Performance Bond Claims: Strict Compliance with the Bond Language is Required
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Performance bonds on a construction project can be a valuable asset. However, the language of the bond may be filled with traps for the unwary. A bond obligee must be careful to strictly comply with the bond language, or else the bond protection may be lost—which can be a very bad thing. A recent case, Arch Ins. Co. v. John Moriarty & Associates of Florida, Inc., 15-22403-CIV, 2016 WL 7324144 (S.D. Fla. Dec. 12, 2016), highlights how a bond obligee can lose its bond protection by failing to strictly comply with the bond language… and it cost the bond obligee One Million Dollars. Failure to understand and strictly comply with the bond language can be costly.
In Moriarty, the general contractor sought approximately $1,000,000.00 from its subcontractor’s surety under the subcontractor’s performance bond. The surety refused to pay, claiming that the general contractor failed to comply with the claim requirements of the bond. The bond language set forth the following steps that the general contractor had to take in making a bond claim: (1) provide surety with notice that it was considering default of the subcontractor; (2) declare the subcontractor in default and notify the surety of the same; and (3) agree to pay the balance of the contract price to the surety or to a replacement subcontractor performing the completion work. Once the three conditions precedent occurred, the bond required that the general contractor allow the surety to mitigate damages by arranging completion of the subcontract. Last, the bond required that the general contractor could not file a claim on the bond until it issued a seven days’ notice of the claim to the surety.
The trial court held that “as a general rule, a surety’s liability on a bond is determined strictly from the terms and conditions of the bond agreement.” Moriarty (citing CC-Aventura, Inc. v. Weitz Co., LLC, 492 Fed. Appx. 54 (11th Cir. 2012)(unpublished). Accordingly, failure to adhere to a performance bond requirement is a material breach, resulting in the loss of an obligee’s rights under the bond. In other words, a surety’s liability on a performance bond depends upon whether the contractor complied with that bond.
It was undisputed in the Moriarty case that the general contractor never: declared a contractor default; terminated the subcontractor; nor agreed to pay the balance of the contract price to the surety. Moreover, the general contractor never allowed the surety to mitigate its damages by allowing the surety to arrange for the completion of the subcontract itself. By depriving the surety of its completion options, the general contractor materially breached the bond. For these reasons, the court ruled that the general contractor was not entitled to payment by the surety and denied the general contractor’s rights to its $1,000,000.00 bond claim. That is quite a harsh result for a general contractor that thought it was protected by the performance bond.
In conclusion, one should always strictly comply with the language of the bond. Read your bonds when you get them. Make sure you understand them clearly, and make sure you follow every requirement. It is probably even worth it to get your attorney’s help before defaulting the bonded party. After all, you don’t want to end up like Moriarty.