IS PERFORMANCE BOND LIABLE FOR DELAY DAMAGES?

images-3There is an argument that a performance bond is not liable for delay damages UNLESS the bond specifically allows for the recovery of such damages.  Keep this in mind when requiring a performance bond so that the bond covers the associated risks (and damages) you contemplate when requiring the bond.    This argument is supported by the Florida Supreme Court’s 1992 decision in American Home Assur. Co. v. Larkin General Hosp., Ltd., 593 So.2d 195, 198 (Fla. 1992):

 

The language in the performance bond, construed together with the purpose of the bond, clearly explains that the performance bond merely guaranteed the completion of the construction contract and nothing more. Upon default, the terms of the performance bond required American [performance bond surety] to step in and either complete construction or pay Larkin [obligee] the reasonable costs of completion. Because the terms of the performance bond control the liability of the surety, American’s liability will not be extended beyond the terms of the performance bond. Therefore, American cannot be held liable for delay damages.

 

 

However, the Eleventh Circuit in National Fire Ins. Co. of Hartford v. Fortune Const. Co., 320 F.3d 1260(11th Cir. 2003), also analyzing an issue relating to the recoverability of delay-type damages against a performance bond, did not narrowly interpret the Florida Supreme Court’s decision in Larkin General Hospital.  Rather, the Eleventh Circuit stated:

 

Larkin General Hospital could possibly be interpreted to mean that a performance bond surety cannot be held liable for…delay damages, whether liquidated or unliquidated, unless the responsibility for delay damages is specified on the face of the performance bond. However, we do not read the decision that broadly. The “purpose of the bond” must be considered, which requires reference to the contract secured by the bond. Where a provision for liquidated delay damages is clearly delineated in the underlying contract and incorporated by reference into the bond, the surety is on notice of the time element of performance and the contractual consequences of failure to timely perform in accordance with the contract.

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While it is true that the terms of the bonds in this case do not expressly require the surety to assume responsibility for delay, “[i]t is the general rule of contract law that where a writing expressly refers to and sufficiently describes another document, the other document is to be interpreted as part of the writing.” Even after Larkin General Hospital, Florida courts have continued to utilize the well-established doctrine of incorporation by reference to impose liability on a performance bond surety. The “purpose” of the performance bonds was to insure performance in accordance with the terms of the respective subcontracts, and those terms plainly include adverse direct consequences for delay. Therefore, under the particular facts of this case, the unequivocal delay damages provisions of the subcontracts are properly considered part of the bonds issued by National Fire because of the incorporation by reference.

Fortune Const. Co., supra, at 1275-76 (internal citations omitted).

 

It is uncertain whether a Florida appellate court will agree with the rationale of the Eleventh Circuit in Fortune Const. Co., albeit the rationale making perfect sense.  If the contract incorporated into the performance bond renders the principal of the bond liable to the obligee for delay damages, then the bond should cover delay damages.  On the other hand, Larkin General Hospital is a Florida Supreme Court decision meaning there is a very strong argument that that the performance bond’s liability for delay damages will not be extended beyond the face of the bond.  For this reason, and as mentioned above, it is essential that the face of the performance bond expresses that it covers the obligee’s delay damages or any other damages stemming from the default of the principal. (By way of example, the AIA A132 performance bond expresses on the face of the bond that it covers delay costs stemming from the bond-principal’s default resulting from the surety’s failure to act and contractual liquidated or actual delay damages, if no liquidated damages, caused by the bond-principal.)

 

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.