Hartford Fire Ins. Co. v. C. Springs 300, Ltd. (Tex.App.- Houston [1st Dist.]
May 29, 2008) (Radack) (construction law, bonding)
REVERSE TC JUDGMENT AND RENDER JUDGMENT: Opinion by Chief Justice Sherry Radack
Before Chief Justice Radack, Justices Alcala and Bland
01-06-00065-CV Hartford Fire Insurance Company v. C. Springs 300, Ltd.
Appeal from 270th District Court of Harris County
Trial Court Judge: Hon. Brent Gamble
CONCLUSION: Because there is legally insufficient evidence to show that C. Springs justifiably relied on
the August 8, 200 letter, and that such justifiable reliance caused damage to C. Springs, the jury's fraud
findings do not support the damages awarded.
O P I N I O N
The issue in this case is whether a three-sentence letter from a company in the business of issuing
performance and payment bonds on construction projects creates an obligation on the part of the
company to issue $17 million in bonds in connection with a construction project, or whether the letter was a
"bondability letter" indicating to the owner of the construction project that its chosen builder had the
necessary relationship with the company to obtain such bonds. We also consider whether the owner of the
construction project can recover for fraud based on the same letter. We reverse and render.
BACKGROUND
The Vineyards construction project
Appellee, C. Springs 300, Ltd. ["C. Springs"] is a limited partnership that was formed to construct, own, and
operate an apartment complex in Colorado Springs, Colorado called "The Vineyards." C. Springs planned
to finance The Vineyards as a "HUD transaction," meaning that its mortgage would be insured under a U.S.
Department of Housing and Urban Development program.
On July 5, 2000, C. Springs selected Williams Company, a Houston contractor, to build The Vineyards.
Having selected a contractor, C. Springs applied to HUD for HUD-guaranteed financing. On August 1,
2000, HUD issued a deficiency letter to C. Springs indicating that the application was incomplete. Among
other things, HUD requested "an assurance of completion" from the contractor, Williams, by August 11,
2000.
C. Springs contacted Williams about obtaining the required information, and Williams, in turn, contacted
FG Insurance Services ["FGI"], a Houston company that wrote surety bonds for several major surety
companies, including appellant, Hartford Fire Insurance Company ["Hartford"]. Williams and FGI had a
pre-existing business relationship.
On August 8, 2000, a Williams employee, Sherry Jett, contacted Kimberly Smith, an administrative
assistant to Richard Heidbrink, an agent for FGI, and explained that Williams needed FGI to sent a letter to
C. Springs to show that Williams was a bondable company. After making some changes to a letter that
Williams had used before, Smith received permission from Heidbrink to sign the letter as Hartford's
attorney-in-fact.
The August 8, 2000 letter
The August 8, 2000 letter referenced "Vineyards at Colorado Springs Apartments" and provided in its
entirety:
Williams Industries, Inc. is bonded through Hartford Fire Insurance Company which is A+ rated on AM Best.
They have a bonding line of credit of $25,000,000 single and $100,000,000 aggregate. Upon receipt of an
acceptable contract, Hartford Fire Insurance Company stands ready to issue 100% performance and
payment bonds in the full amount of the contract.
After obtaining the August 8 letter, C. Springs and Williams continued toward finalizing a HUD construction
contract, which was set to close in mid-December.
Williams's financial position declines.
Because of problems on other construction projects, Williams's financial position began to decline. Williams
lost approximately 1 million dollars between August and October 2000. On October 19, 2000, Hartford
instructed FGI that it was "suspending all bond support of Williams Industries until further notice." In
November 2000, Hartford decided that it would issue no further security bonds to Williams.
On November 7, 2000, a little over a month before the scheduled HUD closing, Williams informed C.
