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Gulf Liquids New River Project, LLC v. American Home Assurance Company Bay Ltd. Gulsby Engineering, Inc. Gulsby-Bay Plant Partners National American Insurance Company Williams Energy Marketing & Trading Company
Citation: Not availableDocket: 01-08-00311-CV
Court: Court of Appeals of Texas; February 16, 2011; Texas; State Appellate Court
Original Court Document: View Document
On February 17, 2011, the Texas Court of Appeals addressed a case involving Gulf Liquids New River Project, LLC, as the appellant against Gulsby Engineering, Inc. and Gulsby-Bay Plant Partners, among others, as appellees. The case arose from an industrial construction contract dispute, where a jury initially awarded over $300 million in damages for breach of contract, tort, and punitive claims to the general contractor and its insurer against the project owner and its primary investor. Subsequently, the trial court partially granted a motion for judgment notwithstanding the verdict (JNOV) from the project owner, dismissing the jury’s tort and punitive damage findings but upholding claims for breach of contract and quantum meruit. The project owner appealed this judgment, while the contractor and its insurer challenged the JNOV ruling concerning tort and punitive damages. The background details reveal that business partners John Douglas and James Tyler established Gulf Liquids Corporation in 1998 to process refinery waste into marketable chemicals. They formed Gulf Liquids Holdings, LLC, which owned Gulf Liquids New River Project, LLC, through which they acquired contracts to purchase and sell processed off-gases from a Louisiana refinery. In 1999, Williams Corporation invested $92.5 million in Holdings, obtaining an indirect interest in Gulf Liquids. Gulf Liquids subsequently hired Gulsby Engineering as the general contractor for two plants, executing two engineering, procurement, and construction (EPC) contracts with fixed prices of $13.5 million and $29 million, respectively, contingent on construction milestones. National American Insurance Company (NAICO) issued performance and payment bonds for Gulsby, with Gulf Liquids and related parties as beneficiaries. After the signing of Contracts 1 and 2, Gulf Liquids contracted for additional off-gas from Motiva Enterprises, necessitating an expansion of the fractionation plant. Gulsby executed a $12 million change order to expand the Base Project contracts, stipulating no change in the base contract price but designating the work as "extra work" approved by the independent engineer, Parsons. Construction commenced on this expansion. In the fall of 2000, Gulf Liquids secured funding to construct a second cryogenic plant and an RPG Splitter near the Motiva refinery, collectively known as the Motiva Project. Gulsby partnered with Bay, Ltd. to create Gulsby-Bay Plant Partners (GBPP) for this endeavor. In February 2001, Gulf Liquids and GBPP signed two fixed-price contracts (Contracts 3 and 4) for the construction, mirroring the terms of the Base Project contracts and including milestone payments and $12 million in fixed-fee payments to compensate Gulsby for the Base Project expansion. Gulf Liquids paid $10 million of these fixed fees at closing, with the remaining $2 million contingent upon the final milestone payment. By September 2000, Gulsby's financial stability waned, and it claimed to have completed substantial work without payment due to Gulf Liquids' directives. When milestone payments for the Motiva Project became due in February 2001, Gulf Liquids mistakenly paid $4 million to Gulsby instead of GBPP, prompting an objection from Bay and a subsequent reinvoicing of Gulf Liquids. Discontent with project progress arose, as, despite certification of mechanical completion by the independent engineer, performance tests had not succeeded. Gulf Liquids later discovered Gulsby owed over $15 million to subcontractors and faced liens against the project, which Gulsby attributed to non-payment from Gulf Liquids. Gulf Liquids demanded NAICO fulfill its payment bond obligations; NAICO initially complied but ceased performance bond payments in July 2001. Following Gulsby's default on the Base Project contracts, Gulf Liquids formally terminated Contracts 1 and 2 on September 18, 2001, leading to GBPP's withdrawal from the Motiva Project. Subsequently, GBPP filed lawsuits against Gulf Liquids, the Bank of Montreal, and Winterthur. Gulf Liquids responded with counterclaims against Gulsby and Bay. Gulsby, Bay, GBPP, and NAICO also initiated claims against Gulf Liquids and its investor, Williams. Gulf Liquids accused Gulsby and GBPP of breaching construction contracts and GBPP of conversion. Prior to trial, Tyler and Douglas reached a settlement with Gulsby, NAICO, GBPP, and Bay. A lengthy jury trial concluded with a 145-page jury charge covering Gulsby's claims against Gulf Liquids for breach of contract, fraud, fraudulent inducement, quantum meruit, and substantial performance, along with claims against Williams for fraud, fraudulent inducement, and tortious interference with contract. The