Surety Company Bound to Honor Contractor's Warranty
...and if he/she shall fully indemnify and save harmless the owner from all costs and damages which it may suffer by reason of failure to do so, and shall reimburse and repay the owner all outlay and expense which the owner may pay in making good any default . . .”
Unlike some bonds, though, this performance bond did not contain any time limit to sue. That is not surprising because the required bond form was part of the owner’s bid solicitation.
The Bitec, Inc. appellate court analyzed the contract and the bond and concluded that the surety had agreed to “all the undertakings” in the contract including the five-year workmanship warranty.
Bitec, Inc. first relied on an older Wisconsin case where the contract contained a general one-year warranty and a specific two-year title warranty.
In that case, the surety was held liable for a claim of cracked and buckling tile. Bitec, Inc., 2009 Wisc. App. 707, *13- 14 quoting Milwaukee Country v. H. Neidner & Co., 263 N.W. 468 (1935), modified on other grounds, 265 N.W. 226 (1936).
Continuing, the Bitec, Inc. appellate court cited cases from other states which had found that a performance bond surety could be liable for post-completion latent defects.
The surety argued that the five-year workmanship warranty was a separate and distinct obligation from the original contract. Surety’s obligation, it argued, ended when contractor properly issued the written extended warranty and, thereafter, the surety was not guarantying that warranty.
The Bitec, Inc. court disagreed; the contract required that contractor provide the five-year warranty as one of the original contractual obligations which the surety had agreed to guaranty.
According to the court, the five-year warranty was not separate; it was not signed by the owner, its terms were not negotiated and there was no separate payment or other consideration for it. Bitec, Inc., 2009 Wisc. App. LEXIS 707, *16 – 17.
By that logic, the surety argued, the surety also would be liable for the 12-year supplier warranty because the contract required the contractor to provide it to the owner even though it was the supplier’s warranty. Perhaps, the court said, but that was not an issue for decision in the appeal.
The appellate court reversed. Absent any special surety defenses, if the contractor breached the extended warranty, the surety would be liable.
Bitec, Inc. teaches that apparently successful contract completion may not be the end of surety liability where extended warranties are required by the contract. A performance bond without a time limit might have a long tail indeed.
