ¶ 37.

The Court ultimately found that such delay damages were not “due” at the time the VSOC was filed and that other items like lost profits, contractual mark-ups, nonrental equipment costs, and overhead for idled equipment were not “within the ambit” of labor, materials, or supplies used or consumed in the performance of work under C.R.S. § 38-26-107(1). Id. at ¶¶ 37-39.

In a section of the opinion, the Court pointed to the Subcontractor’s president’s testimony regarding the inclusion of change order requests that were not memorialized and executed as formal change orders in the VSOC as evidence that the Subcontractor knew its claim was excessive. Id. at ¶¶ 41-43.

Along those same lines, in footnote 10 of the opinion, the Court indicated that amounts were not “due” and subject to a VSOC until these amounts were “due” pursuant to a pay-if-paid clause – i.e., after the prime contractor had received payment from the owner.

The holding of Wadsworth generally (which relies on extensive comparison of case law in the private mechanic’s lien context), and the sections referenced above, have caused concern regarding mechanic’s lien claims. While the Court attempted to note the differences between the VSOC legal standards and the standards in Colorado’s private mechanic’s lien statute, the Court heavily relied on caselaw pertaining to mechanic’s liens to come to its conclusions.

This case is contrary to many practitioners’ interpretation and application as it relates to VSOC and mechanic’s lien claims, and provides pause as to whether and to what extent such claims can include unexecuted or not-yet-memorialized change orders, delay damages, amounts subject to pay-if-paid clauses, and direct overhead costs. As such, professionals and attorneys active in the Colorado construction industry are keeping a close eye on this case as it is escalated to the Colorado Supreme Court.

On October 17, 2024, Wadsworth filed a petition for writ of certiorari with the Colorado Supreme Court, specifically seeking clarification on 1) whether a claimant found to have filed an excessive VSOC forfeits only its statutory remedies under the Colorado Public Works Act or all available legal remedies (including common law claims), and 2) whether a VSOC may include disputed amounts related to delay damages or whether VSOC claims must be limited to undisputed, liquidated amounts. The Supreme Court has not, as of the date of this article, granted or denied Wadsworth’s petition.

By: Michael J. Baker

A couple of years ago, a California court rendered an opinion that a surety is liable for attorney’s fees and costs even if the amount exceeds the penal sum of the bond. (Karton v. Ari Design & Constr., Inc.). This was further confirmed in another opinion last year (Chavez Gen Constr, Inc. v. Moexinia). This year, once again, in an unpublished opinion, the Court ruled that a surety can be liable for fees and costs even if they exceed the penal sum. This is particularly concerning where the bond’s penal sum is much less than the potential cost of litigating the underlying bond claim. Sureties, principals and indemnitors on the bond should understand the issues and deal with the outsized financial consequences.

What the Court did in these cases, was separate the concept of the penal sum of the bond as the limit from the issue of responsibility for an award of attorney’s fees as costs in a litigation. The courts have held when attorney’s fees can be awarded as statutory costs, they can properly be assessed against the surety, even when they exceed the penal sum. By challenging and litigating the underlying claim on the bond in these cases, the surety took on the risk that the litigation would exceed the penal sum of the bond. In the court’s view the surety elected to gamble, and took on the risk of the loss. This risk is more acute the more the attorneys’ fees as statutory costs exceed the penal sum of the bond.

How do you avoid this conundrum of disputing a claim which may in the end cost more than the penal sum of the bond? Here are some tips that the surety, principal, and indemnitor should be considering. The cases’ holdings suggest the attorneys’ fees are not limited by the bond penal sum. This is not necessarily the case. All of these cases dealt with a statutory prevailing party issue where the attorneys’ fees were assessed per the statute and as a cost item to be paid by the losing litigant. When it comes to construction bonds, even California courts continue to hold that a surety’s liability for attorneys’ fees under its principal’s contract are limited by the penal sum. The point being, know what type of bond is at issue.

You also need to evaluate the risk in terms of the penal sum of the bond- the smaller the penal sum the greater the risk of exposure of attorneys’ fees exceeding the amount. Litigation is expensive and costs can escalate quickly. Consider settling claims on small bond amounts sooner, not later. Also, evaluate if an interpleader action would ultimately limit the exposure. 

Courts favor sureties who pay. It is no secret that courts see the sureties as the party with all the leverage. There is typically a disparity in the relationship between surety and claimant, and courts are aware that if the penal sum is small, the surety has nothing to lose if limited to the penal sum. In these cases, the surety can simply outwait or outspend the claimant with no increase in exposure. This approach of waiting and litigating is frowned upon by the court, so consider taking active steps at the outset to mitigate damages and exposure. 

Lastly, carefully evaluate a tender of defense. If a surety tenders to its principal and the principal over litigates, the surety’s exposure increases. Often, the surety is not kept abreast of developments and the dispute can become over litigated, increasing the surety’s exposure more than the penal sum. The surety needs to be more proactive and the principal needs to be aware of this too, after all, it is the principal and the indemnitors that will be looked to in order to make up the surety’s loss. Too often, if the principal or indemnitors cannot make the surety whole, then the surety takes a greater loss.