jury ruled in favor of Gulsby, GBPP, NAICO, and Bay, finding Gulf Liquids liable for breach of contract, fraud, and fraudulent inducement, and holding Williams liable for fraud, fraudulent inducement, and tortious interference with contract. The jury also determined that Gulf Liquids acted as Williams's alter ego, and found both parties involved in a civil conspiracy. Gulsby was awarded approximately $17 million in actual damages and $25 million in punitive damages from Gulf Liquids, and $60 million from Williams. NAICO received $20,182,498 in actual damages, with $20 million in punitive damages from Gulf Liquids and $50 million from Williams. Gulsby chose to pursue recovery based on tort and quantum meruit theories. Post-verdict, the trial court granted a judgment notwithstanding the verdict (JNOV), overturning the tort, punitive damage, and vicarious liability findings. It subsequently awarded Gulsby $5,016,682 for breach of contract and $5,746,077 for quantum meruit against Gulf Liquids, and GBPP $4,360,155 for breach of contract. Each party was ordered to bear its own attorney's fees. After filing appellate briefs, the parties engaged in mediation, resulting in GBPP, Bay, Gulf Liquids, and Williams settling their claims, leading to the withdrawal of appeals and an interlocutory dismissal regarding Contracts 3 and 4. Gulf Liquids appealed the breach of contract and quantum meruit awards, while Gulsby and NAICO appealed the JNOV regarding tort claims against Gulf Liquids and Williams. The jury found Gulf Liquids materially failed to comply with Contracts 1 and 2, affirmatively answering questions on its failure to pay for work and to exercise good faith in contract management, resulting in a breach of contract damage award of $9,016,682 to Gulsby. Gulf Liquids argues that the trial court erred in ruling against it based on jury findings related to breach of contract. The company contends that it did not breach the contract because Gulsby failed to meet a condition precedent necessary for payment, and it properly terminated the contract. Gulf Liquids asserts that it was not obligated to pay Gulsby for "extra work" and that it did not inhibit Gulsby from fulfilling contractual duties. The company emphasizes that the contract stipulates certain conditions that Gulsby must satisfy before payment can be issued. Specifically, articles 5.3 and 10.2 outline that Gulsby must provide satisfactory evidence of payment for all labor and materials as a prerequisite for receiving payment. Gulsby counters that these clauses are not true conditions precedent but rather covenants, and that Gulf Liquids was required to request evidence of payment before withholding its performance. The document explains that conditions precedent are events that must occur before a party is obligated to perform or before a breach can be established. Courts interpret contractual provisions based on overall intent, and conditions precedent are generally disfavored due to their potentially harsh implications. Gulf Liquids contends that articles 5.3 and 10.2 of the contract establish conditions precedent by mandating proof of payment to Gulsby's subcontractors as necessary for Gulsby to receive payment. While the terms "pre-requisite" and "condition" in these articles suggest such conditions, a comprehensive review of the contract reveals ambiguity regarding the parties' intent to create conditions precedent. Specifically, article 10.3 allows Gulf Liquids to withhold payment only if Gulsby has been requested to provide evidence of payment and has failed to do so. This article lacks any language indicating that providing such evidence is a condition precedent to payment. The Texas Supreme Court's ruling in Solar Applications emphasizes that without explicit language designating a lien release as a condition precedent, such provisions are to be interpreted as covenants. Consequently, the conflicting nature of the articles leads to the interpretation that Gulsby's obligation to provide evidence of payment is a covenant, not a condition precedent. Thus, the argument that Gulsby's breach of contract award is invalid due to failure to meet a condition precedent is rejected. Gulf Liquids asserts it did not breach Contracts 1 and 2 by terminating Gulsby, as the contracts allowed termination with or without cause per Article 16. For a termination for cause, Gulf Liquids was required to notify Gulsby of a default and provide a 10-day cure period, with Gulsby entitled to payment for completed work minus any set-off amounts. Under Article 16.3, a termination without cause would grant Gulsby payment for completed work plus an 8% overhead and profit on actual costs. The contracts stipulated that a wrongful termination for cause would be treated as a termination without cause. Gulf Liquids argues that exercising the termination clause does not constitute a breach of contract since it was within its rights to terminate. However, the prior breach of its payment obligation means the termination was effectively without cause. Regarding extra work, Gulf Liquids contests a breach-of-contract judgment related