Springs of problems securing performance and payment bonds for the project. Williams continued to
assure C. Springs that it could work out its problems with obtaining the bonds, and the two parties
continued to work toward the December HUD closing. However, on December 4, 2000, Williams informed
C. Springs that it was not going to be able to secure the bonds by the end of 2000. As a result, C. Springs
and Williams never signed a construction contract. On December 8, 2000, Smith, of FGI, send C. Springs
a letter stating that "an acceptable contract was not received" and "[i]n the absence of a contract and
application, Hartford Fire Insurance Company did not issue any bond in connection with the referenced
project."
C. Springs hires another contractor and finishes the project
In late November 2000, after becoming aware of Williams's problem obtaining bonds, C. Springs began
negotiating with another contractor, Global Construction ["Global"], to build the project. After Williams
informed C. Springs on December 4 that it could not obtain the necessary bonds, C. Springs moved
forward with the project using Global as contractor.
Global's insurance broker also sent a letter to C. Springs regarding its ability to obtain the bonds. The
letter Global obtained provided, "Naturally, Liberty Mutual Insurance Company would expect that the
execution of any final bonds would be subject to a review of the final contract terms and conditions."
In February 2001, C. Springs closed on the HUD contract with Global as its contractor. The contract price
was $18.9 million dollars--$1.9 million dollars more than the $17 million dollars C. Springs had planned to
pay Williams.
C. Springs files suit
C. Springs subsequently brought the underlying suit alleging breach of contract against Hartford and fraud
against Hartford, FGI, Guaranty, (1) Smith, and Williams. Essentially, C. Springs's petition alleged (1) that
the August 8 letter was a contract, which Hartford breached by not later issuing the bonds; and (2) that
Hartford, through its agents, had fraudulently misrepresented to C. Springs that it would issue the bonds.
The trial and jury verdict
C. Springs settled with Smith, nonsuited Williams, and proceeded to trial against the remaining defendants.
Two liability questions were submitted to the jury as follows:
Question 1
Did the August 8, 2000 letter from Kimberly Smith to David Steidley constitute an agreement under which
Hartford agreed that it would issue 100% performance and payment bonds for the full amount of the
contract between Williams and C. Springs, if any, for the construction of the Vineyards project in Colorado
Springs?
It is your duty to interpret the following language in the August 8, 2000 letter: "upon receipt of an
acceptable contract." You must decide its meaning by determining the intent of the parties at the time the
letter was written. Consider all of the facts and circumstances surrounding the making of the letter, the
interpretation of the letter by the parties, and the conduct of the parties
* * * *
* * * *
Answer Yes or No:
Yes Yes
No ___
Question 5
Did one or more of the defendants commit fraud against C. Springs?
Fraud occurs when--
a. a party makes a material misrepresentation
b. the misrepresentation is made with knowledge of its falsity or made recklessly without any knowledge of
the truth and as a positive assertion.
c. the misrepresentation is made with the intention that it should be acted on by the other party, and
d. the other party relies on the misrepresentation and thereby suffers injury
"Misrepresentation" means:
A false statement of fact or
A promise of future performance made with an intent, at the time the promise was made, not to perform as
promised.
A party's denial that he ever made a promise is a factor showing no intent to perform when he made the
promise.
* * * *
Answer Yes or No for each of the following:
Hartford Yes
Guaranty No
FGI No
Kimberly Smith No
The jury awarded $4,278,117 for the difference between what C. Springs paid and would pay under the
contract with Global and what it would have paid under a contract with Williams, including "interest
expense" due to a difference in mortgage rates on debt incurred in connection with the project. The jury
also awarded $362,345 in lost rentals from the Vineyards and $96, 507 for out-of-pocket expenses
incurred by C. Springs. The total damages awarded was $4,736,969. The same measure of damages was
awarded for both the contract claim and the fraud claim.
INDEFINITENESS
Hartford contends that the trial court erred in denying its motion for instructed verdict and submitting the
contract issue to the jury because the August 8, 2000 letter was not, as a matter of law, an enforceable
contract. Specifically, Hartford claims that the letter is too indefinite to form a contract because it lacks
essential terms. Hartford further argues that the lack of essential terms causes the contract to fail under
the statute of frauds.
