Surety Company Bound to Honor Contractor's Warranty
Owners often require that contractors procure performance bonds to guarantee the contractor’s faithful performance of the contract. Statutes require performance bonds on public construction projects.
The performance bond surety’s liability to the owner for the contractor’s failure to complete the contract is not controversial. Absent defenses, the surety must either complete the contract or pay the penal sum of the bond.
But what if the contractor apparently completes the contract successfully, the standard contractual warranty passes without discovery of any defect and one is discovered during the longer period of an extended contractor’s warranty required by the contract and given as a contractual condition to final payment?
Is the surety liable for the contractor’s post-completion obligations under that extended warranty? That was the question in Milwaukee Board of School Directors v. Bitec, Inc., 2009 Wisc. App. LEXIS 707 (Dist. One, Sept. 9, 2009).
The Milwaukee Board of School Directors submitted bids for a roof replacement at an elementary school. The bid documents included the form of contract and form of required performance bond.
Specialty Associates, Inc. was the successful contractor bidder. Atlantic Mutual Insurance Co. was the contractor’s surety. Bitec, Inc. was the supplier of the roof system.
The contract provided that “All Work of every kind shall be delivered upon completion of the project in a perfect and undamaged condition, free of flaws or defects.” The contract further provided that, “unless modified in the detailed specifications,” the contractor would remedy any defective workmanship or materials within one year of final payment.
The contract also provided for additional extended warranties. The contractor was obligated to provide a five-year workmanship warranty and a 12-year “no dollar limit” manufacturer’s warranty covering the materials. The contract mandated specific terms the warranties must contain.
The contractor completed the work, issued the five-year workmanship warranty and delivered the supplier’s 12-year materials warranty to the owner and received final payment. More than two years after final payment, the owner noticed problems with the roof. Within five years of the project’s substantial completion, the owner filed suit against the contractor, the contractor’s insurer, the supplier and the supplier’s insurer— but not against contractor’s surety.
After learning that the contractor had received a bankruptcy discharge, the project owner added contractor’s surety as a defendant, alleging that the surety was liable for its contractor-principal’s breach of contract.
The owner alleged that the contractor had improperly installed, failed to inspect and provided insufficient adhesion, allowing water to infiltrate and damage the roof and structure.
The surety moved for summary judgment. It argued that its duties under the roofing contract had expired and it had no obligation regarding the “separate” five-year extended workmanship warranty issued by the contractor. The trial court agreed. The owner appealed.
As almost all performance bonds do, this bond provided that the surety’s obligation was void if the contractor-principal “shall well, truly and faithfully perform its duties, all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term thereof, and any extension thereof . . .