Florida Court Holds That Contractor’s Failure To Provide Notice Of Default In Accordance With Terms Of Performance Bond Discharged Surety From Its Obligations

Current Builders of Florida, Inc. v. First Sealord Surety, Inc.
2008 Fla. App. LEXIS 4698 (April 2, 2008)

The Court of Appeals of Florida held that a jury finding that a contractor which terminated a subcontractor failed to provide notice in accordance with the terms of a performance bond was sustainable, given that the contractor did not tender the remaining contract balance to the surety or give it an opportunity to provide for the completion of the work. Accordingly, the surety’s obligations under the bond were not triggered.

Current Builders of Florida, Inc. (the “Contractor”) served as the general contractor for a residential project. The Contractor entered into a subcontract with Morgado Plumbing Corporation (the “Subcontractor”) to install plumbing fixtures for the project (the “Subcontract”). The Subcontract required the Subcontractor to furnish the Contractor with a performance bond, which was issued by Sealord Surety, Inc. (the “Surety”).

The Contractor became unhappy with the Subcontractor’s work early on in the project and sent several letters complaining of Subcontractor’s performance. Each letter declared the Subcontractor in default and demanded that the Surety be responsible for any delays and damages. Upon ostensibly learning from a wed site that Subcontractor’s workers compensation insurance had lapsed, the Contractor terminated the Subcontractor about a year into the project. The Contractor hired a replacement subcontractor and notified both the Subcontractor and the Surety. The Surety did not respond and the Contractor filed a complaint against the Surety for breach of the performance bond.

At a jury trial, the Surety argued that the Contractor did not provide proper notice under the bond to trigger the Surety’s obligation. The Surety presented testimony that performance bond required “a declaration of default, a termination and probably an agreement to release the remaining project funds to the surety.” The Surety acknowledged the several “notices of default” sent by the Contractor but testified that as long as a the Subcontractor was working, the Surety had no obligation. The Surety testified that it only received a letter informing it that the Contractor had hired a new subcontractor and such a “termination” letter did not comply with the terms of the performance bond. The jury agreed with the Surety and found that the Surety did not receive proper notice under the performance bond and thus the Surety’s obligations under the bond were discharged.

On appeal, the Court considered whether the evidence presented a trial supported the jury’s finding. The Court evaluated the relevant performance bond terms which state:

“4.2 The Contractor has declared a Subcontractor [sic] Default and formally terminated the Subcontractor’s right to complete the Contract; and
“4.3 The Contractor has agreed to pay the balance of the Contract Price, if any, to the Surety in accordance with the terms of the Construction Contract or to a subcontractor selected by Surety to perform the Construction Contract in accordance with the terms of the Contract with the Contractor.”

The Court stated that the Contractor did not give notice to the Surety that it agreed to pay the balance of the contract to the Surety or to a subcontractor selected by the Surety. Instead the Contractor took over those obligations and thus did not allow the Surety to perform under the bond. Accordingly, the Court affirmed the trial court’s finding.

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