Standard of review
A denial of a motion for directed verdict may be reversed when the evidence conclusively proves a fact
that establishes a party's right to judgment as a matter of law, and there is no evidence to the contrary.
See McCarley v. Hopkins, 687 S.W.2d 510, 512 (Tex. App.--Houston [1st Dist.] 1985, no writ). In reviewing
the denial of an instructed verdict, we consider all the evidence in the light most favorable to the
nonmovant and disregard all evidence to the contrary. Harris County v. Demny, 886 S.W.2d 330, 333
(Tex. App.--Houston [1st Dist.] 1994, writ denied). Every reasonable inference is resolved in favor of the
nonmovant. Id. If there is any conflicting evidence of probative value on any theory of recovery, the issue
must go to the jury. Cliffs Drilling Co. v. Burrows, 930 S.W.2d 709, 712 (Tex. App.--Houston [1st Dist.]
1996, no writ).
Applicable law
A contract is legally binding only if its terms are sufficiently definite to enable a court to understand the
parties' obligations. Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 846 (Tex. 2000).
"The rules regarding indefiniteness of material terms of a contract are based on the concept that a party
cannot accept an offer so as to form a contract unless the terms of that contract are reasonably certain."
Id.( quoting Tex. Oil Co. v. Tenneco, Inc., 917 S.W.2d 826, 830 (Tex. App.--Houston [14th Dist. 1994)
(citing Restatement (Second) of Contracts § 33(1) (1981)), rev'd on other grounds, 958 S.W.2d 178 (Tex.
1997)). But an agreement to make a future contract is enforceable only if it is "specific as to all essential
terms, and no terms of the proposed agreement may be left to future negotiations." Id. (quoting Foster v.
Wagner, 343 S.W.2d 914, 920-21 (Tex. Civ. App.--El Paso 1961, writ ref'd n.r.e.)). When an agreement
leaves material matters open for future adjustment and agreement that never occur, it is not binding upon
the parties and merely constitutes an agreement to agree. Id. A contract is sufficiently definite if a court is
able to determine the respective legal obligations of the parties. T.O. Stanley Boot Co. v. Bank of El Paso,
847 S.W.2d 218, 221 (Tex. 1992). If an alleged agreement is so indefinite as to make it impossible for a
court to fix the legal obligations and liabilities of the parties, it cannot constitute an enforceable contract.
See id.
A contract that creates a suretyship must also comply with the statute of frauds. See Tex. Bus. & Com.
Code Ann. § 26.01(a), (b)(2) (Vernon 2002 & Supp. 2007). To satisfy the statute of frauds, there must be
a written memorandum which is complete with itself in every material detail and that contains all of the
essential elements of the agreement, so that the contract can be ascertained from the writing without
resorting to oral testimony. Cohen v. McCutchin, 565 S.W.2d 230, 232 (Tex. 1978); Frost Nat'l Bank v.
Burge, 29 S.W.3d 580, 594 (Tex. App.--Houston [14th Dist.] 2000, no pet.).
Does the statute of frauds apply to an agreement to enter a surety contract?
C. Springs, however, argues that the statute of frauds does not apply to the August 8, 2000 letter
"[b]ecause the letter binds Hartford only to issue the bonds, not actually to perform in accordance with
their terms[.]" Essentially, C. Springs argues that a promise to enter a surety relationship is different from
the surety relationship itself. Thus, C. Springs argues that the promise to issue the bonds need not contain
all the essential terms of the bonds themselves. We disagree.
"A promise to sign a written contract as surety for the performance of a duty owed to the promisee . . . is
within the Statute of Frauds." Restatement (Second) of Contracts § 117 (1981). Similarly, an agreement to
make a future contract is enforceable only if it is specific as to all essential terms. Fort Worth Indep. Sch.