to payments for work classified as "extra." The jury found Gulf Liquids breached the contract by not exercising good faith in evaluating change requests. The jury awarded damages for unpaid amounts from approved change requests. Gulf Liquids claims it did not breach the contract because Gulsby did not follow required procedures for extra work, which included obtaining prior written authorization. Gulsby counters that Gulf Liquids' prior breach negates its ability to invoke these procedural defenses. The summary agrees with this view. In City of Baytown v. Bayshore Constructors, Inc., the contractor claimed damages for "extra work" due to the employer's inadequate plans and specifications. On appeal, the owner contested the sufficiency of evidence regarding the contractor's compliance with contract terms for submitting extra work claims. The court ruled that an owner's breach of a building contract negates its procedural rights related to change orders and claims for additional costs. Consequently, Gulf Liquids, having failed to pay Gulsby under Contracts 1 and 2, could not invoke the procedural provisions to avoid payment for extra work. The jury found that Gulf Liquids materially failed to comply with the contracts by obstructing Gulsby's performance through a misleading Basis of Design. However, the court upheld the jury's liability finding that Gulf Liquids breached the contracts by not paying Gulsby for amounts owed and approved extra work. On appeal regarding the reduction of contract damages, Gulf Liquids argued that the termination clause limited damages, the evidence was insufficient, and the damages should be reduced based on the "one-satisfaction rule." The court recognized that the termination clause indeed restricts damages. Gulf Liquids contended that the trial court erred in allowing the jury to determine compensation for breach, asserting that the termination rights should not be disregarded. Since the jury found that Gulsby did not breach the contracts, Gulf Liquids's termination was deemed wrongful, categorized as a termination without cause, which impacts Gulsby’s entitlement to benefit-of-the-bargain damages. The court reiterated that parties are bound by their agreed-upon measures of damages for contract breaches. The termination-for-convenience clause limits Gulsby's damages for wrongful termination to the payment for work completed, plus overhead and profit of 8% on actual costs. Gulsby contends that Gulf Liquids' breach of contract invalidates this limitation. Citing previous cases, Gulsby argues that an owner's breach forfeits their rights regarding change orders and additional cost claims. However, these cases do not address whether such a breach nullifies contractual provisions limiting contractor remedies. Gulf Liquids asserts that not enforcing the limitation would render the clause meaningless, a position the court agrees with. The clause implies that wrongful termination by the owner will be treated as a termination without cause, and thus limits the damages as stated. The court emphasizes that allowing an owner to breach while simultaneously negating the limitation provisions leads to circular reasoning, which must be avoided. Furthermore, while the termination clause limits recovery of benefit-of-the-bargain damages, it does not affect claims for approved extra work completed before termination. Therefore, the trial court correctly allowed Gulsby to seek recovery for extra work approved by Gulf Liquids, as this was not limited by the termination clause. Gulf Liquids contends that Gulsby's contract damages should be reduced by $2,500,000 due to a settlement agreement Gulsby entered shortly before trial. They also argue there is insufficient evidence supporting the awarded contract damages. The court agrees that the damages should be limited by the termination-for-convenience clause, thus sustaining Gulf Liquids's appeal on this issue. Regarding the breach of contract, the court finds that Gulsby was not required to prove that subcontractors were paid to receive payment from Gulf Liquids, affirming the trial court's decision to submit jury question number 27 concerning Gulf Liquids's liability for breach of contract. However, the court identifies an error in jury question 38, which allowed the jury to award benefit-of-the-bargain damages, as the contract explicitly limited recoverable damages. The court cannot ascertain how the trial court calculated the $5,016,682 award for breach of contract, leading to a reversal of this award and a remand for further proceedings. In terms of quantum meruit, Gulf Liquids argues that recovery is barred because an express contract governs the claims. Gulsby counters that construction contracts have an exception to this rule. Quantum meruit, based on an implied agreement to pay for benefits received, is typically precluded when an express contract exists. However, exceptions apply in construction contracts, allowing recovery if the services rendered are not covered by the contract, if the contractor partially performed but could not complete due to the owner's breach, or if the owner