Florida Court’s Decision Should be a Caution to General Contractors to Precisely Follow a Performance Bond’s Procedural Requirements

In Arch Insurance Company v. John Moriarty & Associates of Florida, Inc., 2016 U.S. Dist. LEXIS 172173, the U.S. District Court for the Southern District of Florida granted Summary Judgment to a surety after finding that a general contractor did not satisfy the procedural requirements of a performance bond before it submitted a bond claim.  The Defendant was a general contractor who subcontracted the bond’s principal to furnish labor and materials on a project.  The subcontract required the provision of a performance bond which the subcontractor acquired through the Plaintiff.  At some point during the course of the project, the Defendant notified the Plaintiff that it was considering to declare the subcontractor in default. Later at the completion of the contract, the Defendant demanded a $995,239.83 payment from the Plaintiff on the bond due to the performance of the subcontractor.

The terms of the performance bond addressed specific procedures that must have been followed in the event of the subcontractor’s termination for default.  The bond required that: 1) Notice be provided to the subcontractor and Plaintiff that Defendant is, “considering declaring a Contractor Default”; 2) "Declares a Contractor Default, terminates the Construction Contract and notifies [Plaintiff]"; and 3) "Agree[s] to pay the Balance of the Contract Price…to [Plaintiff] or to a contractor selected to perform the Construction Contract." Once those three condition precedents had been met, the bond required that the Plaintiff be given the opportunity to mitigate its damages through arranging for the completion of the defaulted work.  Finally, seven days’ notice must be provided before Defendant can make a demand on the bond. 

The Court found the first requirement was met by Defendant when it alerted the Plaintiff that it was considering declaring a default.  The Court then went on to find that none of the other bond’s default or termination requirements were met.  The Defendant never declared the subcontractor to be in default, never terminated the subcontractor, nor paid the contract balance to the Plaintiff to complete the work.  In fact, the Defendant admits in its response that it, "did not declare [subcontractor] in default, did not terminate the Subcontract, and continued to administer the Subcontract substantially as it had before the Pre Default meeting, with a few additions." The Court stated that, “There can thus be no dispute that [Defendant] never allowed [Plaintiff] to mitigate its damages by arranging for the completion of the subcontract itself. By depriving [Plaintiff] of its completion options, [Defendant] materially breached the bond.”

In its ruling, the Court found that the Defendant failed to comply with the terms of the bond and as a result the Plaintiff was not liable for the nearly $1 million demand.  

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based in Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com