Dist., 22 S.W.3d at 846. A contract to enter a contract covered by the statute of frauds must also meet the
statute of frauds. See Bayor Univ. v. Sonnichsen, 221 S.W.3d 632, 635 (Tex. 2007) (holding that statute of
frauds bars breach of contract claim based on oral promise to enter contract not performable in one year).
Thus, the argument that this is a contract to issue the bonds rather than the bond contract itself is
irrelevant. The same requirements apply to both.
Does the letter adequately describe the essential terms of the alleged agreement?
Thus, we turn to whether the letter in this case contains sufficient "essential terms" to comply with the
statute of frauds, or whether it fails for indefiniteness.
The letter in this case provides that, "[u]pon receipt of an acceptable contract, Hartford Fire Insurance
stands ready to issue 100% performance and payment bonds in the full amount of the contract." The
letter, however, provides little more information. Notably absent is any evidence of the consideration that
Hartford would receive, i.e., the price that Hartford would be paid for the bonds.
C. Springs argues that the missing terms can be supplied by other writings signed by Hartford or its
agents. See Adams v. Abbott, 254 S.W.2d 78, 80 (Tex. 1952) (holding that terms required by statute of
frauds could be supplied by "letters and telegrams signed by the party to be charged and addressed to his
agent or the other party to the contract, or even to a third person not connected with the transaction.").
Specifically, C. Springs points to an invoice sent by FGI employee David Cloud to Williams employee Don
Stephens to supply the missing consideration term.
The invoice in question--Plaintiff's exhibit 6--is insufficient, as a matter of law, to provide the requisite
consideration term for several reasons. First, the invoice is dated November 1, 2000 and does not
reference the August 8, 2000 letter. Although a writing satisfying the statute of frauds can be created after
an agreement, Joiner v. Elrod, 716 S.W.2d 606, 609 (Tex. App.--Corpus Christi 1986, no writ), the later
writing should refer to the earlier agreement. See Crowder v. Tri-C Res., Inc., 821 S.W.2d 393, 396 (Tex.
App.--Houston [1st Dist.] 1991, no writ) (holding that writing requirement may be satisfied with two
documents if second document refers to first). This invoice does not.
Second, the invoice was sent to Williams from FGI after Hartford had informed FGI that it was suspending
the writing of bonds for Williams. See Taber v. Pettus Oil & Ref. Co., 162 S.W.2d 959, 961 (Tex. 1942)
(holding that writing created after repudiation of agreement did not satisfy statute of frauds). Third, the
letter from FGI to Williams that accompanies the invoice states that it is "an indication of pricing from Zurich
Insurance Company"--not Hartford. Fourth, the invoice shows that it is intended to cover pricing of bonds
on a $19 million project, not the $17 million project claimed by Williams. (2) Finally, the face of the invoice
itself shows that it is not a memorandum evidencing a final agreement as to price, but merely a proposal.
The invoice shows that the invoice number is "TBD," the effective date is "TBD," and the policy number is
"TBD." See Biko v. Siemens Corp., 246 S.W.3d 148, 160 (Tex. App.--Dallas 2007, pet. filed) (holding that
writing indicating that it is proposal is insufficient to comply with statute of frauds).
Because the essential terms of the August 8, 2000 agreement--particularly the consideration term--cannot
be ascertained from the writings cited by C.Springs, the agreement is too indefinite, as a matter of law, to
form a binding contract that complies with the statute of frauds. As such, the trial court erred in submitting
the breach of contract issue to the jury.
FRAUD
C. Springs's fraud claim rests on two alleged misrepresentations in the August 8, 2000 letter. We address
each respectively.
Fraudulent inducement
First, C. Springs claims that Hartford misrepresented its willingness to issue the bonds, which, in turn,
induced C. Springs into accepting the offer by partial performance. As such, C. Springs's first fraud claim is
one of fraudulent inducement. We have already held that the August 8, 2000 letter did not create an
enforceable contract. Absent an enforceable contract, C. Springs cannot claim that it was fraudulently
induced to enter such contract. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001).
