QUICK NOTE: CONTRACTOR’S STATUTORY BASIS TO RECOVER ATTORNEY’S FEES AGAINST PERFORMANCE BOND

On October 1, 2019, a modification to existing law (Florida Statute s. 627.756) will take place that allows general contractors to have a statutory basis to recover attorney’s fees against its subcontractor’s performance bond.     (Obviously, the subcontractor will need to be properly defaulted pursuant to the terms of the performance bond and incorporated subcontract.)  Now, while some manuscript subcontractor performance bonds already give the general contractor a contractual right to recover attorney’s fees against the performance bond, this right will also exist by statute for performance bonds issued on or after October 1, 2019.  This modification is good news for contractors that require certain subcontractors to obtain a performance and payment bond (as opposed to enrolling the subcontractor in a subcontractor default insurance program).  Irrespective of this modification, it is still good practice for a contractor requiring a subcontractor to provide a performance and payment bond to also ensure a contractual right exists to recover attorney’s fees under a bond claim.  However, with this modification, a contractor defaulting a bonded subcontractor will also seek to recoup its attorney’s fees against the performance bond under this statute.   Good news for contractors.  Perhaps, not so good news for sureties and subcontractors required to indemnify their sureties.  

 

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.

 

 

INDEMNIFICATION PROVISIONS DO NOT CREATE RECIPROCAL ATTORNEY’S FEES PROVISIONS

shutterstock_121868692In a good, recent decision, the Eleventh Circuit in International Fidelity Insurance Co. v. Americabe-Moriarity, JV, 2018 WL 5306683 (11th Cir. 2018), held that Florida Statute s. 57.105(7) cannot be used to shift attorney’s fees in a contractual indemnification clause in a dispute between a general contractor and subcontractor’s performance bond surety, when the dispute does not involve an actual indemnification claim stemming from a third-party.

 

In this case, a prime contractor terminated a subcontractor and looked to the subcontractor’s performance bond surety to pay for the completion work.  The subcontractor had a standard AIA A312 performance bond that requires the prime contractor to comply with the terms of the bond, as well as the incorporated subcontract, in order to trigger the surety’s obligations under the bond.  The surety filed an action for declaratory relief against the prime contractor arguing that the prime contractor breached the terms of the performance bond through non-compliance thereby discharging the surety’s obligations.  The trial court agreed and the surety moved for attorney’s fees. 

 

The surety’s argument for attorney’s fees was threefold: (1) the indemnification provision requiring the subcontractor to indemnify the prime contractor required the subcontractor to indemnify the prime contractor for, among other things, attorney’s fees; (2) Florida Statute s. 57.105(7) provides that one-sided contractual attorney’s fees provisions must apply to both parties (and treated reciprocally), hence the inclusion of attorney’s fees in the indemnification provision means that the surety should be entitled to attorney’s fees; and (3) since the subcontract was incorporated into the performance bond, the surety should be entitled to attorney’s fees since it steps in the shoes of the subcontractor under principles of surety law.

 

Surprisingly, the trial court agreed with the surety.  However, thankfully, the Eleventh Circuit held that the indemnity provision in the subcontract was an indemnity clause that applies only to third-party claims and not suits between the general contractor and subcontractor.  Thus, the requirement of reciprocity for attorney’s fees provisions pursuant to Florida Statute s. 57.105 does not apply.  The Eleventh Circuit, however, did not enter a ruling as to whether even if s. 57.105 did apply such that attorney’s fees must be reciprocal in an indemnification clause, whether such rationale would allow the performance bond surety to recover attorney’s fees under principles of surety law. 

 

This decision is useful for a few reasons:

 

(1)  If a contractor, subcontractor, etc. is trying to create an argument for attorney’s fees based on an indemnification clause, this decision is helpful to put that issue to bed since the indemnification provision applies in the context of third-party claims, and is not related to independent claims between the contracting parties;

(2) A party looking to take advantage of a performance bond must, and I mean, must, make sure to properly comply with the terms of the bond.  Certain sureties will raise any argument to avoid obligations under a performance bond hoping that the beneficiary of the bond undertakes an act that allows the surety to discharge its obligations; and

(3) General (prime) contractors should explore subcontractor default insurance, which is a first-party insurance policy, as an alternative to performance bonds to avoid the issues associated with delays and other arguments a surety may raise in furtherance of avoiding obligations under the 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.

 

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.