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Fidelity and Deposit Company of Maryland v. Big Town Mechanical, LLC

United States District Court, D. Nevada

November 7, 2017

Fidelity and Deposit Company of Maryland, Plaintiff
Big Town Mechanical, LLC, and Travelers Casualty and Surety Company of America, Defendants



         This contractor-default case involves two tiers of contracts, bonds, sureties, and principals and the consequences that follow when the lower-tier principal defaults. In 2010, the Clark County School District (CCSD) contracted with defendant Big Town Mechanical to install HVAC systems at five elementary schools. The contract required Big Town to take out performance-and-labor and material-payment bonds for the installation at each school. Big Town obtained performance and payment bonds from co-defendant Travelers Casualty and Surety Company of America, and Big Town became the principal and CCSD the obligee. In the event that Big Town defaulted on its obligation under the contract, Travelers would complete Big Town's performance.

         Big Town subcontracted with F.A.S.T. Systems, Inc.-a party that is not involved in this coverage-dispute litigation-to work on the HVAC-installation projects at each of the schools. The subcontract required F.A.S.T. to take out performance-and-labor and material-payment bonds, just as Big Town had done for CCSD. The Big Town-F.A.S.T. subcontract provides that: “[FAST] shall be finally and conclusively bound by the final decision reached by the trier-of-fact in any such arbitration or litigation, and the trier-of-fact is authorized to award to Big Town such sums as the trier-of-fact shall deem proper to compensate Big Town for its claims or damages, including reasonable attorney fees, professional fees, and costs expended.”[1] And the subcontract expressly protects Big Town from any potential liability to F.A.S.T. for “special, indirect, incidental, exemplary or consequential damages of any kind.”[2] F.A.S.T. obtained performance and payment bonds from plaintiff Fidelity and Deposit Company of Maryland, and F.A.S.T. became the principal and Big Town the obligee. In the event that F.A.S.T. defaulted on its obligation, Fidelity would complete F.A.S.T.'s performance.

         F.A.S.T. and Big Town both defaulted, so Fidelity and Travelers succeeded to the rights and liabilities of their respective principals.[3] The Big Town-F.A.S.T. subcontract therefore allowed Travelers to recover attorney's fees from Fidelity and expressly prevented Fidelity from recovering attorney's fees from Travelers. Fidelity asks me to declare the unilateral attorney's-fees provision void for lack of mutuality of obligation.[4] Fidelity seems to confuse the contract principles of mutuality of obligation and mutuality of remedy. And because Nevada enforces unilateral attorney's-fees provisions, I deny the motion.


         As an initial matter, Fidelity's confusingly titled motion seeks “PARTIAL SUMMARY JUDGMENT AS TO DECLARATORY RELIEF SOUGHT [as to Travelers' ability to recover attorney's fees pursuant to contract].”[5] It is unclear which standard-summary judgment or declaratory judgment-applies, but Fidelity applies a summary-judgment standard, [6] and Travelers does not dispute it.[7]It is also unclear whether Fidelity wants judgment on its own declaratory-relief claim[8] or on Travelers' declaratory-relief counterclaim.[9] Neither claim mentions Travelers' ability or inability to recover attorney's fees under the subcontract, and Fidelity's prayer for relief does not request the declaration that it asks for in this motion. I construe Fidelity's prayer “[f]or such other and further relief as this Court deems just and proper”[10] to broadly include this declaration, and I address the issue on the merits.

         A. Partial-summary-judgment standard

         Summary judgment is appropriate when the pleadings and admissible evidence “show there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.”[11] When considering summary judgment, the court views all facts and draws all inferences in the light most favorable to the nonmoving party.[12] If reasonable minds could differ on material facts, summary judgment is inappropriate because its purpose is to avoid unnecessary trials when the facts are undisputed, and the case must then proceed to the trier of fact.[13]

         If the moving party satisfies Rule 56 by demonstrating the absence of any genuine issue of material fact, the burden shifts to the party resisting summary judgment to “set forth specific facts showing that there is a genuine issue for trial.”[14] The nonmoving party “must do more than simply show that there is some metaphysical doubt as to the material facts”; he “must produce specific evidence, through affidavits or admissible discovery material, to show that” there is a sufficient evidentiary basis on which a reasonable fact finder could find in his favor.[15] The court only considers properly authenticated, admissible evidence in deciding a motion for summary judgment.[16] Because the purpose of summary judgment “is to isolate and dispose of factually unsupported claims or defenses, ”[17]the court's ability to grant summary judgment on certain issues or elements-a partial grant of summary judgment-is inherent in Rule 56(a).