accepted benefits from the contractor's partial performance. Gulf Liquids disputes the applicability of these exceptions, asserting that the services were covered by the contract and that Gulsby should not recover based on partial performance. In jury question 40, the jury was tasked with determining whether Gulsby performed compensable work for Gulf Liquids outside the scope of Contracts 1 and 2, to which they affirmed 16 out of 18 items claimed by Gulsby. Gulf Liquids contested that these items were either included in the contract’s scope or classified as "extra work." They further argued that the jury was improperly asked to interpret the contract, a matter reserved for the trial court. The document cites relevant case law establishing that contract interpretation is a legal question, while determining quantum meruit recovery hinges on whether the services in question are covered by a contract. The Court must assess whether the 16 items were contractually covered. Gulf Liquids argues that all items fit within the defined scope or were categorized as extra work under specified contractual provisions. The contract delineates "scope of work" and "extra work," with "scope of work" defined in detail in Exhibit A, and "extra work" comprising tasks not specified but directly related to the work, provided they do not alter the nature of the undertaking. Gulsby contends that since the jury found the 16 items were "outside the scope," they constituted "substantially different undertakings." The Court disagrees, clarifying that even if the work is deemed outside the contract’s scope, it can still qualify as "extra work" if it relates directly to the contract's work without being a substantially different undertaking. No jury finding indicated that the items were unrelated or constituted a different project. Therefore, since the items were either within the scope or considered extra work under the contract, Gulsby cannot validly claim quantum meruit. Gulsby sought recovery under quantum meruit due to partial performance, claiming Gulf Liquids's breach prevented full completion. Under Texas law, a contractor may recover the full contract price if they have substantially performed, less any costs to remedy defects. If not substantially performed, a quantum meruit claim is permissible. The jury found Gulsby had substantially performed, allowing recovery under the contract but not quantum meruit, as established in precedent that prevents recovery on quantum meruit for completed contracts. Consequently, Gulf Liquids's appeal on this issue was upheld, reversing the quantum meruit award and ruling that Gulsby take nothing on that claim. Additionally, Gulf Liquids raised conditional issues regarding alleged charge errors and the admission of insurance evidence, but these were deemed unnecessary to address since the reversal on quantum meruit and breach of contract claims provided sufficient relief. In Gulsby's appeal, the trial court had submitted issues of fraudulent inducement, fraud, and punitive damages to the jury, which ruled in Gulsby's favor. However, the court granted judgment notwithstanding the verdict (JNOV), which Gulsby contests, citing errors in disregarding jury findings related to fraud, tortious interference, accountability of Williams for Gulf Liquids's actions, punitive damages, exclusion of testimony regarding company value, and reductions in damages for breach of contract and quantum meruit, along with the failure to award attorney's fees. Gulsby appeals the trial court's granting of a Judgment Notwithstanding the Verdict (JNOV) regarding its fraudulent inducement claims against Gulf Liquids. The jury found that Gulf Liquids fraudulently induced Gulsby into Contracts 1 and 2 and awarded damages totaling approximately $9 million, broken down by specific contract obligations and change requests. Gulsby argues the trial court erred by disregarding the jury's findings. The standard for granting JNOV allows a trial court to override jury findings if they are immaterial or unsupported by evidence. Fraudulent inducement, requiring proof of a false material misrepresentation made with knowledge of its falsity or without knowledge of its truth, must demonstrate reliance and causation of injury. A party is not bound by contracts obtained through fraud, and fraudulent inducement specifically arises within a contractual context, necessitating proof related to the agreement. Gulsby identifies four false material misrepresentations made by Gulf Liquids that led to the formation of their contracts: 1. **Site Size Misrepresentation**: Douglas of Gulf Liquids claimed the Chalmette site was 1.5 to 2.0 acres, while it was actually only 0.8 acres. Gulsby relied on this information for plant design and pricing, resulting in a $2.38 million increase in costs when plans had to be modified after discovering the true size. 2. **Feedstream Composition Misrepresentation**: Gulf Liquids provided a flawed "basis of design" document to Gulsby, stating that 10% of the feedstream would consist of ZSM-5 catalyst, which was essential for profitability. Evidence indicated that the actual percentage of ZSM-5 was significantly lower, leading to further modifications and increased costs for Gulsby. 