Fidelity & Deposit Co. of Maryland v. Bondwriter Sw., Inc – 7/28/2011
Arizona Court of Appeals Division One Holds That The Comparative Fault Principles Set Forth in A.R.S. § 12-2506 Do Not Apply to Damages on Breach of Contract Claims.
In 2000, Plaintiff Fidelity entered into an agency agreement and power of attorney agreement with Defendant Bondwriter and its employees, David Sparks and Katherine Stanton (collectively “Bondwriter”). The agreements authorized Bondwriter to solicit applications for surety bonds on behalf of Fidelity but required Bondwriter to obtain approval from Fidelity before executing any bond or giving any commitment on Fidelity’s behalf. In July 2004, without Fidelity’s approval, Bondwriter accidentally issued and delivered performance and payment bonds to a general contractor, Adaptive, for a project with the City of Flagstaff. Bond writer realized its error and retrieved the bonds two days later, but not before Adaptive had signed the bonds and delivered copies to Flagstaff. Neither Fidelity nor Bondwriter knew that Flagstaff had received copies of the bonds. When Adaptive failed to complete the project, Flagstaff made claims against Fidelity on the bonds. Fidelity conferred with outside counsel and decided to honor the bonds.
In 2006, Fidelity sued Bondwriter alleging breach of contract and negligence for issuing the Flagstaff project bonds without Fidelity’s approval. After a three-day bench trial, the trial court found in favor of Fidelity on both its contract and negligence claims and calculated damages for both claims at $511,061. The court, however, apportioned the contract damages between Adaptive, Adaptive’s employees, Flagstaff, and Bondwriter, and entered judgment against Bondwriter for only 5% of the total damages. The trial court also awarded only 5% of Fidelity’s requested attorneys’ fees. Fidelity timely appealed, and Bondwriter cross-appealed.
The Arizona Appeals Court affirmed in part, vacated in part, and remanded. The Court first held that A.R.S. § 12-2506 does not allow the apportionment of contract damages, based primarily on the plain language of that statute. The history and purpose of the statute further demonstrate that it was intended to apply only to torts, and other jurisdictions have reached similar conclusions. Thus, the Court vacated the judgment and remanded for an entry of a revised judgment in favor of Fidelity, including a revised attorneys’ fees award.
The Court then turned to Bondwriter’s cross-appeal issues. The Court first rejected Bondwriter’s argument that Fidelity ratified the issuance of the bonds by paying Flagstaff’s claims. The Court explained that there was sufficient evidence in the record from which the trial court could have concluded that Fidelity paid the claims to protect its own interests and avoid loss, which does not constitute ratification. See Restatement (Second) of Agency § 101(b) (“Ratification is not effective . . . if the principal is obliged to affirm in order to protect his own interests.”).
The Court next addressed Bondwriter’s argument that it did not breach the agency agreement or power of attorney agreement because it never legally executed the bonds since the originals were not delivered to Flagstaff. The Court rejected this argument because even if the bonds had not been executed, the agreements prohibited Bondwriter from giving any “commitment” without Fidelity’s approval, and sending bonds to Adaptive constituted a commitment.
Finally, the Court rejected Bondwriter’s argument that the Court improperly awarded damages to Fidelity on its contract claim, explaining that the damages were foreseeable and Fidelity made reasonable efforts to mitigate those damages by consulting with outside counsel before paying the claims.
Judge Gemmill authored the opinion; Presiding Judge Johnsen and Judge Brown concurred.