L & A Contracting Co. v. Southern Concrete Services, Inc. , 17 F.3d 106 ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-7171.
L & A CONTRACTING COMPANY, Plaintiff-Counter Defendant-Appellee,
v.
SOUTHERN CONCRETE SERVICES, INC., Defendant-Counter Claimant-
Appellant,
and
Fidelity & Deposit Company of Maryland, Defendant-Appellant.
March 25, 1994.
Appeal from the United States District Court for the Southern
District of Mississippi.
Before WISDOM, HIGGINBOTHAM, and JONES, Circuit Judges.
WISDOM, Circuit Judge:
This case turns on the legal distinction between "breach" and
"default".
A primary contractor sued its bonded subcontractor and the
bonding agent for damages arising from the subcontractor's breach
of the subcontract. The district court held the subcontractor and
surety liable to the contractor. On this appeal, the subcontractor
and surety challenge the district court's judgment. We AFFIRM the
district court's judgment against the subcontractor. We VACATE the
judgment against the surety and RENDER judgment in the surety's
favor.
I. BACKGROUND
L & A Construction Company ("L & A"), the general contractor
on a project to build a bridge in Apalachicola, Florida,
1
subcontracted with Southern Concrete Services ("Southern") to
provide concrete for the project. Southern, as required by the
subcontract, obtained a performance bond from Fidelity & Deposit
Company of Maryland ("F & D"). Southern began supplying concrete
to L & A in early 1987.
We need not chronicle the ensuing deterioration in business
relations between L & A and Southern. It suffices for this opinion
to say that Southern failed to provide sufficient concrete to L &
A in a timely manner and breached the subcontract in numerous other
particulars. L & A repeatedly complained to Southern about its
slow delivery rates and the poor quality of the concrete Southern
supplied. On May 29, 1987, L & A sent Southern a letter stating
that Southern had breached the contract and giving Southern five
days to cure the deficiencies in its performance. L & A sent a
copy of the letter to F & D. Southern's performance apparently
improved after the May 29 letter. In response to a routine inquiry
from F & D on August 3, 1987, L & A stated that Southern was
performing satisfactorily.
Southern's improved performance did not last long, and L & A
soon resumed its periodic complaints. On January 12, 1988, L & A
sent another letter to Southern and F & D in which it requested
"that the Bonding Company take the necessary steps to fulfill this
contract to prevent any further delays and costs to L & A". F & D
did not respond to the letter and took no action. Southern
completed its obligations under the subcontract on May 27, 1988.
At no time did L & A refuse to accept Southern's performance.
2
L & A sued Southern and F & D for breach of contract in
Mississippi state court on August 19, 1988. The defendants
promptly removed the case to the United States District Court for
the Southern District of Mississippi on the basis of diversity of
citizenship.1 Southern counterclaimed against L & A alleging
various breaches of the subcontract.
The district court conducted a six-day bench trial beginning
on August 17, 1992. On September 22, 1992, the district court,
applying Florida law,2 held that both Southern and L & A had
breached the subcontract. The district court, after offsetting the
award from Southern's counterclaim, held that L & A was entitled to
recover damages of $642,269 plus postjudgment interest from
Southern and F & D.3 After the district court overruled their
1
Southern averred in its petition for removal that it was a
Michigan corporation having its principal place of business in
Michigan, F & D was a Maryland corporation, and L & A was a
Mississippi corporation. The amount in controversy indisputably
exceeded the statutory minimum of 28 U.S.C. § 1332(a).
2
The parties agree on appeal that the district court
correctly chose to apply Florida law. See Restatement (Second)
of Conflict of Laws §§ 188, 194 (1971); Boardman v. United
Servs. Auto. Ass'n, 470 So.2d 1024, 1032-34 (Miss.1985).
3
The district court appears to have miscalculated the damage
award. In its judgment of September 22, 1992, the district court
itemizes its damage award:
Base damages $349,152
Prejudgment interest 178,269
Attorneys' fees 115,048
The sum of those figures is $642,469, or $200 more than the
$642,269 the district court awarded. Because neither party
called the discrepancy to our attention, however, we consider any
argument over that $200 difference waived.
Although the district court's judgment does not so state, it
3
posttrial motions, the defendants appealed to this Court. L & A
cross-appealed from the district court's judgment but later
dismissed its cross-appeal. Only the defendants' appeals remain
for us to decide.
This case turns on the language of the subcontract and
Southern's performance and payment bond. "A bond is a contract,
and, therefore, a bond is subject to the general law of
contracts".4 We review de novo questions involving the
construction or interpretation of contracts.5
II.
