Surety's Liability on Bond Not Contingent on Formal Declaration of "Default"
While it took four separate opinions involving the nine Justices, yesterday the Supreme Court decided in the Colorado Structures v. Ins. Company of the West case that:
- By a 6-3 vote, the Obligee on a surety bond (i.e., the GC where a subcontractor bond is at issue, and the Owner where a GC bond is at issue) need not declare the Principal (the subcontractor or GC) to be in default before triggering the Surety's liability on the bond, and
- By a 5-4 vote, the Olympic Steamship doctrine applies to surety bonds, which now means that the party seeking relief on the bond (normally the Obligee) is entitled to recover its attorneys fees as the prevailing party and that such recovery is not limited by the penal sum of the bond.
Of the two holdings, the Olympic Steamship may be the more durable because the surety industry presumably can (as signaled by the lead opinion) tinker with the language of the standard bond form to make a declaration of default -- which the Court defined as an intent to terminate the contract, as distinguished from a breach of the contract -- to be a true condition precedent to the surety's duty to pay. The Olympic Steamship holding, by contrast, was the Court's policy determination that fees ought to be paid in this context just as they are paid in the liability insurance context
Copy of lead opinion also available here Download file