A developer formed a limited partnership to construct and operate an apartment complex. The partnership sought to use a mortgage guaranteed under a program of the U.S. Department of Housing and Urban Development (HUD). As a condition of HUD-guaranteed financing, HUD required “an assurance of completion” from the contractor. The partnership directed the construction contractor with whom it was negotiating to obtain and to furnish to the partnership a letter showing that the contractor was “a bondable company.” The contractor turned to its producer, with whom it had a pre-existing business relationship, to generate a letter concerning its surety credit relationship. The letter, dated in August 2000 and signed by the producer as attorney-in-fact for the surety company, stated the following:

After receipt of the letter, the partnership continued to negotiate with the construction contractor, intending to finalize the construction contract and to close on the HUD financing in mid-December. Over the next several months, the contractor’s financial position declined significantly due to problems on other construction projects, prompting its surety company to inform the contractor’s producer in mid-October that the surety company was suspending all bonding support for the contractor “until further notice.”

In November, the surety company decided that it no longer would bond the contractor, whereupon the contractor informed the partnership that it was experiencing problems securing performance and payment bonds for the apartment project, but assured the partnership that it could work out this problem. In early December, the contractor further informed the partnership that it would not be able to secure performance and payment bonds before the end of the year. Shortly thereafter, the producer sent a letter to the partnership stating that “an acceptable contract was not received” and “[i]n the absence of a contract and application, [the surety company] did not issue any bond in connection with the reference project.”

The partnership had started negotiations with a second contractor for the project and, in February 2001, closed on the HUD financing with the second contractor. The construction contract was in the amount of $18.9 million, a $1.9 million increase over the amount the partnership intended to pay the first contractor. The partnership initiated lawsuits against the surety company, the bond producer, and the first contractor, among others, alleging claims of breach of contract against the surety company and fraud against the surety company, the bond producer, and the first contractor. At trial, the jury awarded the partnership more than $4.7 million dollars in damages against the surety company on the breach of contract claim and the fraud claim. The surety company then brought an appeal, arguing, among other things, that the “bondability” letter did not constitute an enforceable contract.

The appellate court first examined the surety company’s contention that the bondability letter was not an enforceable contract, noting that a contract “is legally binding only if its terms are sufficiently definite to enable a court to understand the parties’ obligations.” The appellate court further observed that “[w]hen an agreement leaves material matters open for future adjustment and agreement that never occur, it is not binding upon the parties and merely constitutes an agreement to agree.” The appellate court also concluded that a surety bond contract, including a contract to issue bonds, must comply with the statute of frauds, a statute that is satisfied when a written memorandum exists “which is complete with itself in every material detail and that contains all of the essential elements of the agreement, so that the contract can be ascertained from the writing without resorting to oral testimony.”

In ascertaining whether the “bondability” letter contained all the “essential terms” needed to comply with the statute of frauds, the appellate court pointed out that, among other essential terms, the letter failed to include any information regarding the consideration—e.g., the price—that the surety company would receive for issuing the bonds and ruled that the letter was “too indefinite” to form a binding agreement that complies with the statute of frauds.

The appellate court next turned to the fraud claims, each of which were based on a separate alleged misrepresentation, and noted that the first was predicated on a claim of fraudulent inducement—i.e., the surety company misrepresented its willingness to issue the bonds—and the second on a claim of common-law fraud—i.e., the surety company misstated in the letter the single and the aggregate surety bonding lines of the construction company. A claim by a party that it was fraudulently induced to enter into a contract cannot stand in the absence of an enforceable contract, reasoned the appellate court.

The appellate court then tackled the claim alleging common-law fraud. Noting the surety company’s admission that the “bondability” letter contained a “false statement of fact”—i.e., incorrect bonding line amounts, the appellate court reasoned that the partnership could not have reasonably relied on that statement and, in any event, the partnership’s damages were not caused by the misrepresentation regarding the amount of the contractor’s bonding line. In making its determination, the appellate court pointed out that the “bondability” letter did not contain a representation that the bonding line would continue indefinitely, or even past the date of the letter. Without such a representation, the partnership could not have justifiably relied on the letter as a firm commitment by the surety company to issue bonds in the future, reasoned the appellate court.

Moreover, opined the court, the misrepresentation in the letter was not the cause-in-fact of any partnership damages; rather, any damages suffered by the partnership would have resulted from the fact that the contractor’s financial condition had deteriorated, rendering the contractor incapable of obtaining bonding, not from a misstatement of the contractor’s existing bonding line. For these reasons, the appellate court reversed the trial court’s decision.