A. F & D's Liability Under its Bond
We turn first to F & D's appeal. As a surety, F & D's
liability is governed by the terms of its bond with L & A. While
Southern is, of course, directly liable for its own breach of
contract, the bond in this case imposes liability on F & D for
Southern's breach only if two conditions exist. First, Southern
must have been in default of its performance obligations under the
subcontract. Second, L & A must have declared Southern to be in
default.6 The main focus of our inquiry is on the declaration
appears from the record that Southern and F & D's liability to L
& A was intended to be joint and several.
4
American Home Assurance Co. v. Larkin Gen. Hosp., Ltd., 593
So.2d 195, 197 (Fla.1992).
5
Gladney v. Paul Revere Life Ins. Co., 895 F.2d 238, 241
(5th Cir.1990).
6
F & D's Subcontract Performance Bond provided that F & D
would become liable to take certain actions to remedy Southern's
breach "[w]henever Principal shall be, and shall be declared by
Obligee to be in default under the subcontract, the Obligee
4
requirement, although we shall also briefly address the type of
default that is required.
We first must consider whether the bond term "declared ... to
be in default" is ambiguous.7 While the construction of
unambiguous contracts is a matter of law, resolving ambiguous
contracts requires a fact-specific inquiry to ascertain the
parties' intent. That inquiry is best performed by the district
court, and its factual determinations of the parties' intent will
be reversed on appeal only if clearly erroneous.8
A contractual term is ambiguous if it is reasonably subject
to more than one meaning.9 Although the bond does not define the
terms "declare" or "default", we consider the term "declared in
default" unambiguous; the definition L & A offers is unreasonable.
The only authority L & A offers for its view is Webster's Ninth New
Collegiate Dictionary. Webster's defines "declare" as "to make
clear; to make known formally or explicitly; to make evident; to
having performed Obligee's obligations thereunder". Pl.'s Ex.
189; Appellant's Record Excerpts tab J. In this tripartite
suretyship arrangement, F & D was the "surety", Southern the
principal obligor or simply the "principal", and L & A the
"obligee". See In re Eli Witt Co., 2 B.R. 487, 491
(Bankr.M.D.Fla.1979); Restatement (Third) of Suretyship § 1
(Tent.Draft No. 1, 1992).
7
Whether a contract term is ambiguous is a question of law
which we are free to decide de novo. See Carrigan v. Exxon Co.
U.S.A., 877 F.2d 1237, 1240 (5th Cir.1989).
8
Godechaux v. Conveying Techniques, Inc., 846 F.2d 306, 314-
15 (5th Cir.1988).
9
See Friedman v. Virginia Metal Prods. Corp., 56 So.2d 515,
517 (Fla.1952); Fireman's Fund Ins. Co. v. Murchison, 937 F.2d
204, 207 (5th Cir.1991).
5
state emphatically" and "default" as "to fail to fulfill a
contract, agreement, or duty". Therefore, L & A concludes, any
communication that "[made] it clear that [Southern] failed to
fulfill a contract or duty" constituted a legal declaration of
default.
Three factors counsel rejection of L & A's popular dictionary
authority. First, L & A's proffered definition misapprehends the
legal nature of the "default" that is required before the obligee's
claim against the surety matures. Although the terms "breach" and
"default" are sometimes used interchangeably,10 their meanings are
distinct in construction suretyship law. Not every breach of a
construction contract constitutes a default sufficient to require
the surety to step in and remedy it. To constitute a legal
default, there must be a (1) material breach or series of material
breaches (2) of such magnitude that the obligee is justified in
terminating the contract.11 Usually the principal is unable to
10
See, e.g., Black's Law Dictionary 417 (6th ed. 1990),
including "the omission or failure to perform a legal or
contractual duty" among the definitions of "default".
11
We draw this meaning from the words of a commentator:
Not every breach of a construction contract, not even
every material breach, constitutes a default under the
contract as to justify termination and the involvement
of a surety, if there is one. A default which would
involve the surety is believed to require a material
breach or series of breaches which are sufficient to
justify termination of the contract by the
owner/obligee.
James A. Knox, Representing the Private Owner, in
Construction Defaults: Rights, Duties, and Liabilities §
9.3, at 201 (Robert F. Cushman & Charles A. Meeker eds.,
1989). Accord Robert J. Hoffman & David L. Simmons, Suing
6
complete the project, leaving termination of the contract the
obligee's only option.12 The definition of "default" implicit in
L & A's dictionary analogy impermissibly blurs the distinct
concepts of "breach" and "default".13
Second, L & A's definition is impractical. A definition of
a contract term that leads to impractical or commercially absurd
the Subcontractor and Material Supplier, in Construction
Litigation: Representing the Contractor § 8.9 (Robert F.
Cushman, John D. Carter & Alan Silverman eds., 1986). Mr.
