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 firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.