FIVE-YEAR STATUTE OF LIMITATIONS ON PERFORMANCE-TYPE SURETY BONDS

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The statute of limitations on a claim against a performance-type bond is 5 years from the breach of the bond, i.e., the bond-principal’s default (based on the same statute of limitations that governs written contracts / obligations).  See Fla. Stat. s. 95.11(2)(b).   This 5-year statute of limitations is NOT extended and does NOT commence when the surety denies the claim.  It commences upon the default of the bond-principal, which would be the act constituting the breach of the bond.  This does not mean that the statute of limitations starts when a latent defect is discovered. This is not the case.  In dealing with a completed project, the five-year statute of limitations would run when the obligee (beneficiary of the bond) accepted the work.  See Federal Insurance Co. v. Southwest Florida Retirement Center, Inc., 707 So.2d 1119, 1121-22 (Fla. 1998). 

 

This 5-year statute of limitations on performance-type surety bonds has recently been explained by the Second District in Lexicon Ins. Co. v. City of Cape Coral, Florida, 42 Fla. L. Weekly D2521a (Fla. 2d DCA 2017), a case where a developer planned on developing a single-family subdivision. 

 

In 2005, the developer commenced the subdivision improvements.    Pursuant to a City ordinance governing commercial and residential development of 446.09 acres, the developer was required to provide a surety bond to the City “in an amount of the estimated cost to complete all required site improvements, as determined by the City.”   The developer provided the City two surety bonds totaling $7.7 Million representing the estimated cost to complete the remaining subdivision work.  The surety bonds stated:

 

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, that if the said Principal [DEVELOPER] shall construct, or have constructed, the improvements herein described, and shall save the Obligee [CITY] harmless from any loss, cost or damage by reason of its failure to complete said work, then this obligation shall be null and void, otherwise to remain in full force and effect, and the Surety, upon receipt of a resolution of the Obligee indicating that the improvements have not been installed or completed, will complete the improvements or pay to the Obligee such amount up to the Principal amount of this bond which will allow the Obligee to complete the improvements.

 

 

In March 2007, construction of the subdivision improvements ceased due to nonpayment by the developer. 

  

In 2010, the City contacted the developer’s surety claiming it wants to have the outstanding subdivision work completed.  The surety sent a letter to the City requesting information so that it could review the City’s claim.  The City did not provide the requested information because the City was considering selling the project.

 

In 2012, a buyer purchased the project from the City for $6.2 Million.

 

In 2012, the City sued the surety bonds and assigned its claim to the new buyer.  The surety argued that the five-year statute of limitations expired on the surety bonds before the City filed suit in 2012.  The trial court rejected this argument and after a bench trial judgment was entered against the surety.

 

On appeal, Second District reversed the trial court’s judgment against the surety and remanded for the trial court to enter judgment in favor of the surety holding that the claims against the surety bond are barred as a matter of law by the 5-year statute of limitations.  

 

The surety bond here, no different than a performance bond, required the developer (bond principal) to construct and complete the subdivision improvements. When the developer failed to do so (defaulted under the bond), the City’s rights under the bond accrued.  Here, construction ceased in 2007; thus, the City’s rights against the bond accrued in 2007 when the developer stopped the development of the subdivision improvements.

 

The surety bonds the developer provided the City are analogous to obligations in a performance bond.  These are analogous to performance-based obligations in a warranty bond.  These surety bonds with performance based obligations will be governed by the five-year statute of limitations governing written contracts / obligations.  The statute of limitations will accrue when the bond-principal defaults and otherwise breaches the terms of the bond.

 

If you are dealing with issues relating to a performance-type surety bond, it is important that you consult with counsel to make sure your rights are preserved.  There are many considerations with the statute of limitations being one of those considerations.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

 

SURETIES DO NOT ISSUE BONDS RISK-FREE TO THE BOND-PRINCIPAL

shutterstock_4091836If your construction company is bonded, then you have signed a General Agreement of Indemnity with your surety / bonding company.  Stated another way, if a surety issued an obligee on behalf of your construction company, as the bond-principal, a payment or performance bond, then you have signed a General Agreement of Indemnity with your surety.  