Knox has pointed out that a clear definition of "default" is
most necessary in several common construction problems,
including one that precisely matches the circumstances of
this case. His list of circumstances in which a clear
meaning of "default" is most necessary includes:
4. When the all-too-common confused situation develops
where the obligee is claiming the principal has
defaulted and the principal is claiming that the owner
is in default.
5. A variation of the preceding situation, when the
situation is confused, the obligee claims default but
does not terminate and yet demands action by the
surety.
James A. Knox, What Constitutes a Default Sufficient to
Justify Termination of the Contract: The Surety's
Perspective, Constr.Law., Summer 1981, at 1.
12
See, e.g., Cotton States Mut. Ins. Co. v. Citizens and S.
Nat'l Bank, 308 S.E.2d 199, 203 (Ga.Ct.App.1983), explaining that
"default in the relevant sense occurs only when the principal
finds itself unable to pay and calls upon the surety to pay in
accordance with the terms of the bond" (emphasis added).
13
Our holding that a material breach of the subcontract is
required before L & A may seek relief from F & D does not deprive
L & A of a remedy for partial breaches of the subcontract. The
subcontract itself prudently provides that L & A may withhold
payments from Southern to compensate for partial breaches. See
Pl.'s Ex. P-22, Appellants' Record Excerpts, tab I, sec. 3. L &
A urges that the bond makes F & D an insurer even for those
partial breaches, but we are unable to square that contention
with the bond's requirement of a default.
7
results is unreasonable.14 Serious legal consequences attend a
"declaration of default", particularly in cases such as this case
involving multi-million-dollar construction projects. Before a
declaration of default, sureties face possible tort liability for
meddling in the affairs of their principals.15 After a declaration
of default, the relationship changes dramatically, and the surety
owes immediate duties to the obligee.16 Given the consequences that
follow a declaration of default, it is vital that the declaration
be made in terms sufficiently clear, direct, and unequivocal to
inform the surety that the principal has defaulted on its
obligations and the surety must immediately commence performing
under the terms of its bond. Sureties deprived of a clear rule for
notices of default would be reluctant to enter into otherwise
profitable contracts. Nothing in the record suggests that the
parties intended such an impractical result.
Finally, L & A's definition does not promote the purpose for
which the parties probably included a notice of default provision
14
See Lakeland Tool & Eng'g, Inc. v. Thermo-Serv, Inc., 916
F.2d 476, 481 (8th Cir.1990); G.M. Shupe, Inc. v. United States,
5 Cl.Ct. 662, 704 (Cl.Ct.1984).
15
See, e.g., Gerstner Elec., Inc. v. American Ins. Co., 520
F.2d 790 (8th Cir.1975); Cox v. Process Eng'g, Inc., 472 S.W.2d
585, 587 (Tex.Civ.App.—Amarillo 1971, no writ); Restatement
(Second) of Torts §§ 766, 766A (1979). "Prior to default, a
surety does not have a unilateral right to intervene in a
contract dispute between an owner and a principal unless the
indemnity agreement between the surety and principal provides
otherwise". Robert F. Cushman, et al., Representing the
Performance Bond Surety, in Construction Defaults, supra note 11,
§ 5.2, at 106.
16
Zoby v. United States, 364 F.2d 216, 219 (4th Cir.1966);
In re Wilson, 9 B.R. 723, 725 (Bankr.E.D.N.Y.1981).
8
in F & D's bond. That purpose was to avoid the common-law rule
that a secondary obligor such as F & D is not entitled to notice
when the time for its performance is due.17 That purpose is not
served if L & A can fulfill its duty to provide "notice of default"
to F & D by sending letters containing no mention of a default.
We conclude, therefore, that F & D's is the only reasonable
view. A declaration of default sufficient to invoke the surety's
obligations under the bond must be made in clear, direct, and
unequivocal language. The declaration must inform the surety that
the principal has committed a material breach or series of material
breaches of the subcontract, that the obligee regards the
subcontract as terminated, and that the surety must immediately
commence performing under the terms of its bond.
Under this standard, L & A's evidence is insufficient as a
matter of law to establish a declaration of default. None of the
letters L & A sent to Southern and F & D even contained the word
"default", nor do we find an unequivocal declaration of default in
the other items of correspondence L & A's brief calls to our
attention.18 Accordingly, we must VACATE the district court's
17
See Restatement of Security § 136 & cmt. a (1941).
