Monday, September 12, 2016

Is a member of the public entitled to make a claim under a contractor-licensing bond posted with the city?

Yes, says the Eighth District, in Koster v. Chowdhury. The court's decision--which is correct, in my view--is arguably a reversal of its 1996 unpublished holding in Soltesz v. Dicamillo.

The case turns on whether members of the public are intended third-party beneficiaries of licensing bonds.

As a condition of obtaining a contractor's license, the City of Cleveland requires applicants to provide a $25,000 surety bond to "guarantee[] full and faithful compliance by the applicant with [Ohio Building Code] and this [municipal] Building Code and with pertinent rules and regulations promulgated under it." Western Surety Company provided a bond for Laguna Homes, LLC, which bound Western "unto the City of Cleveland or to any of its officers, for the use of any person, persons, firm, or corporation with whom [Laguna] shall contract to construct, alter, repair, add to, subtract from, reconstruct or remodel any building, structure, or appurtenance thereto or any part thereof." Laura Koster, a dissatisfied Laguna customer, sued both Laguna and Western. The trial court granted summary judgment to Western on the grounds Koster was not a beneficiary under the bond.

The Eighth District reversed. After first distinguishing licensing bonds from insurance policies or contracts and performance bonds (under the former the insurer has its own money at risk; the purpose of the latter is to compensate a counterparty who needs to hire someone else to complete unfinished or inadequate work; and under a surety bond the surety does not have its own money at risk because of its right of indemnification from the principal) the court focused on the language in the ordinance and bond providing that the bond was given "for the use of any person," not merely the city. The court found that the intent of the parties to the surety contract was to benefit not just the City, but also the people for whom Laguna did work that did not comply with the relevant building codes. The court therefore reversed the grant of summary judgment and remanded to the trial court.

What makes this case interesting is that the Eighth District has previously held that a member of the public is not an intended third-party beneficiary of a licensing bond. The court here distinguishes its earlier holding in Soltesz v. Dicamillo by noting that the language of the bond and ordinance and that case were absent from the record.  It remains anyone's guess as to how an action on a performance bond gets to the court of appeals without the language of the bond in the record.

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