 

The General Agreement of Indemnity is NOT to be taken lightly.  Without the General Agreement of Indemnity, the surety is NOT issuing the bonds you need to work on a certain project.  A bond is not insurance and sureties do not issue the bonds under a risk-free premise. Oh no!  If a surety has to pay-out claims under a bond, the surety will be looking to recoup that loss from the indemnitors that executed the General Agreement of Indemnity.

 

The General Agreement of Indemnity will generally require not only the construction company, but individuals (both husband and wife) and, potentially, other affiliated companies to indemnify the surety in the event a claim is made against a bond (the indemnitors).  Thus, there will be multiple indemnitors the surety will look towards if they perceive risk under the bond.  If you take the General Agreement of Indemnity lightly, then you could find yourself, for lack of a better expression, up “s#*#*t’s creek without a paddle!”  This is no joke.

 

In a recent example, Great American Ins. Co. v. Brewer, 2017 WL 3537577 (M.D.Fla. 2017), a subcontractor furnished a general contractor with a performance bond.   The subcontractor was defaulted and then terminated and a claim was made against the subcontractor’s performance bond.  The surety, to mitigate its exposure, entered into a settlement agreement with the general contractor.

 

Before the surety entered into a settlement agreement with the general contractor, it demanded that the subcontractor (bond-principal) and other listed indemnitors post $1.5M in collateral pursuant to the General Agreement of Indemnity.  The subcontractor (and the other indemnitors) refused.   After the surety entered into the settlement agreement with the general contractor, it demanded that the subcontractor (and the other indemnitors) post approximately $2.8M in collateral representing amounts covered in the settlement and additional amounts constituting the surety’s exposure to the general contractor.  The subcontractor (and other indemnitors) again refused. 

 

The subcontractor’s refusal was predicated on the argument that it was improperly defaulted and terminated.  And this argument is where the subcontractor’s problem lies.  The subcontractor’s belief is largely irrelevant if the surety operates in good faith (and proving bad faith in this context is very, very challenging).    But, in order to even argue that the surety did not act in good faith, the subcontractor (and its indemnitors) would need to post collateral per the terms of the General Agreement of Indemnity.

 

In Florida, a construction performance bond surety like Plaintiff is “entitled to reimbursement pursuant to an indemnity contract for any payments made by it in a good faith belief that it was required to pay, regardless of whether any liability actually existed.”  Further, where—as here—an indemnity agreement gives the surety discretion to settle a claim brought under a bond, “the only defense to indemnity for [such a] settlement is bad faith on the part of the surety.”

 

 

A bad faith defense is not available to indemnities like Defendants who do not post collateral in accordance with a demand under an indemnification agreement.  When a bad faith defense is available, it requires proof of “an improper motive or dishonest purpose on the part of the surety.” Standing alone, evidence of a surety’s “lack of diligence,” negligence, and even “gross negligence,” is not evidence of bad faith.

 

Great American Ins. Co, supra, at *7 (internal citations omitted).

 

 

Importantly, disagreeing with a surety’s investigation is not evidence of bad faith by the surety. Great American Ins. Co, supra, at *8.  It requires, as stated, a truly improper motive or dishonest purpose — very, very difficult to prove.

 

General Agreements of Indemnity tend to have the same fundamental provisions.  Before you refuse a demand made by your surety, consider the ramifications. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

HURDLES WITH TRIGGERING A SUBCONTRACTOR PERFORMANCE BOND

shutterstock_523359034There have been a couple of decisions as of late, particularly in federal court, that have gone in favor of a performance bond surety and against a general contractor’s claim against a subcontractor’s performance bond.   These decisions have been so unfavorable that they may be swaying certain internal decisions to move to subcontractor default insurance with, perhaps, subcontractors that pose less risk.    From the general contractor’s perspective, if they have to stop the management of the job and progress to jump through hoops to trigger the performance bond’s obligations, rightfully or wrongfully, the bond may not provide them the value they need.  Performance bonds are an appropriate product in many instances, but there should be more consistency regarding the actual trigger of a subcontractor’s performance bond obligations.  Project teams need to absolutely understand what efforts they need to take, and how they need to take such efforts, in order to properly trigger a performance bond’s obligations.  This is a must (and I have presented many seminars on this very issue).  Or, the general contractor should move away from the traditional AIA /standard performance bond form, which is the direction I always go when I am involved in the drafting of a performance bond.

