Construction Risk Management
Big Disputed Oregon Power Plant Surety Claim Inches Toward Trial
Zurich and Liberty Mutual contend that the bankrupt contractor was not properly terminated.
One of the biggest surety bond claim disputes in years inched closer to a trial last month when the parties agreed that separate lawsuits in federal court in Portland should be merged into a single case. At issue is whether a utility improperly terminated its contract with a power plant prime contractor, opening the way for the sureties to deny a possible $179 million claim.
Oregon-based Portland General Electric Co. filed a lawsuit in February, 2016 against sureties Zurich American Insurance Co. and Liberty Mutual Insurance Co. when the companies declined to respond to the utilities’ claim under their bonds. The two sureties argued that PGE had improperly terminated Abengoa Abeinsa, the Spain-based prime contractor that had completed some notable energy projects in the U.S. but had filed for bankruptcy or insolvency-type protection in courts in Spain and the U.S. The sureties had advanced $5 million to PGE to keep work going on the project in late 2015.
The dispute over the claims involves the Carty Generating Station, a 440-Mw natural gas generating station near Boardman. Since the contractor’s financial trouble stopped it from working, PGE itself managed the work to finish on the project, which went into service in July, but PGE claims it also has footed the bill for defects it says were the responsibility of Abengoa.
Last year, federal bankruptcy court was the first place where the tensions over the bond claim became public.
Liberty Mutual and Zurich said in bankruptcy court pleadings that they had issued surety bonds to Abengoa units with penal sums exceeding $250 million, including bonds in the amount of $145.6 million for the Oregon project. The sureties initially denied liability for the whole amount in a letter sent to the utility last March, according to a PGE statement. In a bankruptcy court pleading dated April 20, Zurich said the sureties “dispute” potential power plant bond claims by PGE of losses between $179 million and $236 million.
Subsequent court complaints in federal district court show some of the details surrounding the contractor’s termination and the defects the sureties say violated the surety agreement and excuse them from paying the claim.
The events, as recited in PGE’s lawsuit, built gradually into a crisis in late 2015, when Abengoa obtained protection from creditors in Spain and already had fallen behind in payments to subcontractors. PGE claims that Abengoa’s failure to pay numerous subcontractors triggered firms to place liens on the Carty Project and make claims against PGE in an amount of approximately $30 million.
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In December, said PGE, the utility wrote Abengoa a termination letter, declaring the contractor in default on its engineer, procure and construct contract. The same day, PGE said in its lawsuit complaint, the utility wrote to the sureties to inform them that it terminated the contractor under the terms of the performance bond.
In its response to the complaint, the sureties admit that PGE sent a letter to Abengoa “purporting to declare a default under the EPC contract and notified the sureties.” But the sureties deny the remaining allegations in PGE’s description of what transpired, apparently intending to contest that PGE properly terminated Abengoa under the terms of the performance bond. It is possible that the sureties would have preferred to continue to finance Abengoa's participation on the partly completed project, especially since they had advanced $5 million to PGE, under a “full reservation of rights,” to keep the project going.
An attorney for PGE declined to comment on the litigation and an attorney for the sureties could be reached for comment on the allegations or the prospects of a trial.
Abengoa is now working with global creditors to exit bankruptcy.
