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A Missouri case illustrates a frequent issue that arises in construction: a surety that refuses to pay a subcontractor's payment bond because the contractor-principal denies any amount is due. The case entails a "vexatious refusal" to pay the claim promptly. The case involves a dispute about a contractor's backcharges against a subcontractor whose lack of manpower allegedly caused project delays.
Welcome to our new readers in eastern Missouri!
For more than five years, this column typically has selected a recently decided case to illustrate a particular issue of construction law. Usually, the selected case was from one of the three states of the then-readership areas, Illinois, Indiana or Wisconsin. Now we add Missouri to the mix.
In that spirit, this month we discuss a Missouri case to illustrate an issue often confronted, a payment bond surety's refusal to pay a subcontractor's payment bond claim because the contractor-principal denied any amount was due, Jerry Bennett Masonry, Inc. v. Crossland Construction Co., 2005 Mo. App. LEXIS 1104 (S. Dist. July 29, 2005).
Under Missouri statutes, Mo. Rev. Stat. §34.057 (2000), 18 percent interest and attorneys' fees can be awarded on the subcontractor's payment bond claim for the surety's "vexatious refusal" to pay the subcontractor's claim promptly. (This compared to a standard Missouri pre-judgment interest rate of 9 percent, Mo. Rev. Stat. §408.020 (2000).
A 'Vexatious Refusal'
What is a "vexatious refusal" to pay© If a court eventually determines that the contractor did owe the subcontractor, does the subcontractor claimant necessarily recover the interest penalty and attorneys' fees from the surety for the surety's original refusal to pay©
The Jerry Bennett Masonry case involved a dispute about a contractor's backcharges against a masonry subcontractor whose lack of manpower allegedly caused project delays.
The contractor refused to pay the subcontractor's retainage of $67,057. The contractor contended that the subcontractor's failure to provide adequate manpower resulted in damages to the contractor of $171,140.
The subcontractor claimed against the contractor's payment bond. The surety refused to pay, citing the contractor's position.
The subcontractor sued the contractor and the surety. The subcontractor sought payment of the retainage from the contractor and surety, interest of 9 percent from the contractor and penalty interest of 18 percent and attorneys' fees from surety for "vexatious refusal" to pay under §34.057. The Contractor counterclaimed for $171,140.
After a bench trial, the trial court determined that the subcontractor had failed to provide adequate manpower for the timely completion of the project but that the contractor suffered from its own inadequate planning during some phases of the project. The trial court awarded the subcontractor its retainage less a set-off of $33,496 for the contractor's damages.
The contractor's damages awarded were the reasonable value of some extra road and sidewalk construction the contractor performed in lieu of the owner's assessment of $129,000 for 86 days of liquidated damages. The trial court denied the balance of the contractor's claimed damages. The result was the contractor recovered only 20 percent of the contractor's counterclaim.
The net positive recovery to the subcontractor was $33,561. The trial court awarded no interest to the subcontractor on any of the subcontractor's interest claims against the contractor or the surety.
An Appeal Filed
The subcontractor appealed, but the contractor and surety did not.
On appeal, the appellate court reversed the trial court's refusal to grant 9 percent interest on the net recovery to the subcontractor. Otherwise, the appellate court affirmed the trial court's judgment, Jerry Bennett Masonry, Inc., 2005 Mo. App. LEXIS 1104, *41.
The Jerry Bennett Masonry appeal involved a number of legal issues. Space limitations prevent us from discussing the issues beyond the question of whether the subcontractor should have recovered penalty interest and attorneys' fees for the surety's "vexatious refusal" to pay.
Like in many situations, the surety had deferred to the contractor's directives to the surety not to pay the bond claim originally. The subcontractor claimant argued on appeal that the surety should have paid, promptly after submission of the bond claim, at least that portion of the claim awarded after trial. The surety's refusal to pay earlier, according to the subcontractor, was "vexatious."
Relevant Principles
The Jerry Bennett Masonry appellate court summarized the applicable Missouri principles of law:
1. Because statutes providing for a surety's refusal to pay are penal in nature, they are strictly construed, Jerry Bennett Masonry, 2005 Mo. App. LEXIS 1104, *32 citing Missouri Department of Transportation ex rel. PR Developers, Inc. v. Safeco Ins. Co., 97 S.W.2d 21, 42 (Mo. App. 2002).
2. To recover penalties for vexatious refusal to pay, the claimant must show that the refusal was willful, and without reasonable cause, as the facts would have appeared to a reasonable person before trial, Id.
3. If there is an open question of fact or law, a surety may insist on a judicial determination of such question without facing the statutory penalties for vexatious refusal, Id.
4. Under Missouri decisions, a surety for a solvent principal need not independently investigate a bond claim to avoid a penalty for vexatious refusal.
5. "The test [for vexatiousness] is not the final determination of the issues, but rather, how the facts appeared at the time of the refusal to pay," Jerry Bennett Masonry, Inc., 2005 Mo. App. LEXIS 1104, *33 quoting Morris v. J.C. Penney Life Ins. Co., 895 S.W.2d 73, 76 (Mo. App. 1995).
In Jerry Bennett Masonry, the contractor-principal was solvent and, at the time of the subcontractor's payment claim, asserted a counterclaim of nearly three times the subcontractor's claim. Applying the Missouri rules and considering "all the facts and circumstances," the appellate court could not say that the surety's refusal to pay the bond claim was willful and without reasonable cause. Thus, the subcontractor could not recover the penalty interest rate or attorneys' fees.
The Jerry Bennett Masonry appellate court did not comment on the fact that the contractor-principal ultimately prevailed on only 20 percent of that counterclaim. The result on the subcontractor's "vexatious refusal" claim might have differed if the contractor-principal had been insolvent or had not recovered a portion of its counterclaim.
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