 

To discuss the consternation with triggering subcontractor performance bond obligations, one just has to look at the recent decision in International Fidelity Ins. Co. v. Americabe-Moriarty JV, 2017 WL 766912 (11th Cir. 2017).   This appellate decision dealt with the fundamental issue of whether the contractor properly triggered a subcontractor’s performance bond.  The appellate court found that it did not.  This meant that the general contractor breached the terms of the performance bond, discharging the bond’s obligations, and the surety was off the hook for any subcontractor default.   This is clearly not what the general contractor intended when it wanted its subcontractor to be bonded. 

 

In this case, the subcontract provided that if the subcontractor failed to cure a default after a three-day notice to cure period, the general contractor was at liberty to terminate the subcontract upon an additional three day notice to the subcontractor, which it could  then take possession of materials and employ others to complete the work.

 

The performance bond incorporated the subcontract.  (Every performance bond will incorporate the applicable contract.)  The performance bond further contained the following routine language applicable to standard-form bonds:

 

§ 3 If there is no Owner Default under the Construction Contract, the Surety’s obligation under this Bond shall arise after

.1 the Owner first provides notice to the Contractor and the Surety that the Owner is considering declaring a Contractor Default. Such notice shall indicate whether the Owner is requesting a conference among the Owner, Contractor and Surety to discuss the Contractor’s performance….

.2 the Owner declares a Contractor Default, terminates the Construction Contract and notifies the Surety; and

.3 the Owner has agreed to pay the Balance of the Contract Price in accordance with the terms of the Construction Contract to the Surety or to a contractor selected to perform the Construction Contract.

§ 5 When the Owner has satisfied the conditions of Section 3, the Surety shall promptly and at the Surety’s expense take one of the following actions:

§ 5.1 Arrange for the Contractor, with the consent of the Owner, to perform and complete the Construction Contract;

§ 5.2 Undertake to perform and complete the Construction Contract itself, through its agents or independent contractors;

§ 5.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract …; or

§ 5.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, make payment to the Owner; or

.2 Deny liability in whole or in part and notify the Owner, citing the reasons for denial.

§ 6 If the Surety does not proceed as provided in Section 5 with reasonable promptness, the Surety shall be deemed to be in default on this Bond seven days after receipt of an additional written notice from the Owner to the Surety demanding that the Surety perform its obligations under this Bond, and the Owner shall be entitled to enforce any remedy available to the Owner.

 

On August 17, 2015, the general contractor issued a notice of default to the subcontractor and surety.  This was sent per the subcontract and section 3 of the bond.  On August 20, 2015, the surety responded that it needed more information and directed the contractor not to take any steps without the written consent of the surety.  A conference call was held on September 2, 2015.  Thereafter, on September 21, 2015, the contractor sent the subcontractor and surety a letter terminating the subcontractor and notifying the surety that it will pay the surety the balance of the subcontract amount consistent with section 3 of the bond.  On October 1, 2015, the contractor sent the surety the additional notice required by section 6 of the bond, which started the 7-day clock. 

 

However—and this is a HUGE however per the court—on September 16, 2015 the contractor got a cost proposal from a completion subcontractor relating to completing the defaulted subcontractor’s scope.  The completion subcontractor sent a schedule reflecting a start state of September 21, 2015.  By September 23, 2015, the completion subcontractor had begun certain work at the project.

 

Thus, after the surety got the October 1, 2015 letter, it sent the contractor a letter on October 8, 2015 advising the contractor that its actions engaging a completion subcontractor discharged its obligations on the bond.  The contractor responded that the surety was in default of the bond by not acting with reasonable promptness per section 5 of the bond.    This lawsuit was then initiated. 

 

As mentioned, the Eleventh Circuit held that the contractor breached the terms of the performance bond discharging the surety’s obligations under the bond.  In other words, the performance bond was never properly triggered: 

 

Here, both the bond and subcontract required Americaribe [contractor] to provide notice to Fidelity [performance bond surety] when terminating CPM [subcontractor]. Americaribe did provide notice on September 21. However, the subcontract required the contractor give three-days notice before undertaking to complete the work. And the bond gave Fidelity time to choose among four options for undertaking the work itself, after Americaribe sent the termination notice. This undefined period of time was then followed by another requirement for Americaribe to provide seven-days notice before Fidelity would be in default. Neither the bond nor the contract allowed Americaribe to immediately hire Dillon to complete the work.