         B. Validity of the unilateral attorney's fees provision

         Fidelity argues that the Big Town-F.A.S.T. subcontract lacks the mutuality of obligation required of all contracts because it allows Big Town (and Travelers) to recover attorney's fees but not F.A.S.T. (or Fidelity). Fidelity conflates mutuality of obligation with mutuality of remedy. Regardless, neither concept entitles Fidelity to the declaratory relief that it requests.

         1. Mutuality of obligation

         “Mutuality of obligation requires that unless both parties to a contract are bound, neither is bound.”[18] Simply put, “mutuality of obligation” is synonymous with “consideration, ” so a contract that lacks “mutuality of obligation” fails for “want of consideration.”[19] “To constitute consideration, a performance or return promise must be bargained for. A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.”[20] “Consideration may be any benefit conferred or any detriment suffered.”[21] And “courts do not generally inquire into the adequacy of consideration because the values exchanged are often difficult to measure and the parties are thought to be better at evaluating the circumstances of particular transactions.”[22]

         Fidelity attempts to stretch these contract principles to require mutuality of individual contract terms, [23] but in so doing fundamentally misapplies contract law. It argues that “[t]he presence of adequate consideration may cure the lack of mutuality of obligation” where a contract includes a unilateral attorney's-fees provision, and “Big Town did not provide any additional consideration in the Subcontracts to remedy this one-sided provision.”[24] Mutuality of obligation applies only to contract formation and not to individual-provision equality. And this adequate-consideration-may-cure rule that Fidelity takes out of context applies only to option contracts and unilateral right-to-rescind provisions.[25]

         In an option contract, one party, “in return for valuable consideration, agrees with another [party] that the latter may” agree to an underlying contract “within a specified time upon expressed terms and conditions.”[26] An “option contract is distinct from the contract which is the underlying agreement and it must stand or fall on its own merits.”[27] Once the parties agree to an option contract, the offeror is obligated to leave the underlying-contract offer open to the offeree for the duration of the option contract; the offeree has no obligation to accept the underlying-contract offer but has the option to accept it. The option contract therefore lacks mutuality of obligation but maintains validity because the offeree gave consideration to leave the option open for a specified time. Unilateral right-to-rescind provisions are analogous to option contracts. The party with the right may rescind the contract within a specified period of time at its option, but it has no obligation to do so, and the other party is bound regardless. The Big Town-F.A.S.T. subcontract was not an option contract, and there was no unilateral right-to-rescind provision in the subcontract, so Fidelity's argument misses the mark.

         And there is no legitimate dispute that the Big Town-F.A.S.T. subcontract was supported by consideration from each party. Big Town promised to pay F.A.S.T. to complete various assignments associated with the HVAC-installation projects, and F.A.S.T. promised to complete the assignments in exchange for payment.[28] It's not for me to decide whether the terms and conditions included in the agreement were “fair” or “equal.” The bottom line is that Big Town and F.A.S.T. were both obligated to perform under the subcontract (subject of course to any excuse-of-performance defenses), so the contract does not lack mutuality of obligation. Whether the parties were both obligated (or not) to pay attorney's fees is of no import to the unilateral attorney's-fees provision's validity.

         2. Mutuality of remedy

         The bulk of Fidelity's motion references “mutuality of obligation.” But Fidelity basically argues that because it can't recover attorney's fees, Travelers shouldn't be able to either, and Fidelity supports that argument with authority from other states that convert-by statute-unilateral attorney's-fees provisions into bilateral ones.[29] Most notable is Fidelity's citation to Reynolds Metals Co. v. Alperson, in which the California Supreme Court discussed that “[California Civil Code] Section 1717 was enacted to establish mutuality of remedy where a contractual provision makes recovery of attorney's fees available for one party . . . and to prevent oppressive use of one-sided attorney's fees provisions.”[30] So it seems as though Fidelity is actually suggesting that the subcontract lacks mutuality of remedy rather than mutuality of obligation.

         Mutuality of remedy is an archaic contract principle with so many exceptions that its validity today is questionable.[31] Traditionally, mutuality of remedy applied only to the equitable remedy of specific performance, and it required, as a condition of seeking specific performance, that both parties be susceptible to specific performance.[32] For example, a contract for personal services would lack mutuality of remedy because a court cannot compel specific performance of personal services even though it can compel specific performance of payment for those services.

         Mutuality of remedy does not affect the validity of a contract or its terms; it affects the remedies that are available to the parties-specifically, whether specific performance is available.[33] The common-law mutuality-of-remedy rule doesn't require both parties to have all of the same remedies available to them, and it has no application when a party does not seek specific performance. The cases cited by Fidelity do not apply the common-law ...

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