On most commercial projects, the property owner can require the contractor to obtain a performance bond to ensure that the work is completed even if the contractor defaults under the construction contract. Usually these bonds give the surety, or company holding the bond, several options to pursue in completing the project in the event the surety has to step in. But is one of those options hiring the prior the contract who breached the original contract?
In a recent Third District Court of Appeal decision, the answer was yes! In Seawatch at Marathon Condominium Association, Inc. v. the Guarantee Company of North America, a condominium association hired a general contractor to perform $5.4 million in renovations. The association also required the contractor to obtain a performance bond from a surety. When construction was partly completed, the association declared the contractor in default and sought to use the performance bond to complete construction.
Under the surety bond, the surety had several options once contacted by the association. It could:
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
4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the OWNER for a contract for performance and completion of the Contract, arrange for a contract to be prepared for execution by the OWNER and the contractor selected with the OWNER'S concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the Bonds Issued on the Contract, and pay to the OWNER the amount of damages as described in paragraph 6 in excess of the Balance of the Contract Price incurred by the OWNER resulting from the CONTRACTOR Default; or
4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances;
4.4.1 After investigation, determine the amount for which it may be liable to the OWNER and, as soon as practicable after the amount is determined, tender payment therefore to the OWNER; or
4.4.2 Deny liability in whole or in part and notify the OWNER citing reasons therefore.
After several months of discussion with the association, the surety decided to proceed under section 4.2, and hire the original general contractor to complete its work.
The association filed suit seeking a declaration that the surety could not, under section 4.2, hire the original contractor without the same consent required by section 4.1. The trial court disagreed and allowed the surety to hire the original general contractor. On appeal, the Third District Court of Appeal affirmed that decision, noting that the plain language of section 4.2 did not impose any consent or approval requirements on the association.
It is important for contractors to note that the language at issue in this case is common in surety bonds. If you find yourself in a dispute with a property owner who terminates the contract and triggers the performance bond, remember that you could still be engaged by the surety to finish the work. In many cases, this may make the most sense, as it will usually be more expensive for a new contractor to takeover a project than it will for a prior contractor to make corrections and then complete construction.