Federal District Court: Language of the Bond is Clear and Explicit as to Bond Term and Penal Sum
I think that you will agree with me that it is quite satisfying to read a legal opinion in which the court correctly reads the plain language of the relevant performance bond and interprets it as was intended rather than as a creative wish-fulfillment dream of the obligee.
One such recent opinion was Plenary Infrastructure Belle Chase, LLC v. Aspen American Insurance Co., 2024 U.S. Dist. LEXIS 31032 (E.D. La. Feb. 23, 2024). In that opinion the federal district court considered and granted a motion for partial summary judgement filed by the surety. The court ruled in favor of the surety on both issues, finding as follows: (1) the surety was liable for its principal’s operations and maintenance obligations only during the term of the bond; and (2) the penal sum of the bond was the limit of the surety’s liability.
Factual Background
Plenary Infrastructure Belle Chasse, LLC (Plenary) was the general contractor on a public-private partnership bridge replacement project (Project) with the Louisiana Department of Transportation and Development (LA DOTD). Plenary was responsible for financing, design-build construction, tolling, and long-term operations and maintenance for the bridge replacement. Plenary and the LA DOTD executed a Comprehensive Agreement (Agreement) setting forth the terms and conditions for the Project, including that Plenary (or its subcontractor) was obligated to perform operations and maintenance (O&M) work until the existing bridge was decommissioned in accordance with the Agreement. The Agreement further required Plenary or its subcontractor to furnish a bond to secure its performance.
Plenary subcontracted the O&M work to DBi Services, LLC (DBi), which obtained an O&M bond (Bond) from Aspen American Insurance Company (Aspen), with Plenary as the obligee. Among other things, the Bond, in the amount of $599,400.00, provided that it was effective for one year, from January 21, 2021, to January 20, 2022.
On October 22, 2021, DBi ceased operations and was terminated. Plenary sent Aspen a letter making a demand under the Bond. Plenary claimed that Aspen not only was responsible for the damages that Plenary had incurred but also for those that it would incur after the Bond’s expiration date. On December 7, 2021, Aspen notified DBi and Plenary that it would not be renewing the Bond; so the Bond expired on January 21, 2022. On February 11, 2022, Aspen tendered $118,191.73 to Plenary but denied the remainder of the claim.
In response, Plenary filed suit against Aspen, asserting breach of contract for failure to pay the amount demanded by Plenary under the Bond. Plenary argued that, “because Aspen’s obligations were triggered by the Bond Term, Aspen is liable for all costs incurred by Plenary, without regard to whether or not the costs were incurred or anticipated to be incurred prior to January 20, 2022,” the last day before the Bond expired. In its motion, Aspen sought partial summary judgment on two legal issues related to Plenary’s claim under the Bond: (1) the term of the Bond (and dismissal of any claims for damages related to performance outside the Bond term); and (2) the penal sum of the Bond (and dismissal of any claims for damages in excess of the penal sum). In response, Plenary argued that the motion was premature and there were genuine issues of material fact regarding the extent of Aspen’s liability.
Court’s Analysis
In a nutshell, Aspen argued that the Bond only covered costs incurred for O&M work performed or to be performed during the Bond’s term—not for the entire period of the O&M contract, as Plenary asserted—based on the Bond language and the Agreement with LA DOTD. Aspen urged that Plenary was not entitled for costs incurred after January 20, 2021, and any amount above $599,400 because the plain language of the Bond stated that “the Bond was only effective to guarantee DBi’s performance of services for the one-year period of January 21, 2021 to January 20, 2022.” Aspen further argued that the “total amount for which Aspen can be liable to Plenary under the Bond is capped at the Bond’s penal sum.” In a creative response, Plenary contended that “Aspen’s interpretation of the contract leads to absurd consequences, and instead, the Bond Term establishes the time frame in which the subcontractor default will trigger Aspen’s obligations.”
The court began its analysis by citing a Louisiana statute, La. Civ. Code art. 2046: “When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent.” The court further opined as follows:
A performance bond, which guarantees that a contractor will perform the contract, is a conventional bond, so the language of the bond itself controls its meaning. . . . The language used in the conventional bond must be deemed to fully express the parties’ intent when the words are clear and explicit and lead to no absurd consequences. [Case citations omitted.]
Quoting from an esteemed construction law treatise, 4A Bruner & O’Connor Construction Law § 12:22 (2023), the court asserted that the penal sum is “‘the limit of the surety’s financial exposure under a performance bond. [It is] the sum stated on the face of the performance bond as the surety’s maximum liability to the obligee for completion of the contract or payment of the obligee’s actual costs of completion.’”
The Bond stated, in pertinent part, as follows:
DBI [sic] Services, LLC, as Principal, and Aspen American Insurance Company as Surety . . . hereby bind themselves . . . to Plenary Infrastructure Belle Chasse, LLC, as Obligee, . . . for all obligations incurred by the Principal under its O&M Contract for the maintenance of State Project . . . in the amount of . . . $599,400.00 for the Performance Bond furnished in accordance with Section 16.08(a) of the O&M Contract.
The Bond continues that the obligations of the principal and surety under the Bond are for the “maintenance of the Project’s current annual term only” and that the Bond is “subject to an annual renewal or replacement” of the Bond in accordance with Section 16.08(a) of the O&M Contract. In addition, the Bond provides that it “shall be effective from January 21, 2021 to January 20, 2022, unless said bond is released by the Obligee prior thereto, and may be continued by Continuation Certificate by the Principal and Surety.”
In consideration of these foregoing terms, the court found that “the language of the Bond is clear and explicit and leads to no absurd consequences, so no further interpretation is needed to determine the parties’ intent as to the term of the Bond." The court opined that “[t]he Bond clearly sets out limits to the suretyship: that Aspen’s obligations continue for the annual term (January 21, 2021 to January 20, 2022) only, unless the bond is released early by Plenary or if DBi and Aspen extend the Bond.” [Emphasis added.] The court observed that neither party alleged that the Bond was extended and that Aspen notified Plenary on December 7, 2021, that the Bond would not be renewed.
With regard to the penal sum, the court found, again, that the language of the Bond was clear and explicit: Aspen could be liable under the Bond for costs up to $599,400. The court declined to look at extrinsic evidence beyond the four corners of the document, as Plenary urged, to determine that the parties agreed that Aspen would not be liable for contractual damages in excess of the penal sum.
Thus, having found the relevant language of the Bond “clear and explicit,” the court granted the motion for partial summary judgment in favor of the surety on both issues: (1) the surety was only liable for its principal’s O&M obligations during the Bond term, and (2) the penal sum was the limit of the surety’s liability. Another satisfying legal opinion in which the court correctly interpreted the clear and explicit language of a bond.
The author of this article is Martha Perkins, General Counsel at NASBP. She can be reached at mperkins@nasbp.org or 240.200.1270.
This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels and should not act upon any information contained in this article without such advice.