3. **Surety Bond Reimbursement Promise**: Gulsby secured two $10 million surety bonds, but Douglas insisted on additional bonding for the full contract price, costing Gulsby $1.875 million. Douglas assured Gulsby that Gulf Liquids would reimburse this cost, a promise that was never fulfilled. 4. **Utility Cost Reimbursement Promise**: Gulsby needed to increase the plant's horsepower, which Gulf Liquids acknowledged would incur additional utility costs. Douglas promised reimbursement for these costs to facilitate contract signing, but Gulf Liquids failed to provide any reimbursement. Gulf Liquids argues that these misrepresentations are immaterial and should not be actionable, claiming the case is fundamentally a breach-of-contract issue where punitive damages are not applicable and asserting that merger clauses in the contracts negate Gulsby's reliance on oral misrepresentations. The court expresses agreement with the latter point regarding reliance on oral misrepresentations. Gulf Liquids contends that Gulsby could not justifiably rely on alleged misrepresentations due to specific contract provisions. In fraud claims, plaintiffs must demonstrate actual and justifiable reliance, as established in Grant Thornton LLP v. Prospect High Income Fund. Justifiability is assessed by considering the plaintiff's individual characteristics and circumstances at the time of the alleged fraud, with the presence of "red flags" suggesting reliance is unwarranted, based on Lewis v. Bank of America. Gulf Liquids argues that merger clauses in the contracts preclude Gulsby's reliance on any pre-contract oral representations, referencing Schlumberger Technology Corp. v. Swanson, where the court upheld that clear contractual disclaimers of reliance can negate fraudulent inducement claims. In Schlumberger, the Swansons explicitly stated they were not relying on Schlumberger’s representations and were represented by counsel, which the court recognized as valid grounds for dismissing their claims. However, the Texas Supreme Court in Forest Oil Corp. v. McAllen noted that disclaimers of reliance do not automatically bar fraudulent inducement claims; the court must consider the contract's specifics and surrounding circumstances, including negotiation processes, legal representation, the nature of the transaction, the parties' business acumen, and the clarity of the release language. Gulf Liquids asserts that Article 25.10 of the EPC Contract disclaims reliance on any oral representations, negating Gulsby's claims of fraudulent inducement. Article 25.10 stipulates that the contract and its exhibits represent the entire agreement between the parties, prohibiting any modifications unless documented in writing. Gulsby's allegations of misrepresentations regarding additional compensation and site size, made orally before the contract was signed, are not recognized due to this merger clause, which bars pre-contractual terms from supporting fraudulent inducement claims. Regarding the misrepresentation of feedstream components, Gulf Liquids contends that Gulsby was required to design a system based on the provided feedstream, and any inaccuracies would not constitute a breach by Gulsby. Article 8.2 confirms that Gulsby is not liable for failure to achieve the stated recovery rates if the feedstream materially deviates from Exhibit B. Thus, Gulsby could not be harmed by an erroneous design basis since it was not contractually responsible for creating a functional system under incorrect parameters. Additionally, Article 3.3 grants Gulf Liquids the right to modify the project scope, indicating that Gulsby could not reasonably rely on the unchangeability of the feedstream specifications. Consequently, Gulsby cannot demonstrate harm arising from changes to the feedstream, as it was not bound to design a system based on altered specifications. Gulsby failed to demonstrate reasonable reliance on feedstream calculations due to a contract provision allowing Gulf Liquids to alter those calculations, which could have modified the scope of Gulsby's work. Consequently, any changes would have provided Gulsby grounds for requesting additional compensation. The trial court's decision to grant Judgment Notwithstanding the Verdict (JNOV) and dismiss the fraud claims against Gulf Liquids was upheld. In Gulsby’s appeal regarding tortious interference claims against Williams, the jury found that Williams intentionally interfered with Gulsby's contracts but deemed that interference unjustified. Williams argued that its actions were justified as it had a legal right to interfere, which the trial court agreed with, stating that the jury's negative finding on justification was immaterial. Justification serves as an affirmative defense against tortious interference, and the court concluded that if a defendant is found to possess a legal right to interfere, the motive becomes irrelevant. The court thus upheld the trial court's ruling regarding Williams' interference claims. If the defendant