March 20, 2006

E-Mail This Article Steven Koprince Steven J. Koprince is an associate in the Vienna, Va., office of Wickwire Gavin, P.C. He specializes in construction and contract litigation, focusing on all phases of the construction process. Mr. Koprince can be reached at skoprince@wickwire.com. Wickwire Gavin, P.C. Download the complete opinion. U.S. court's decision.

United States Court of Appeals, 6th Sixth Circuit

By Steven J. Koprince
Wickwire Gavin, PC

Lexicon, Inc. v. Safeco Insurance Co. of America

No. 04-6086
February 9, 2006

If a contractor’s costs increase due to delays beyond the contractor’s control, can the contractor recover against a surety on a payment bond for those increased costs? In the absence of specific language in the payment bond addressing this issue, the contractor may recover some costs, but not others. As a recent Sixth Circuit decision demonstrates, the contractor may recover for increased labor and materials costs caused by such delays, but not for lost profit and overhead.

Lexicon was a construction contractor for the expansion of a melt shop and other facilities at a steel plant in Kentucky. The project’s general contractor, SMS Demag Co., entered into a subcontract with Icon Inc. to perform equipment installation and commissioning services. Pursuant to its agreement with SMS, Icon provided a payment bond through Safeco Insurance Co. of America. The payment bond allowed any of Icon’s subcontractors to sue on the bond if Icon failed to pay for work, labor or materials provided to the project. The bond did not define the terms “work,” “labor” or “materials.”

After the payment bond was issued, Icon hired Lexicon as a subcontractor to erect and install certain equipment. Lexicon experienced numerous delays on its subcontract, resulting in significant cost overruns. Lexicon was not responsible for the delays. Once Lexicon’s work was substantially complete, it sought an equitable adjustment to the subcontract, including payments for the delays and for various change orders agreed to by the parties. The parties agreed to a $1.5 million settlement for Lexicon’s contract claims, but the settlement agreement provided that Lexicon could still pursue its “delay and impact” claims.

Lexicon then filed suit against Safeco, arguing that the payment bond required Safeco to pay for the delay claims that were exempted from the settlement agreement. Safeco filed a motion for summary judgment, arguing that Lexicon’s claims were not for “work, labor or material” provided to the project, and therefore, were not covered by the payment bond. The district court awarded summary judgment to Safeco, and Lexicon appealed.

The appeals court upheld the district court’s award of summary judgment to Safeco in part and reversed in part, remanding the case to the district court for further proceedings.

First, the court addressed whether, in general, a contractor may recover on a payment bond for increased costs caused by delays outside of the contractor’s control. Citing precedent from other jurisdictions, the court held that “labor and material costs caused by delay can be recovered under a payment bond.” However, “damages for delay not related to labor and materials, or damages for breach of contract, may not be recovered.” Therefore, Lexicon’s ability to recover damages from Safeco depended on whether Lexicon’s delay claims were for increased labor and material costs or for unrelated damages.

The court found that certain damages claimed by Lexicon were not compensable. Specifically, the court held that Lexicon could not recover from Safeco for overhead and lost profits. In addition, Lexicon could not recover from Safeco for hours expended on the project beyond those contemplated in Lexicon’s original bid, because “[i]f Lexicon estimated the cost at ten hours for a job that ended up taking twenty hours on the scale that we see in Lexicon’s claim here, bonding companies would end up paying for the contractors’ too low bids.” However, the court found that several of Lexicon’s other damages claims were vague, and it was uncertain whether those claims were for increased labor and materials costs or for other, non-recoverable costs.

The Sixth Circuit affirmed summary judgment in Safeco’s favor on Lexicon’s claims for damages based on lost profits and overhead. It reversed summary judgment as to Lexicon’s other damages claims, and remanded to the district court to determine whether the remaining bond claims were for compensable labor and materials related to the delay.

In this case, the court found that a contractor could only recover on a payment bond for delay damages to the extent those damages represented increased costs of labor and materials. This case reflects the view of the majority of courts on this issue, and is an example of the limits of the protection afforded contractors by payment bonds.

Case participants: Michael D. Strong (Lathrop & Gage) and Robert M. Connolly (Stites & Harbison) for appellant.

Gregory J. Berberich (Gottesman & Associates) and J. Thomas Mellott (Statman, Harris, Siegel & Eyrich) for appellee.

Before: Judges Kennedy, Cook and Griffin.

Opinion By: Judge Kennedy.

Decision: Affirmed in part, reversed in part, and remanded.