 ***

Before Americaribe sent the termination notice on September 21, Dillon [completion subcontractor] had already sent Americaribe a proposal for completing the work remaining on the subcontract, as well as a schedule with a presumed start date of September 21. Then, on September 22, Americaribe sent vendors of CPM a letter, copying Fidelity, informing them of CPM’s termination and that “[Americaribe] intends to award the subcontract to complete the remaining work … to Dillon.” As of September 23, Dillon had commenced some work required for the project. Thus, the question is whether these actions breached the notice provisions of the bond and subcontract.

***

Americaribe did not comply with the subcontract’s three-day notice requirement. It had already hired Dillon, which began remedying the defaulted work during that three-day period. Neither did Americaribe comply with the bond’s requirements, which expressly afforded Fidelity time to elect among options for completing the defaulted work. Americaribe’s immediate hiring of Dillon to complete the project and the costs Dillon incurred completing CPM’s work thwarted Fidelity’s ability to choose among the options it had for remedying CPM’s default under § 5 of the bond. Therefore, Fidelity is not liable on the bond.

 

This is a very, very harsh outcome.   Although I mentioned this above, it is imperative that the project team understand the steps it needs to take to properly default a subcontractor and trigger the subcontractor’s performance bond.  Not doing so will render the value of the performance bond useless to the general contractor that is relying on the security of that bond.  

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

PROPERLY TRIGGER THE PERFORMANCE BOND

unknownA performance bond is a valuable tool designed to guarantee the performance of the principal of the contract made part of the bond.   But, it is only a valuable tool if the obligee (entity the bond is designed to benefit) understands that it needs to properly trigger the performance bond if it is looking to the bond (surety) to remedy and pay for a contractual default.  If the performance bond is not properly triggered and a suit is brought upon the bond then the obligee could be the one materially breaching the terms of the bond.  This means the obligee has no recourse under the performance bond.  This is a huge downside when the obligee wanted the security of the performance bond, and reimbursed the bond principal for the premium of the bond, in order to address and remediate a default under the underlying contract.

 

A recent example of this downside can be found in the Southern District of Florida’s decision in Arch Ins. Co. v. John Moriarty & Associates of Florida, Inc., 2016 WL 7324144 (S.D.Fla. 2016).  Here, a general contractor sued a subcontractor’s performance bond surety for an approximate $1M cost overrun associated with the performance of the subcontractor’s subcontract (the contract made part of the subcontractor’s performance bond).  The surety moved for summary judgment arguing that the general contractor failed to property trigger the performance bond and, therefore, materially breached the bond.  The trial court granted the summary judgment in favor of the performance bond surety.  Why?

 

The performance bond in this case appeared to be an AIA performance bond (the AIA Document A312 Performance Bond or modified version thereof).   This appears clear from the following finding by the court:

 

Under the bond in this case, Arch’s [performance bond surety] obligations are not triggered unless Moriarty [general contractor-obligee]: (1) first provides notice to R.C. [subcontractor-principal of bond] and Arch that it is “considering declaring a Contractor Default”; (2) “declares a Contractor Default, terminates the Construction Contract and notifies [Arch]”; and (3) “agree[s] to pay the Balance of the Contract Price … to [Arch] or to a contractor selected to perform the Construction Contract.” …Once Moriarty complies with those three conditions precedent, the bond then requires Moriarty to allow Arch to mitigate its damages by arranging for the completion of the subcontract itself. Lastly, before Moriarty may properly make a demand under the bond, it must provide seven days’ notice to Arch.”

 

The general contractor, as commonly done, notified the subcontractor and subcontractor’s surety that it was considering declaring the subcontractor in default, but never (i) formally declared the subcontractor in default, (ii) terminated the subcontractor, or (iii) agreed to pay the subcontract balance to the performance bond surety.  Thus, the general contractor (obligee) never allowed the surety to mitigate damages by arranging completion of the subcontract upon the subcontractor’s (bond principal) default.

 

Remember, in order to preserve a performance bond claim it is important to properly trigger the performance bond and the surety’s role under the bond.  This means dotting your i’s and crossing your t’s when it comes to declaring the bond principal in default under the specific terms of the bond.   Moreover, if you are the obligee, consider preparing the performance bond form so that you can remove some of the underlying notice provisions in the bond to make the bond more favorable to you.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.