David Adelstein | Florida Construction Legal Updates | December 25, 2017<\/p>\n
A\u00a0performance bond<\/strong>\u00a0is a valuable tool designed to guarantee the performance of the principal of the contract made part of the bond.\u00a0\u00a0 But, it is only a valuable tool if the\u00a0obligee<\/strong>(entity the bond is designed to benefit) understands that it needs to\u00a0properly trigger\u00a0the\u00a0performance bond\u00a0if it is looking to the bond (surety) to remedy and pay for a contractual default.\u00a0\u00a0If the performance bond is\u00a0not\u00a0properly triggered and a suit is brought upon the bond then the obligee could be the one materially breaching the terms of the bond<\/strong>.\u00a0 This means the obligee has no recourse under the performance bond. \u00a0This is a huge downside when the obligee wanted the security of the performance bond, and reimbursed the bond principal for the premium of the bond, in order to address and remediate a default under the underlying contract.<\/p>\n <\/p>\n A recent example of this downside can be found in the Southern District of Florida\u2019s decision in\u00a0Arch Ins. Co. v. John Moriarty & Associates of Florida, Inc<\/i>., 2016 WL 7324144 (S.D.Fla. 2016).\u00a0 Here, a general contractor sued a subcontractor\u2019s performance bond surety for an approximate $1M cost overrun associated with the performance of the subcontractor\u2019s subcontract (the contract made part of the subcontractor\u2019s performance bond).\u00a0 The surety moved for summary judgment arguing that the general contractor failed to property trigger the performance bond and, therefore, materially breached the bond.\u00a0 The trial court granted the summary judgment in favor of the performance bond surety.\u00a0 Why?<\/p>\n <\/p>\n The performance bond in this case appeared to be an\u00a0AIA performance bond<\/strong>\u00a0(the AIA Document A312 Performance Bond or modified version thereof).\u00a0\u00a0 This appears clear from the following finding by the court:<\/p>\n <\/p>\n Under the bond in this case, Arch\u2019s [performance bond surety] obligations are\u00a0not triggered unless\u00a0Moriarty [general contractor-obligee]: (1) first provides notice to R.C. [subcontractor-principal of bond] and Arch that it is \u201cconsidering declaring a Contractor Default\u201d; (2) \u201cdeclares a Contractor Default, terminates the Construction Contract and notifies [Arch]\u201d; and (3) \u201cagree[s] to pay the Balance of the Contract Price \u2026 to [Arch] or to a contractor selected to perform the Construction Contract.\u201d \u2026Once Moriarty complies with those three conditions precedent, the bond then requires Moriarty to allow Arch to mitigate its damages by arranging for the completion of the subcontract itself. Lastly, before Moriarty may properly make a demand under the bond, it must provide seven days\u2019 notice to Arch.\u201d<\/strong><\/p>\n <\/p>\n The general contractor, as commonly done, notified the subcontractor and subcontractor\u2019s surety that it was considering declaring the subcontractor in default, but never (i) formally declared the subcontractor in default, (ii) terminated the subcontractor, or (iii) agreed to pay the subcontract balance to the performance bond surety.\u00a0 Thus, the general contractor (obligee) never allowed the surety to mitigate damages by arranging completion of the subcontract upon the subcontractor\u2019s (bond principal) default.<\/p>\n <\/p>\n