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Virtually all public contracts, and many private contracts, require any contractor bidding for the work to provide a surety bond guaranteeing payment and performance obligations. In order to obtain surety bonds, contractors must demonstrate financial strength and viability. If a contractor lacks sufficient financial strength to qualify for surety bonds, then it is effectively foreclosed from bidding on or being awarded public contracts and at least some private contracts.
There are many factors that go into a contractor’s ability to obtain surety bonds. Financial strength can be measured in terms of capitalization of the company, debt, ongoing projects, and track record of success. If a contractor is weak or overextended in one or more of these areas, it may find it difficult, or even impossible, to obtain bonding. That in turn may make it difficult for the contractor to obtain work, including work that in the past might have been its bread and butter.
Obviously, it may not be anyone’s fault if a contractor is financially weak or otherwise unable to bond. Financial weakness may result from poor estimating, poor project management, bad luck or factors beyond anyone’s control, and sometimes even reasonably strong contractors may have difficulty bonding (for example, the surety markets became very hard immediately following the 9/11 attacks). But what if a contractor’s financial weakness or inability to bond is directly attributable to the conduct of another party, for example an owner wrongfully withholding payments on a project? In those circumstances, can the contractor claim damages from the owner for its impaired bonding capacity? In other words, can the contractor claim lost profits on jobs it was unable to bid but otherwise reasonably expected to be awarded?
These questions have been commonly posed in disputes between contractors and owners in Colorado and other jurisdictions. Until recently, however, we did not know the answer in Colorado. We now do. The answer is definitive: Claims for lost profits based on impaired bonding capacity, resulting in a contractor not being able to bid on and obtain other public works projects, are too speculative as a matter of law and therefore not permitted in Colorado.
This issue was decided in February, 2007 by the Colorado Court of Appeals in Denny Const., Inc. v. City and County of Denver. Dennywas a contractor for Denver Water on the construction of an office building. Denver Water withheld certain amounts under the contract, claiming that Denny was in default under the contract. The case was tried to a jury, which found in favor of Denny and awarded relatively modest damages (about $25,000) for payment owed under the contract for work performed, plus approximately $150,000 for costs, expenses and unreimbursed payments made by the surety as the result of Denver Water’s claim on the performance bond. Most of the damages, which were in excess of $1,000,000, were for lost profits attributable to contracts that Denny could not bid due to impairment of its bonding capacity.
Not surprisingly, Denny’s surety restricted its access to bonding and ultimately declined to provide any bonds on future projects. This effectively precluded Denny from bidding on any public contracts. Denny claimed that, as a result of its impaired bonding capacity, it had lost over $1,500,000 in additional profits over a three-year period during which it was unable to bid on public projects.
Despite the fact that Denny had been successful in obtaining awards of other public contracts in the past, the Court of Appeals reversed the verdict for lost profits based on
impaired bonding capacity. In doing so, the Court of Appeals noted that while Denny submitted a list of projects it believed it could not bid due to its loss of bonding capacity, it did not identify any specific projects that it actually lost as a result of its lost bonding capacity. Of course, it would have been next to impossible for Denny to actually prove which projects it actually lost, since it was not in a position to bid. The Court went on to note that “whether a party bidding on a particular public project is successful in obtaining the contract depends on a host of factors in addition to bonding capacity. Moreover, profit on such a contract is dependent, in part, on unpredictable future events such as weather, changes in labor and material costs, and changes in management personnel, to name a few. In short, Denny’s theory of lost profits is ‘based on inferences piled upon inferences.’”
Ultimately, the Court of Appeals concluded that “a claim that a party would have received profits from future public project contracts if its bonding capacity had not been impaired is speculative as a matter of law.” In reaching that finding, the Court joined dozens of other jurisdictions that have come to the same conclusion. The Court of Appeals also noted that the damages for lost profits were not reasonably foreseeable, which was another basis for not permitting the claim.
While impaired bonding capacity is a very real problem for contractors, contractors need to be aware that such impaired bonding capacity will not provide a basis for damages in disputes with owners. It might be true that contractors whose bonding capacity is impaired will lose work that they otherwise would have obtained, and in that sense they are genuinely damaged, but the threat of a claim for lost profits against an owner based on other projects not obtained is no longer viable.
Kevin Bridston is the Manager of Holland & Hart’s Construction Practice Group.
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