cannot legally prove justification, it may still establish a defense if the trial court finds that the defendant interfered while exercising a colorable right, and the jury concludes that the defendant acted in good faith despite being mistaken. Williams contends it was exercising its legal rights regarding change orders, which the court supports. The Holdings Operating Agreement granted Williams the right to require express written consent from Tyler and Douglas before incurring liabilities or expenditures over $10,000. Enforcing a valid contract does not constitute unjustifiable interference. Consequently, Williams's actions were justified as a matter of law, making the jury's finding of bad faith irrelevant. The trial court rightly disregarded the jury's finding of tortious interference. Regarding Gulsby's claims against Williams for benefiting from Gulf Liquids's fraud and being responsible for its conduct, the court determined that since Gulf Liquids did not commit fraud, Williams cannot be held vicariously liable. The court also upheld the decision to disregard punitive-damage findings and awards against Gulf Liquids and Williams, citing that without an underlying tort, punitive damages cannot be awarded. Gulsby's conditional argument for reversing the case due to the exclusion of testimony about his company's value, intended to demonstrate damages from alleged fraud and tortious interference, was also rejected. The court noted that since it disregarded the tort liability findings, the damages were not material to the case, rendering the excluded evidence non-controlling. Error in excluding Jerry Gulsby's testimony regarding his company's value was deemed harmless, leading to the overruling of his fifth issue. In his sixth issue on appeal, Gulsby contended that the trial court wrongly reduced his damages for breach of contract and quantum meruit by a total of $4 million instead of the warranted $2 million, as both awards included compensation for the Geismar expansion. However, this issue became moot due to the prior reversal of Gulsby's breach-of-contract and quantum meruit awards. In his seventh appeal issue, Gulsby argued that the trial court improperly awarded $0 in attorney's fees for his breach-of-contract claim because he failed to segregate fees between the breach-of-contract and fraud claims. Instead of a take-nothing judgment, the appropriate remedy for unsegregated fees is a new trial. Given that the breach-of-contract claims were reversed and remanded, the court acknowledged that the unsegregated fees could inform the segregated amount. Consequently, the take-nothing judgment on attorney's fees was reversed, and the issue was remanded for further proceedings. NAICO issued payment and performance bonds for Gulsby, with Gulf Liquids as a beneficiary. After Gulf Liquids discovered Gulsby owed over $15 million to subcontractors, it demanded NAICO fulfill its bond obligations. NAICO initially complied but later refused to pay under the performance bonds, leading Gulf Liquids to terminate the contracts. NAICO subsequently sued Gulf Liquids and Williams for reimbursement of bond payments and punitive damages. In a jury finding, Gulf Liquids and Williams were determined to have fraudulently induced NAICO to issue the bonds by not disclosing material facts, with the jury instructed to consider only actions prior to the bonds' execution. The jury found that Williams tortiously interfered with bonds without justification and that Gulf Liquids and Williams committed fraud against NAICO. They determined Williams benefited from this fraud and awarded NAICO $20,182,498 in actual damages based on these tort findings. The jury also concluded there was clear and convincing evidence of harm to NAICO and malice by Williams, leading to punitive damages of $20 million against Gulf Liquids and $50 million against Williams. However, following post-verdict motions, the trial court granted a judgment notwithstanding the verdict (JNOV), ruling that NAICO would take nothing on its tort claims against both defendants. NAICO appeals, asserting that the trial court erred in granting JNOV. The standard for granting JNOV allows a trial court to disregard a jury finding if it is immaterial or unsupported by evidence. Gulf Liquids and Williams contended the tort questions were immaterial, claiming that NAICO should pursue claims against Gulsby due to its indemnity agreement and not independently for tort recovery. They argued that fraud and misrepresentations are defenses against a surety's liability rather than grounds for independent tort claims. The court found no authority supporting NAICO's position that such fraud could constitute an independent tort claim. It noted that fraud in inducing a construction contract could defend against a surety's liability, and significant alterations to bonded contracts could discharge the surety's obligations. Lastly, it stated that performance bonds are conditional upon the principal's material breach of the bonded contract. A contractor's substantial compliance with a construction contract precludes a finding of material breach, as established in *Vance v. My Apartment Steakhouse of San Antonio, Inc.