What was once thought of as a minor exposure on smaller penal sums, especially on many statutory bond claims, is no longer the case. No doubt the unintended consequence will be greater premiums, particularly on lesser penal sum bonds.

By Elisabeth M. McOmber

On March 7, 2024, the Utah Supreme Court issued its decision in Sunstone Realty Partners X LLC v. Bodell Construction Company (2024 UT 9). The decision provides a cautionary tale for parties to a construction contract who may seek to enforce a judgment in Utah.

The underlying dispute at issue involved construction defect claims and arose from a construction contract between Sunstone, a Hawaiian real estate development company, and Bodell, a Salt Lake City based commercial construction firm. The construction project was in Hawaii and the dispute was arbitrated in Hawaii. Sunstone prevailed in the arbitration and received an arbitration award of $9.5 million against Bodell, which was then entered as a judgment by a Hawaiian court. Sunstone then domesticated the judgment in a Utah state court pursuant to the Utah Foreign Judgment Act (UFJA), which allows a foreign judgment to be domesticated in Utah and sets out how a Utah court must treat a foreign judgment. Utah Code Section 78B-5-301-307. Shortly thereafter, Bodell filed a motion with the Utah court asking it to order that Utah’s post-judgment interest rate applied rather than Hawaii’s rate. This was a distinction with a real difference as Utah’s rate at the time was 2.29% while Hawaii’s was 10%. The Utah court granted Bodell’s motion and entered an order that simply stated that “Utah’s post judgment rate applies as of the date of the domestication of the foreign judgment in Utah.” 2024 UT 9, ¶6.

Sunstone appealed on three bases: (1) the district court erred by failing to apply Hawaii’s interest rate; (2) the contract between Sunstone and Bodell required that Hawaii’s rate be applied; and (3) Hawaii’s rate should apply due to comity between the two states. The Utah Supreme Court affirmed the Utah District Court’s decision holding that the lower Utah post-judgment interest rate applied.

On the first issue, Sunstone argued that Hawaii’s higher rate should apply because doing so served the UFJA’s general purpose and because post-judgment interest is a substantive part of the judgment rather than a means of enforcing a judgment. The Utah Supreme Court disagreed. The Court first looked to the provision of the UFJA stating: “[a] foreign judgment filed under this part has the same effect and is subject to the same procedures, defenses, enforcement, satisfaction, and proceedings . . . as a judgment of a district court of this state.” 2024 UT 9, ¶13. The Court then assessed whether post-judgment interest fell within this provision. The Court found that post-judgment interest is an enforcement mechanism designed to encourage prompt payment of a judgment and is not, as Sunstone argued, a substantive part of a judgment. The Court then determined that post-judgment interest therefore falls within the provision of the UFJA, and the district court was correct in determining that Utah’s post-judgment interest rate applied.

On the second issue, Sunstone argued that the contract’s provisions should govern regardless of the Utah statute. The contract provided that it was governed by the law of the location of the project, i.e., Hawaii, and that payments were to bear interest at either a rate that the parties agreed to in writing or at the legal rate in the place where the project was located. Again, the Utah Supreme Court disagreed. The Court first found that the contract’s choice of law provision did not apply because: (1) such an agreement only applies to the substantive law governing the dispute; and (2) absent a specified rate set out in the judgment itself, application of post-judgment interest is a procedural matter which is governed by the law of the forum, i.e. Utah. The Court then turned to Sunstone’s reliance on the contract’s provision regarding interest on payments. The Court noted that the contract could have contained a provision setting an agreed post-judgment interest rate, but it did not. The Court found that the contract provision Sunstone wanted applied related only to interest on payments, did not constitute an agreement regarding the post-judgment interest rate, and that it would not “allow[] the parties to transmogrify an unrelated interest rate clause into an expression of agreement on a post judgment [sic] interest rate.” 2024 UT 9, ¶26. Accordingly, the Court held that absent any such specific clause in the contract, the UFJA governed, and Utah’s post-judgment interest rate applied.

Finally, on Sunstone’s third argument that principles of comity required application of Hawaii’s post-judgment interest rate, the Utah Supreme Court once more did not agree. The Court explained that comity was the principle that courts of one state should defer to those of another for considerations of public policy and in the exercise of judicial discretion. The Court found, however, that where an issue is addressed by statute, in this case the UFJA, the legislature had already decided how the question should be resolved and the Court could not use principles of comity to avoid the statute’s requirements.

In sum, this case carefully analyzed Utah’s foreign judgment enforcement statute (some version of which exists in nearly every other state) to find that Utah’s post-judgment interest rate applies to a foreign judgment domesticated in Utah and any non-Utah company entering into a contract involving a Utah company should be aware of this aspect of Utah law. But the decision’s key takeaway is that this entire issue could have been avoided if Sunstone had ensured that the contract contained a specific provision addressing post-judgment interest on any judgment arising out of the contract and had further ensured that the specified post-judgment rate was included in the judgment entered by the Hawaiian court. Thus, Sunstone Realty Partners X LLC v. Bodell Construction Company once again emphasizes the cautionary tale that it is critical to carefully review any contract before it is entered into to ensure that all necessary provisions are negotiated and included.