Contract documents

August 15th, 2024

The issue of the payment of attorney’s fees can be a hotly contested topic. Construction claims are often extremely complex, as they typically involve multiple parties and numerous claims that arise out of equity and the contract. As a consequence, disputing parties may pay significant sums for attorneys to investigate disputes, prepare legal arguments, advise parties of their rights, and devise a path to settlement. Parties may claim that their attorney’s fees should be paid by the opposing party. This is especially true when the underlying contract includes provisions relating to attorney’s fees. Recently, the Court of Appeals of Indiana held that a surety was not entitled to recovery its attorney’s fees from the bonded obligee, despite the surety’s claim for breach of obligee’s bonded obligations.

In Great American Insurance Company v. Cline Avenue Bridge, LLC,[1] project owner Chicago Avenue Bridge (CAB) entered into a design and construction contract with Figg Bridge Builders to build the Cline Avenue Bridge in East Chicago. The construction contract included a provision for attorney’s fees and costs in the event of breach by CAB.[2] It also specified that no rights were created for third parties except as related to assignment to Figg’s surety. As required by the contract, Figg obtained AIA Contract Documents A312^®-2010 Payment Bond and A312^®-2010 Performance Bond from Great American Insurance Company (GAIC).[3] Consistent with AIA Contract Documents standard language, the performance bond required GAIC to pay its obligation if the obligee, CAB, was not in default and after CAB provided notice to GAIC that CAB was considering declaring Figg in default. The performance bond did not provide for attorney’s fees.

In 2017, CAB issued a notice to proceed and triggered a 30-month substantial completion schedule. Figg did not meet that schedule. Despite not providing advance notice to GAIC, CAB terminated the construction contract with Figg due to ongoing delays and subsequently hired a third-party to complete the project. CAB sought payment from GAIC under the performance bond for these costs. In response, GAIC concluded it had no liability for payment because CAB did not provide notice to GAIC of its termination of Figg and CAB’s hiring of a third party.

Figg filed suit against CAB for breach of contract, which lead to arbitration where Figg was awarded damages and attorney’s fees.[4] Meanwhile, CAB sued GAIC alleging liability under the performance bond due to Figg’s breach. GAIC counterclaimed, arguing CAB’s termination of Figg without notice caused it financial losses under the payment bond. GAIC and CAB settled most claims, but disputed GAIC’s counterclaim for attorney’s fees related to CAB’s breach.

In upholding summary judgment in favor of CAB, the Court of Appeals of Indiana held that GAIC had no contractual or equitable basis from which it could recover its attorney’s fees from CAB. First, the Court found that the plain language of the bonds did not entitle GAIC to recover its attorney’s fees.[5] The Court stated that neither of the bonds provided GAIC with a contractual right to recover its attorney’s fees in a dispute under the bonds.

The Court also found that GAIC was not entitled to claim Figg’s contractual right to recovery attorney’s fees under the construction contract.[6] GAIC argued, as surety, it is entitled it to fees from CAB by way of Figg’s right to claim attorney’s fees under the construction contract. GAIC argued that the construction contract was incorporated by reference into the bonds and additionally, under the doctrine of equitable subrogation, it is entitled to stand in Figg’s shoes and to make the same demands that Figg could have made. The Court reasoned that if Figg had breached the contract and GAIC completed Figg’s obligations on the project, and if Great American were then successful in a dispute with CAB over GAIC’s performance of Figg’s obligation, it may be able to claim Figg’s right to recover attorney’s fees. However, in this case, CAB breached the contract, not Figg. Thus, the Court found that the incorporation of the construction contract to be irrelevant. Since the Court found that GAIC did not step into Figg’s shoes under the construction contract, it denied GAIC’s equitable subrogation claim.

Finally, the Court found that GAIC’s reliance on its right of assignment to be misplaced.  GAIC argued that under an indemnity agreement entered into with Figg, wherein Figg assigned all future construction contract to GAIC in consideration for issuance of bonds, GAIC was entitled to rely on Figg’s right to recover attorney’s fees under the construction contract.[7] The Court found that the indemnity agreement did not apply because Figg assigned its future construction contracts in order to “secure the obligation of and ‘any other indebtedness and liability’ owed by Figg to Great American.”[8] The indemnity agreement provided that it was effective “only in the event of … any abandonment, forfeiture or breach or alleged breach of any contracts referred to in the Bonds ….”[9] Because the Court found that GAIC never stepped into Figg’s shoes due to a purported breach by Figg, and Figg has no liability to Great American, the indemnity agreement was not an avenue for GAIC to recover its attorney’s fees from CAB.

Parties should be aware of the claim for attorney’s fees after a dispute arises. This includes a surety’s right to attorney’s fees and costs. However, as this case shows, this right may be limited by a court of competent jurisdiction. It is important to note that the above conclusion made by the Court of Appeals of Indiana may not always be the result in a different jurisdiction and under a different set of facts and circumstances. Parties should be informed and aware of claims that may be asserted by sureties when bonds are procured for a project.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.  

[1] 235 N.E.3d 1269 (Ind.App., 2024)

[2] Id. at 1271.

[3] Id. at 1272.

[4] Id. at 1273.

[5] Id. at 1276-77.

[6] Id. at 1277.

[7] Id. at 1277-78.

[8] Id. at 1278.

[9] Id.