Island Insurance v. Hawaiian Foliage & Landscape, Inc.

The question in this case is whether the government is an intended beneficiary, for the purpose of securing the payment of taxes due, of the surety bond that insured a subcontractor’s performance. Parties to surety contracts are free, of course, to choose whether or not to insure for tax obligations. We interpret the language of the contract in this case to have done so, *1163 and therefore hold that both the state and federal governments are intended beneficiaries of the surety contract to the extent of the subcontractor’s past due tax obligations.

BACKGROUND

Oahu Construction Co. (“Oahu” or “obli-gee” or “prime contractor”) contracted with the City and County of Honolulu to build a golf course. Oahu subcontracted some landscaping work to Hawaiian Foliage & Landscape, Inc. (“Hawaiian” or “subcontractor” or “principal”). Plaintiff-appellee Island Insurance Co. (“Island” or “the surety”) issued a “Subcontractor’s Performance and Payment Bond” (“the bond”) to insure Hawaiian’s performance. Hawaiian was required by its contract with Oahu (“the subcontract”) to obtain such a bond. The bond named Hawaiian as principal and Oahu as obligee and was for the amount of $2,698,787, the…

dissenting.

I respectfully dissent from the court’s determination that the state and federal governments were intended beneficiaries of the surety bond insuring Hawaiian Foliage and Landscape’s (“Hawaiian”) performance. The purpose and language of the surety bond nowhere evinces an intent that Island Insurance Co. (“Island”) be held liable for Hawaiian’s unpaid taxes. Indeed, as I explain below, it would have made little sense for the parties to enter into the agreement described by the majority.

I

I do not dispute the majority’s recital of the facts or the relevant language of the bond and subcontract. I part company, however, with its conclusion that the surety bond, which is clearly meant to protect Oahu Construction Co. (“Oahu”) from Hawaiian’s failure to perform and nowhere mentions the state or federal government *1169 as beneficiaries, requires Island to pay Hawaiian’s taxes.

The bond provides that Island is liable if Hawaiian fails: (1) to duly and truly perform and to complete the subcontract, (2) to pay for all materials used in performance of the subcontract, and (3) to hold Oahu harmless from all claims for any labor and materials used in the performance of the…