Language in Performance Bond Critical in Determining Surety’s Rights to Complete

Language in Performance Bond Critical in Determining Surety’s Rights to Complete

October 10, 2019

If an owner terminates a contractor due to a contractor default on a bonded project, can the surety hire the same contractor to complete the work under the bond?  Depending on the language of the bond, it may be permissible in Florida.

Recently, in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, No. 3D18-1337, 2019 WL 4850194 (Fla. 3d DCA Oct. 2, 2019), a Florida appellate court ruled that the unambiguous terms of an AIA A312 Performance Bond permitted a surety to propose a previously-terminated contractor as the "replacement contractor" under a Takeover Agreement.

The AIA A312 Performance Bond provided that the surety was required to exercise one of the following series of options upon a contractor’s default:

"4.1 Arrange for the contractor, with consent of the owner, to perform and complete the Contract; or

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or..."

The surety elected to complete the contract itself pursuant to Section 4.2 of the Bond, and presented a Takeover Agreement to the owner.  The Takeover Agreement provided that the defaulted contractor would complete the project for the surety.  The owner refused the Takeover Agreement because it would not consent to the terminated contractor completing the work on the project.

The appellate court held that the terms of Section 4.2 were unambiguous, and lacked the consent requirement of Section 4.1.  Therefore, the court would not read into Section 4.2  a consent requirement, and held that the surety’s refusal to provide another replacement contractor was not a breach under the terms of the bond.

The owner also argued that the surety could not complete the project itself under Section 4.2 because it was not a licensed contractor.  However, the appellate court rejected this argument, holding that the surety did not need to be a licensed contractor to enter into the Takeover Agreement.

Like any construction contract, it is important to understand the terms contained within a performance bond.  Had the owner successfully modified the terms of the bond to require its consent to a replacement contractor, the dispute (and the resulting legal fees) could have been avoided.