U.S. District Court in Florida Rules Performance Bond Claims Barred By Obligee’s Failure to Declare Default and Its Performance of Corrective Work Without Affording Surety Opportunity to Cure

North Amer Spec Ins. Co. v. Ames Corp./Dawson Building Contractors, Inc. JV
2010 U.S. Dist. LEXIS 25748 (S.D. Fla. Mar. 10, 2010)

Defendant Ames Corporation/Dawson Building Contractors, Inc. (Ames/Dawson), as general contractor, engaged American Roofing, LLC (American Roofing) to perform roofing work at the Veterans Administration Medical Center located in West Palm Beach, Florida. Plaintiff North American Specialty Insurance Company (NAS), as surety, issued performance bonds on behalf of American Roofing, naming Ames/Dawson, as obligee.

In the event of a default, the bonds required Ames/Dawson to declare a default and provide a demand or reasonable notice of such default to NAS. Upon receiving a demand or notice of a default, the bonds granted NAS a right to arrange for the performance of American Roofing’s obligations or to remedy any alleged default.

According to Ames/Dawson, it declared American Roofing in default of its subcontract through a series of letters, which thereby triggered NAS’ obligations under the bonds. When NAS failed to adequately respond, Ames/Dawson presented a claim to NAS for damages under the bonds for, among other things, supplementing American Roofing’s work force.

NAS denied the claim, and sought a declaratory judgment in order to bar Ames/Dawson’s bond claims. NAS argued that Ames/Dawson’s letters did not declare a default or termination of the subcontract, nor did Ames/Dawson make a demand upon NAS to perform under the bonds. In addition, NAS claimed that Ames/Dawson’s unilateral decision to supplement and remediate American Roofing’s work without affording it sufficient time to analyze Ames/Dawson’s claim or to remedy the alleged default discharged NAS from liability under the bond as a matter of law.

The United States District Court for the Southern District of Florida granted NAS partial summary judgment on its claim for a declaratory judgment. Specifically, the court held that none of the letters, upon which Ames/Dawson relied to establish that it declared American Roofing in default, contained the “clear, distinct, and unequivocal” language required to declare a default. The court relied upon a similar case of the United States Court of Appeals for the Fifth Circuit, which held that letters from a general contractor that did not contain the word “default” or an “unequivocal declaration of default in other terms of correspondence” are insufficient as a matter of law to establish a declaration of default. The court also held that once Ames/Dawson engaged in corrective work without allowing NAS to perform, its conduct constituted a material breach that voided the bonds and absolved NAS of any further obligation.

Click here to view full text of decision courtesy of LexisNexis.

This entry was posted in Payment bond, Subcontract and tagged , , , . Bookmark the permalink.