Daniel Lund III | Phelps Dunbar
A federal court sitting in the United States Virgin Islands, in the process of partially granting a request for reconsideration asserted by a surety, reaffirmed aspects of the challenged ruling concerning the ability of a claimant to seek “consequential damages” from a performance bond surety – potentially beyond the penal sum of the bond.
The request for reconsideration sought a full dismissal of the consequential damages claims against surety. The federal court refused to dismiss, after conducting an assessment under Banks v. Int’l Rental & Leasing Corp., 55 V.I. 967 (2011), as to whether Virgin Islands courts have articulated an on-point rule, analyzing what the majority of other courts do, and then determining “which approach represents the soundest rule for the Virgin Islands.”
The analysis conducted by the court acknowledged that the Second Restatement of Contracts allows for consequential damages “under ordinary contract law”: “[W]hen such damages are not expressly excluded, a party in breach (including in breach of the implied covenant of good faith and fair dealing) may be required to compensate the counterparty for such losses to the extent they are foreseeable.”
Notwithstanding United States case law (albeit scant reference to these decisions was made by the court) which arguably protects sureties against consequential damages generally, the court leaned heavily on several contrary United States federal and state court decisions, finding that “the majority of jurisdictions follow the Restatement’s rule and allow for consequential damages for breach of a performance bond where the parties have not bargained to exclude them.”
Finally determining that “the soundest rule of law for the Virgin Islands holds that, where the parties have not bargained for an alternate arrangement, even if ‘a performance bond is not intended to compensate for indirect losses,’ a surety’s ‘own alleged breach of the performance bond’ can give rise to liability beyond the bond’s penal sum…,” the Virgin Islands federal court ruled: “In sum, because the Performance Bond did not preclude recovery of consequential damages, they are available here.”
The grant of reconsideration is found at GEC, LLC v. Argonaut Ins. Co., 2023 U.S. Dist. LEXIS 150739 (D.V.I. Aug. 28, 2023); the amended opinion of the court denying the motion to dismiss is at this link.
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