*, meaning the surety cannot be held liable on bonds. NAICO argues it was misled by Gulf Liquids and Williams, asserting that had it known of Gulf Liquids's non-payment to Gulsby, it could have declared an owner default prior to bond payment. However, an owner default serves as a defense to a surety's liability. Fraudulently inducing bond issuance or waiving contract defenses does not create grounds for tort recovery. While NAICO cites cases permitting sureties to pursue negligence claims against third parties (engineers, accountants, and banks) due to contractual duties, these specific situations do not support a general claim for independent tort recovery in this context. The law does recognize equitable remedies for sureties who incur costs on bonds, including the right to reimbursement from the principal and potential restitution for benefits conferred, even if the principal is not liable for the original bond amount. Under equitable subrogation principles, a surety can assert claims from its principal against the obligee related to the bonded contract. This includes contract, tort, or statutory claims, as outlined in the Restatement (Third) Suretyship and relevant legal literature. Sureties often face the challenge of needing to establish the principal's liability before seeking reimbursement, leading to reluctance in settling disputes until liability is confirmed. To mitigate the risk of non-reimbursement if the principal is later found not to be in default, sureties commonly secure indemnity agreements with their principals. In this case, NAICO has an indemnity agreement with Gulsby, allowing NAICO to recover amounts paid in good faith under the belief that they were owed, promoting settlement without litigation over the principal's liability. The trial court disregarded jury findings that Gulf Liquids materially altered contracts and committed an "owner default," which caused NAICO damages of $20,182,498.53. NAICO argues that the court erred in this disregard. Gulf Liquids contends it did not breach the bonds, and any "owner default" constitutes a defense to the surety's liability. The court agrees that both "owner default" and "material alteration" serve as defenses against the surety's liability but notes that NAICO has not cited cases that support a direct damage claim against the owner by the surety based on these defenses. NAICO's claims for damages against Gulf Liquids were not upheld due to a lack of clear authority allowing a surety to pursue direct claims for damages resulting from "owner default" or "material alteration." Consequently, the trial court correctly disregarded jury damage awards related to NAICO's breach of contract claims. However, the jury's finding of an "owner default" was valid, as Gulf Liquids breached Contracts 1 and 2 by failing to pay Gulsby, establishing grounds for NAICO to assert this finding defensively. Moreover, NAICO's request for a declaratory judgment was supported by the jury's findings and is now granted, discharging NAICO's liabilities on the bonds due to the "owner default." Regarding punitive damages, NAICO's claim was rejected because Gulf Liquids and Williams did not commit an underlying tort, thus the trial court rightly dismissed the punitive damage awards. On attorney's fees, the trial court’s $0 award was deemed erroneous due to NAICO's failure to segregate fees related to different claims. The proper remedy is a new trial on attorney's fees rather than a take-nothing judgment, leading to a reversal of the trial court's decision and remanding for further proceedings. Finally, the court decided to reverse the breach-of-contract award in Gulsby’s favor and remand for additional proceedings, indicating errors in submitting benefit-of-the-bargain damages to the jury. The trial court's submission of quantum meruit claims to the jury was erroneous as these claims were encompassed by existing contracts. Consequently, the quantum meruit award has been reversed, and Gulsby is ordered to take nothing on these claims. The appellate court affirms the trial court's judgment notwithstanding the verdict (JNOV), which disregards the jury's findings related to tort claims, resulting in a take-nothing judgment for Gulsby against Gulf Liquids and Williams. The court also finds any errors in excluding Jerry Gulsby's testimony about pre-contract value to be harmless. However, the trial court's decision to award Gulsby $0 in attorney's fees for the breach-of-contract claim is deemed incorrect, leading to a remand for further proceedings on this issue. Regarding NAICO's appeal, the court affirms the JNOV and the take-nothing judgment on tort claims against Gulf Liquids and Williams. It reverses the denial of NAICO's request for declaratory relief, declaring that NAICO is discharged from its bond obligations. Additionally, the judgment awarding NAICO $0 in attorney's fees is reversed, and this claim is also remanded for further proceedings. Chief Justice Sherry Radack presided over the panel, which included Justices Bland and Massengale.