Common-law fraud
Second, C. Springs argues that the August 8, 2000 letter contained a misrepresentation of fact--the
amount of Williams's bondability--that C. Springs relied on in moving forward with Williams as contractor.
Specifically, the letter stated that Williams had a "bonding line of credit of $25,000,000 single and
$100,000,000 aggregate." However, the evidence shows, and Hartford concedes, that this is a "mistake,"
and that Williams's credit had "never exceeded $10 million for a single job and $85 million aggregate." We
address whether this fraud claim (1) was pleaded, (2) is supported by sufficient evidence, and (3) gives
rise to the damages awarded on it.
Sufficiency of pleading on the issue
A trial court cannot enter judgment on a theory of recovery not sufficiently set forth in the pleadings or
otherwise tried by consent. Miller v. Towne Servs., Inc., 665 S.W.2d 143, 147 (Tex. App.--Houston [1st
Dist.] 1983, no writ); see also Tex. R. Civ. P. 301 (providing that the "judgment of the court shall conform to
the pleadings"). There are, however, exceptions to rule 301. Unpleaded claims or defenses that are tried
by express or implied consent of the parties are treated as if they had been raised by the pleadings. See
Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 495 (Tex. 1991). The party who allows an issue to be
tried by consent and who fails to raise the lack of a pleading before submission of the case cannot later
raise the pleading deficiency for the first time on appeal. Id. Moreover, "[w]hen issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if
they had been raised in the pleadings." Tex. R. Civ. P. 67. To determine whether an issue was tried by
consent, we examine the record not for evidence of the issue, but rather for evidence of trial of the issue.
Case Corp. v. Hi-Class Bus. Sys. of Am., Inc., 184 S.W.3d 760, 771 (Tex. App.--Dallas 2005, pet. denied).
A party's unpleaded issue may be deemed tried by consent when evidence on the issue is developed
under circumstances indicating that both parties understood the issue was in the case, and the other party
failed to make an appropriate complaint. Id.
At the charge conference, Hartford objected to submitting the definition of misrepresentation as a "false
statement of fact" because "there are no pleading to support plaintiff's claim that the reference to
Williams's bonding line of credit in the August 8th letter was fraudulent, and the issue has not been tried by
consent." The trial court overruled Hartford's objection and submitted the issue to the jury.
The record shows that the issue of Williams's bonding line of credit was raised several times during the
trial and supports the trial court's conclusion that the issue was tried by consent.
Legal and factual sufficiency of the evidence
Next we turn to whether the evidence is legally and factually sufficient to support the jury's finding that
Hartford committed fraud based on its statement in the August 8, 2000 letter that Williams had a "bonding
line of credit of $25,000,000 single and $100,000,000 aggregate."
When an appellant attacks the legal sufficiency of an adverse finding on an issue on which it did not have
the burden of proof, it must demonstrate that no evidence supports the finding. Croucher v. Croucher, 660
S.W.2d 55, 58 (Tex. 1983). In deciding whether the evidence in support of the finding amounts to "no
evidence," the reviewing court considers only the evidence and inferences tending to support the jury's
finding, views that evidence in the light most favorable to the finding, and disregards all contrary evidence
and inferences. Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997); Havner v. E-Z Mart
Stores, Inc., 825 S.W.2d 456, 458 (Tex. 1992); see City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex.
2005) (holding that whether reviewing court starts with all or only part of record, it "must consider evidence
in the light most favorable to the verdict, and indulge every reasonable inference that would support it," but
"if the evidence allows of only one inference, neither jurors nor the reviewing court may disregard it").
Thus, "[a] no-evidence point will be sustained when (a) there is a complete absence of evidence of a vital
fact, (b) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to
prove a vital fact, (c) the evidence offered to prove a vital fact is no more than a scintilla, or (d) the
evidence conclusively establishes the opposite of the vital fact." Merrell Dow Pharm., Inc., 953 S.W.2d at
711. "More than a scintilla" of evidence exists to support a jury finding when the evidence supporting the
finding, taken as a whole, would enable reasonable and fair-minded people to draw different conclusions.
