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Appeals court overturns bond ruling in favor of Hanover unit

Corps of Engineers

A federal appeals court overturned a ruling in favor of a Hanover Insurance Group unit in a dispute over a bond, ruling the lower court’s decision was premature.

In 2013, Memphis, Tennessee-based Dunbar Mechanical Contractors LLC, which is designated a Service Disabled Veteran Owned small business, was awarded an Army Corps of Engineers ditch and tributary project in Arkansas with a $2 million bid price, according to Thursday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Hanover Insurance Co. v. Dunbar Mechanical Contractors, LLC.

The same day it was awarded the prime contract Dunbar entered into a subcontract agreement with Poplar Bluff, Missouri-based Harding Enterprises LLC to work on the project for $1.7 million. A month later, it entered into a separate employment agreement with Gregg Harding, Harding Enterprise’s sole member, to serve as the project manager for $62,000, the ruling said.

Hanover Insurance, a unit of Worcester, Massachusetts-based Hanover Insurance Group, issued a bond for the full stated value of the contract, listing Harding Enterprises as the principal and Dunbar as the obligee, according to the ruling.

In April 2017, Dunbar informed Hanover it was terminating Harding Enterprises as the subcontractor and Gregg Harding as the project manager because of Harding Enterprises’ alleged default under the subcontract agreement. “Dunbar demanded performance on the bond,” the ruling said.

During an investigation, Hanover discovered Dunbar had subcontracted more than 85% of the work under the prime contract to Harding Enterprises, which was against federal regulation, and denied Dunbar’s claim on that basis.

Hanover then filed suit in U.S. District Court in Jonesboro, Arkansas, seeking a declaration it had no obligation to Dunbar under the bond and seeking rescission of the bond on the basis of the underlying contract’s alleged illegality.

The district court granted Hanover summary judgment in the case, concluding the subcontract “undisputedly violated federal law” because the amount of the contract plus Mr. Harding’s compensation amounted to 90.66% of the value of the primary contract, despite the federally mandated 85% limit.

A three-judge appeals court panel unanimously overturned the district court ruling. “Based upon the language of the regulation, we agree with Dunbar that the district court erroneously concluded that the subcontract was undisputedly in violation of this regulation because the percentage that Dunbar spent on contract performance relative to the prime contract price could not be conclusively ascertained until conclusion of performance of the primary contract,” the ruling said, in reversing the lower court and remanding the case for further proceedings.

Dunbar’s attorney, Matthew W. Willis, with Ashley, Ashley & Arnold in Dyersburg, Tennessee, said, “The court analyzed the statute very carefully and very thoroughly” and “obviously we believe they got it right.”

Hanover had no comment on the ruling.

Earlier this month, a federal appeals court affirmed a lower court ruling and held the former partial owner of a now-bankrupt energy company must compensate RLI Insurance Co. in connection with the firm’s failure to meet its bond obligations.