A federal appeals court overturned a lower court ruling on Monday, ruling that a Tokyo Marine unit must pay a surety bond because a new contract issued in a construction project was essentially the same as the one under which its bond had been issued.
The trial involves a water control and improvement district in Cloverleaf, Texas, which was building a new headquarters, according to the judgment of the 5th U.S. Circuit Court of Appeals in New Orleans in Harris County Water Control and Improvement District Number 89 v. Philadelphia Indemnity Insurance Co; E&M Enterprises, Inc.
The district required Las Vegas-based E&M to issue a performance guarantee, which it received from the Tokyo Marine Unit Philadelphia Indemnity. Before work began, however, the district̵7;s project manager backed off.
As a result, the district and E&M executed a new agreement without Philadelphia’s knowledge or consent. After construction began, the project ran into problems and the construction company failed to complete it.
When the district sought what it believed it owed under the performance guarantee, Philadelphia refused to pay, claiming that the second agreement had created a new contract that it had never agreed to bind.
The district filed a lawsuit for breach of contract in the U.S. District Court in Houston, which ruled in favor of the insurance company. It was set aside by a unanimous three-judge in the Court of Appeal.
The panel said that since the 1960s, “The Supreme Court of Texas has only ruled that material Amendments to a binding contract will release a guarantor from its obligations. “
Details show that the new contract “was objectively intended to be an adjustment of the project manual” in the original agreement, “not a completely new contract”, the ruling said, by reversing the lower court ruling and remanding the case for further proceedings.
Lawyers in the case did not respond to requests for comment.