HOEKSTRA, P.J.
In these cases involving the interpretation of a contract Livingston County and the Livingston County Board of Public Works (collectively "the County") appeal by leave granted the trial court's orders limiting Hanover Insurance Company's (Hanover) actual and liquidated damages. Because we conclude that the plain language of the suretyship contract limited the liability of Hanover to the amount of the performance bond, we affirm.
These consolidated appeals arise from the failure of Northline Excavating, Inc. (Northline), to complete a sanitary sewer extension project in Livingston County and the County's attempt to collect damages for nonperformance of a contract under the terms of a performance bond issued by Hanover on behalf of Northline. In 2007, the County entered into a contract with Northline to construct a sanitary sewer pipe and pump station along Grand River Avenue. The contract price was Northline's bid of $251,035. The contract also included a liquidated damages provision of $1,000 a day for each day the contract remained substantially uncompleted beyond the date for completion provided in the contract. In order to comply with MCL 129.201, which requires a contractor to provide a performance bond for public-sector contracts exceeding $50,000, Northline and Hanover executed a performance bond. The amount of the performance
The performance bond contains the following provisions regarding Hanover's obligations as surety under the bond:
The parties agree that shortly after Northline began excavation and sewer installation it encountered difficulties constructing the sewer extension pursuant to the terms and specifications of the construction contract. There is a factual dispute regarding whether the problematic conditions were disclosed by the County in the plans and specifications of the project. It is not disputed that the parties held a conference as required by the performance bond to discuss methods by which Northline could perform the construction contract. According to the County, the parties failed to reach any agreement at the conference. Northline agreed to submit a "plan of action" detailing how it would complete the project. However, the County ultimately rejected Northline's initial and revised action plans, and notified Northline of its rejection by way of letter. The County similarly notified Northline in a letter that it was declaring a contractor default and terminating Northline's contract. Thereafter, the County notified Hanover of its declaration of a contractor default with regard to Northline for noncompliance with the provisions of the construction contract. Hanover acknowledged receipt of the County's letter and notified the County that it was investigating its claim. Eventually, Hanover denied liability and notified the County of its position by way of letter.
Thereafter, the County commenced suit against Northline and Hanover. The County sought to recover against Northline under a breach of contract theory. It sought to recover under the performance bond against Hanover. Additionally, Northline and Hanover, the latter pursuant to its right of subrogation, commenced
Immediately after the trial court finished its bench ruling, counsel for the County inquired whether the trial court was limiting Hanover's liability for combined actual damages, liquidated damages, and reasonable attorney fees to the penal sum of the bond. The trial court responded by directing the parties to brief the question whether Hanover could be held liable for liquidated damages in an amount in excess of the penal sum of the bond. Following the parties' submission of briefs, the proceedings were reconvened to consider the County's motion in limine to allow liquidated damages in an amount in excess of the penal sum of the bond. The trial court denied the motion from the bench, finding that the language of the contract limited the recovery of all damages to the amount of the performance bond. Thereafter, these appeals ensured.
The issue on appeal is whether the plain language of the performance bond expressed an intent contrary to the generally understood principle that a surety is liable only for the amount of the bond.
We review de novo questions involving the proper interpretation of a contract. Rory v. Continental Ins. Co., 473 Mich. 457, 464, 703 N.W.2d 23 (2005). "In ascertaining the meaning of a contract, we give the words used in the contract their plain and ordinary meaning that would be apparent to a reader of the instrument." Id. We must "give effect to every word, phrase, and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory." Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 468, 663 N.W.2d 447 (2003). We cannot read words into the plain language of a contract. Terrien v. Zwit, 467 Mich. 56, 75, 648 N.W.2d 602 (2002).
The contract at issue is required by statute. MCL 129.201 provides that a performance bond must be provided by a principal contractor before construction can begin on any public building project exceeding $50,000 in value. MCL 129.202, which explains the required performance bond, provides:
"A performance bond assures completion of a project in the event of default by the general contractor." Kammer Asphalt Paving Co., Inc. v. East China Twp. Sch., 443 Mich. 176, 179 n. 4, 504 N.W.2d 635 (1993). The performance bond contract is a suretyship contract, which involves a principal, an obligee, and a surety. Will H. Hall & Son, Inc. v. Ace Masonry Constr., Inc., 260 Mich.App. 222, 228, 677 N.W.2d 51 (2003). "A surety is one who undertakes to pay money or take any other action if the principal fails therein." Id. at 228-229, 677 N.W.2d 51. "The liability of a surety is limited by the scope
Further, Michigan law has long recognized that a surety is only liable for the amount of the performance bond. See, e.g., Graff v. Epstein, 238 Mich. 227, 232, 213 N.W. 190 (1927) ("Of course, liability of the sureties cannot exceed the penalty of the bond."); Fidelity & Deposit Co. of Maryland v. Cody, 278 Mich. 435, 444, 270 N.W. 739 (1936) (holding that "the penalty of the respective bonds is the measure of the total liability of the surety company"); Shambleau v. Hoyt, 265 Mich. 560, 573, 251 N.W. 778 (1933) (holding that "defendants and their surety bound themselves to the extent of the penal sum of the bond."); Vreeland v. Loeckner, 99 Mich. 93, 95, 57 N.W. 1093 (1894) ("The judgment is valid in its entirety as to the principal defendant, but void as to the surety in the excess over the penal sum of the bond."); Spencer v. Perry, 18 Mich. 394, 399 (1869) (holding that it is generally understood that bonds "fix the limit beyond which the liability of the defendant should not extend," and noting that if the parties intended to provide for indefinite liability, they could have entered into a different type of agreement).
Thus, in light of the fact that performance bonds have traditionally been interpreted to limit a surety's liability to the amount of a performance bond, we will not presume that Hanover's liability is greater than the amount of the bond unless the contract language plainly expresses the parties' intent to expand Hanover's liability contrary to the general interpretation and understanding of performance bonds.
The County maintains that the language of the performance bond does plainly express an intent to expose Hanover to liability exceeding the amount of the bond. Specifically, the County argues that ¶ 6 does not control damages in this case because Hanover proceeded under subparagraph 4.4, and ¶ 6 only applies if a surety elects to arrange for completion of the construction project as provided under subparagraphs 4.1, 4.2, or 4.3.
While we agree with the County that ¶ 6 does not apply when the surety elects to proceed under subparagraph 4.4,
Thus, neither ¶ 5 nor ¶ 6 addresses the surety's liability when it proceeds under subparagraph 4.4. However, the contract is not completely silent in regard to the surety's liability when it elects to proceed under subparagraph 4.4 because the face of the bond clearly states that the bond amount is $251,035, and our common law has long recognized that a surety's liability is limited to the face amount of the performance bond. See, e.g., Graff, 238 Mich. at 232, 213 N.W. 190; Shambleau, 265 Mich. at 573, 251 N.W. 778; Vreeland, 99 Mich. at 95, 57 N.W. 1093. Moreover, the performance bond contains no language specifically expanding the surety's liability beyond the amount of the performance bond. Accordingly, we conclude that the trial court did not err by holding that Hanover's liability is limited to the amount of the performance bond.
Affirmed.
RONAYNE KRAUSE, J., and BOONSTRA, J., concurred with HOEKSTRA, P.J.