Introduction

For over a century and a half, it has been blackletter law in the United States that the “penal sum” or, as used by Virginia courts, the “face amount,” of a surety’s bond is the limit of a surety’s liability.  While there are some well-known exceptions, as a general rule, American courts have remained faithful to the sanctity of the face amount of a surety bond.

But what about when a construction contract, incorporated by reference into a bond, contains an attorneys’ fees provision?  In Virginia, may a court award attorneys’ fees against a surety in excess of the face amount of the bond where bad faith or a takeover of work is not involved?

Virginia Needs A Clear Statement Of Law On This Issue

Surprisingly, the law is not clear in Virginia on whether a court can award attorneys’ fees against a surety in excess of the face amount of the bond.  When considering the issue of attorneys’ fees exceeding the face amount of a bond, one would presume that Virginia would follow other jurisdictions that generally cap damages against sureties to the amount of the bonded obligation.  However, this precise issue has eluded direct consideration by Virginia’s highest courts.

One of the few Virginia Supreme Court decisions even mentioning the concept of attorneys’ fees in excess of the face amount of a bond is 35 years old and ambiguous enough to provide fodder to both sides of the argument.  In Board of Supervisors of Stafford County v. Safeco Insurance Company of America, the Virginia Supreme Court considered whether the county could recover consequential damages against Safeco under a performance bond in excess of the face amount of the bond.  Safeco, 226 Va. at 339.  The bond in question contained the following limiting language: “[T]he liability of the Surety for any and all claims hereunder shall in no event exceed the penal amount of this obligation as herein stated.”  Safeco, 226 Va. at 333.  The Virginia Supreme Court held:

Under the statute and the limiting language of the bonds we hold that the trial court correctly ruled that the County could not properly claim consequential damages other than interest. The principal amount of the judgment against Safeco may not exceed the aggregate principal amount of the bonds. We hold that the County has made out a prima facie case for recovery of a judgment in the principal amount, limited to the face amount of the bonds.

Id. at 339.

At first blush, the holding appears to state that only interest may exceed the face amount of the bond.  But a closer examination reveals that it is unclear whether the issue of attorneys’ fees is even before the court on appeal.  The holding encompasses “consequential damages other than interest.” Safeco, 226 Va. at 339 (emphasis added).  But the court did not mention interest when it framed the issue on appeal: whether “the trial court erred in…denying the County the right to seek compensatory damages in excess of the face amount of the bonds.”  Id. at 331-332.  This is important because the county’s other counts in the complaint sought, “judgment in the face amounts of the bonds…with interest, costs, and attorney’s fees.”  Id.

Without examining the underlying briefs of a 35-year old case, it is unclear whether attorneys’ fees are even part of the Safeco decision.  It is possible that the appealed consequential damages count also included a request for attorneys’ fees in addition to interest, with the court only mentioning interest because it is treated differently.  In other words, this would mean that the court considered attorneys’ fees as being included in the consequential damages.  Alternatively, the court might not have mentioned attorneys’ fees because that issue was not before the court, and the court’s reference was made, in dicta, as a general statement that interest may exceed the face amount of a bond.

Also, even if Safeco is on point, the importance of the holding is reduced by its reference to the statutory basis for limiting damages to the face amount of the bond.  See Safeco, 226 Va. at 339 (“[u]nder the statute and the limiting language of the bonds…”).  The statute referenced by the court was a previously repealed statute that “provided that judgment against a surety could not be obtained for more than the amount to which his liability was limited on the bond.”  Id. at 338 (referring to §8-353 of the Code of 1950).  According to the Safeco court, the statute was repealed because it “merely declared what were ‘longstanding and clear principles of substantive law.’”  Id.  The repealed statute is referenced in the holding because the saving provision of Virginia Code Section 8.01-1 would retroactively apply the repealed law to the facts of Safeco.  Nevertheless, it provides an argument to attorneys wishing to diminish the effect of the Safeco by stating that the decision depended on a now-repealed statute.

Other Virginia cases do not address the attorneys’ fees issue directly and are of limited value on the specific issue of attorneys’ fees other than standing for the general proposition that recovery is limited to the face amount of a bond.  In other cases, where the face amount of a bond is exceeded, extenuating circumstances such as bad faith or surety takeover of work make those cases inapposite to this analysis.

Why Is This Important?

Virginia’s lack of a clear judicial interpretation on this issue is important because the ambiguity leads to needless increased attorneys’ fees and bonding costs.  Even a newly minted attorney could fashion together a good-faith argument that, based on the current state of the case law, attorneys’ fees may be recovered in excess of the face amount of a bond.  Moreover, to the extent the text of a hypothetical bond limits recovery for “completion costs,” “cost to complete the work,” or other similar costs to the face amount of the bond, it could be argued that the limitation does not include attorneys’ fees because they are not completion costs.  The result is extended legal briefings on the issue and increased costs to the client.

An even worse scenario would be in an arbitration where the arbitrator (or panel) is unfamiliar with Virginia law and understands the bond limit in Virginia to only “cover the cost of completion of the improvements.”  See Bd. of Supervisors of Fairfax County v. Ecology One, Inc., 219 Va. 29, 36 (1978).  In jurisdictions where statutes permit recovery of attorneys’ fees on successful bond claims, such as Florida, Washington, or Texas, the concept of attorneys’ fees being layered on top of the face amount of a bond may be typical practice for a non-Virginia arbitrator.  Given the ambiguous state of Virginia law, it would be difficult to overturn such an award based an arbitrator’s manifest disregard of the law.

 

 

Conclusion

The easiest way for a surety to address the issue of whether attorney’s fees may exceed the penal sum of the bond is to include express language in its bonds specifically addressing attorneys’ fees.  For example, such language could state that “in no event shall the total liability of the Surety, including liability for any attorneys’ fees, costs, and/or pre-judgment interest to the extent applicable, exceed the amount of this bond.”  In the meantime, the industry must await the legislature or a court to clarify whether attorneys’ fees may be recovered in excess of the face amount of a bond in Virginia.

To determine how Watt Tieder can help address or mitigate the issue of attorneys’ fees on the face amount of a surety bond in Virginia, please contact Jonathan Wright: (703) 749-1062 or jwright@watttieder.com.

 

Re-printed (in part) from the Virginia State Bar Construction Law and Public Contracts Newsletter, Issue No. 72, Spring 2018.