What are the Legal Rights of a Project Owner or Surety in the Event of a Construction Default?
Surety bonds play an essential role in Florida construction projects. The surety guarantees the performance of a general contractor in completing a project under the terms of its contract with the owner. In the event of default, the owner can terminate the contract and demand satisfaction from the surety.
Court: Surety Allowed to Retain Original Contractor Over Owner’s Objections
Like the construction contract itself, the surety bond is also a legally binding agreement. Owners need to carefully review and understand the terms of a surety bond prior to the start of a project. In some cases, the bond may limit an owner’s options in the event of default.
An October 2019 decision by the Florida Third District Court of Appeal, Seawatch at Marathon Condominium Association v. Guarantee Company of North America, offers a case in point. This case arose from a default on a condominium renovation project in Marathon, Florida. The owner entered into a $5.4 million construction contract with a general contractor. Simultaneously, the owner obtained performance bonds from a surety.
When the owner declared the contractor in default, it moved to terminate the construction contract and requested the surety exercise its rights under the performance bonds. Under the terms of the bond, the surety had a number of options on how to respond to the default. The surety ultimately elected to “[u]ndertake to perform and complete the Contract itself, through its agents or through independent contractors.”
More precisely, the surety opted to take over the project and retain the original contractor to complete the project. The owner objected to this election, arguing the terms of the bond prohibited the surety from retaining the original contractor “as completion contractor.” When the surety stood by its decision, the owner filed a lawsuit, seeking a judicial interpretation of the performance bonds.
Both the trial court and the Second District concluded that the surety “was within its rights to hire [the default contractor] as a completion contractor.” But the surety also did not “make a legally sufficient election” because it conditioned its actions on the owner signing a separate takeover agreement for the project.
As the Second District explained, one of the options available to the surety was to “arrange for the contractor, with the consent of the owner, to perform and complete the contract.” The surety chose a separate option, which was to assume control of the project itself and retain the contractor. This second option did not require the owner’s consent. The owner could not “graft the owner consent provision” from the first option onto the second option.
With respect to the election, the appeals court said the surety’s “conditional” election was improper, and so notwithstanding the owner’s lawsuit, the surety “remained obligated under the bonds.”
Speak with a Florida Construction Attorney Today
A default is never a desirable outcome for anyone involved in a construction project. But if things do go wrong, it is important to consult with an experienced Florida bond claims lawyer who can assist you in sorting out your legal obligations. Contact Linkhorst & Hockin, P.A., today at 561-626-8880 if you need legal advice on any construction-related matter.