Id.
In reviewing the factual sufficiency of the evidence to support a jury finding, the court conducts a neutral
review of all the evidence and sets aside the verdict only "if it is so contrary to the overwhelming weight of
the evidence as to be clearly wrong and unjust." Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); see also
Minucci v. Sogevalor, S.A., 14 S.W.3d 790, 794 (Tex. App.--Houston [1st Dist.] 2000, no pet.).
To prevail on a fraud claim, a plaintiff must prove that (1) the defendant made a material representation
that was false; (2) the defendant knew the representation was false or made it recklessly as a positive
assertion without any knowledge of its truth; (3) the defendant intended to induce the plaintiff to act upon
the representation; and (4) the plaintiff actually and justifiably relied on the representation, which caused
injury. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001). Justifiable reliance
and causation are necessary elements of fraud. Prospect High Income Fund v. Grant Thornton, LLP, 203
S.W.3d 602, 618 (Tex. App.--Dallas 2006, pet. denied).
a. Justifiable Reliance
Hartford admits that the August 8, 2000 letter contained a false statement of fact about Williams's bonding
line of credit, but argues that there is no evidence, or insufficient evidence, to show that C. Springs
justifiably relied on the statement. Specifically, Hartford argues that "C. Springs simply could not have
relied on the August 8 letter as an unconditional, unbreakable commitment to issue bonds" because "[n]o
one could reasonably believe that such a letter binds a surety to stand ready in perpetuity to issue bonds
whenever they are called for, on whatever contract price, under whatever conditions exist at the time." We
agree.
Even if the August 8, 2000 letter had not contained a misrepresentation about Williams's bonding line of
credit, C. Springs could not have relied on the letter without a representation that Williams would remain
bondable. Put another way, the letter does not promise that Williams's credit limit, in whatever amount, will
continue past the date of the letter. Absent a promise to lend against the line of credit--a promise that we
have already held Hartford did not make--the amount of Williams's line of credit is irrelevant. Even when a
bonding line exists and credit remains on it, a surety is not bound to issue bonds absent an agreement to
do so. William Schwartzkopf, Practical Guide to Construction Contract Surety Claims § 2.04(H) (2007).
Because the August 8, 2000 letter does not represent that Williams's line of credit, in either the true or
misrepresented amount, would continue to exist into the indefinite future, C. Springs cannot claim to have
justifiably relied on any part of the letter in choosing to do business with Williams.
b. Causation
To establish the element of causation in a fraud claim, a plaintiff must show that the defendant's acts or
omissions were a cause-in-fact of foreseeable losses. High Income Fund, 203 S.W.3d at 618. A
defendant's acts or omissions are a cause-in-fact if the plaintiff can show, beyond mere conjecture, guess,
or speculation, "that an act or omission was a substantial factor in bringing about an injury which would not
otherwise have occurred." Id. (quoting Marathon Corp. v. Pitzner, 106 S.W.3d 724, 727 (Tex. 2003)). In
this case, C. Springs's damages were not caused by the misrepresentation regarding the amount of
Williams' bonding line of credit. Instead, C. Springs's damages were caused by the fact that Williams
became unbondable in any amount because of its deteriorating financial condition. The misrepresentation
in the August 8 letter was not a "substantial factor" in bringing about C. Springs's injury because,
regardless of the amount of the credit line stated in the letter, Williams became unbondable. As such, the
misrepresentation in the August 8 letter was not a cause-in-fact of C. Springs's damages.
Because there is legally insufficient evidence to show that C. Springs justifiably relied on the August 8, 200
letter, and that such justifiable reliance caused damage to C. Springs, the jury's fraud findings do not
support the damages awarded.
CONCLUSION
We reverse and render judgment that C. Springs take nothing by way of its claims against Hartford.
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Alcala and Bland.
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