Tokio Marine must pay surety bond in construction ruling

A federal appeals court overturned a lower court ruling Monday and held a Tokio Marine unit must pay a surety bond because a new contract issued in a construction project was essentially the same as the one under which its bond had been issued.

The litigation involves a water control and improvement district in Cloverleaf, Texas, that was building new headquarters, according to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Harris County Water Control and Improvement District Number 89 v. Philadelphia Indemnity Insurance Co; E&M Enterprises, Inc.

The district required Las Vegas-based E&M to post a performance bond, which it obtained from Tokio Marine unit Philadelphia Indemnity. Before work began, though, the district’s project manager backed out.

That led to the district and E&M executing a new agreement without Philadelphia’s knowledge or consent. After construction began, the project ran into trouble and the construction company failed to complete it.

When the district sought what it thought it was owed under the performance bond, Philadelphia refused to pay, claiming the second agreement had created a new contract it had never agreed to bond.

The district filed suit for breach of contract in U.S. District Court in Houston, which ruled in the insurer’s favor. It was overturned by a unanimous three-judge appeals court panel.

The panel said that since the 1960s, “the Supreme Court of Texas has held that only material alterations to a bonded contract will relieve a surety from its obligations.”

Details show that the new contract “was objectively intended to be an adjustment to the project manual” in the original agreement, “not a brand-new contract,” the ruling said, in reversing the lower court ruling and remanding the case for further proceedings.

Attorneys in the case had no comment or did not respond to a request for comment.