18
After inviting us to write Webster's Ninth New Collegiate
Dictionary into Florida law, L & A provides a list of ten letters
it sent to Southern, each of which it characterizes as a
"declaration of default" under its definition even though only
two of the letters were sent to F & D. Appellee's Principal
Brief at 14-15. The sizeable volume of correspondence that fits
L & A's definition of "declaration of default" underscores the
overbreadth of the definition. A declaration of default is an
act of legal significance marking a fundamental change in
relations among the parties to a suretyship contract. The burden
is on the party initiating that fundamental change to express it
9
judgment against F & D for Southern's breach, because L & A has
failed to prove a necessary precondition to F & D's liability under
its bond.19
B. F & D's Liability for Delay Damages
F & D next challenges the district court's judgment holding
it liable for delay damages. We need not linger long on this
question because it is directly controlled by the Florida Supreme
Court's opinion in American Home Assurance Co. v. Larkin General
Hospital, Ltd.20 The Larkin Court held that "the surety's liability
plainly and unequivocally. Letters from general contractors
attempting to prod subcontractors into improved performance are
inevitably abundant in large construction projects but are not
generally thought to constitute declarations of default. See
Knox, Representing the Private Owner, supra note 11, § 9.2, at
200. It is not asking too much of obligees to require that when
they wish to give up on a principal and look to the surety for
satisfaction, rather than merely to urge the principal to what
they hope will be better performance, they must say so to the
surety in clear, unequivocal terms. See, e.g., id. § 9.7, at
217-18.
19
Part IV.C of the district court's opinion dealt with what
the district court characterized as F & D's breach of its own
surety bond. On this appeal, L & A seizes on that language to
argue that F & D's actions exposed it to liability for its own
breach of contract notwithstanding Southern's conduct. Obviously
L & A intends this argument to bring it within the protection of
some favorable language in footnote 2 of the Florida Supreme
Court's Larkin opinion, which we address below. We reject L &
A's argument. L & A's failure to declare Southern in default
excuses F & D's failure to remedy Southern's breach. F & D did
not breach the terms of its bond and accordingly has no liability
under the bond.
Because we conclude that L & A failed to declare
Southern in default, we need not resolve the question
whether the first requirement of the bond—that Southern
actually be in default—was met here.
20
593 So.2d 195 (Fla.1992).
10
for damages is limited by the terms of the bond".21 The bond here
contained no provision imposing liability on F & D for delay
damages, and the district court may not imply such a provision. 22
Therefore, the district court erred in holding F & D liable for
delay damages. We are not persuaded by L & A's attempts to
distinguish away the clear command of Larkin.23 Accordingly, we
VACATE the award of delay damages against F & D.
C. F & D's Liability for Attorney Fees
Because F & D is not liable under the terms of its bond, it
is not liable for consequential damages, such as attorney fees,
flowing from Southern's breach of its contract. Accordingly, to
21
Id. at 198.
22
"[T]he liability of a surety should not be extended by
implication beyond the terms of the contract, i.e., the
performance bond". Id.23
L & A first contends that the bond in Larkin contained
different language from F & D's bond. Even if that is true—and F
& D contends that it is not—it is irrelevant. Larkin did not
turn on the language of the particular bond before the Court in
that case, but rather stated what was obviously intended to be a
general proposition of law. Second, L & A contends that F & D's
bond was ambiguous. We conclude that the bond was not ambiguous,
but even if it were, that is irrelevant to this issue. Larkin
plainly states that the express terms of the bond provide the
sole measure of F & D's obligation. If F & D's liability for
delay damages is not "expressed in the bond ", id. at 198(emphasis added, internal quotation omitted), F & D has no such
liability. Finally, L & A relies on footnote 2 of Larkin for the
proposition that Larkin does not apply to cases involving a
surety's liability for its own breach of its bond. That is what
Larkin says, but this is not that case. L & A plainly seeks
recovery from F & D for Southern's breach of the subcontract.
That is precisely the circumstance Larkin covers.
The district court similarly distinguished Larkin on
grounds irrelevant to the holding of that case, but our
discussion of L & A's objections to Larkin should dispose of
the district court's reasoning as well.
11
the extent the district court held F & D liable for attorney fees,
we VACATE the award.
III.
A. Southern's Liability for Delay Damages
We turn now to Southern's appeal. Southern challenges its
liability for delay damages, arguing that L & A failed to prove
that Southern's delay resulted in the project as a whole becoming
overdue. Southern contends that, under Florida law, a
subcontractor may not be held liable for delay damages unless the
general contractor was late in completing the construction project.
The cases Southern cites do not support that proposition, however.24
24
Fred Howland, Inc. v. Gore, 152 Fla. 781, 13 So.2d 303(Fla.1942), held simply that an owner cannot be awarded
liquidated damages under a clause providing for damages in the
event of a 30-day delay in completion of the project unless the
owner proves that the condition precedent occurred; in other
words, proves that the project was delayed for thirty days.
Southern cites no similar clause in its contract with L & A.
Lynch v. Florida Mining & Materials Corp., 384 So.2d
325 (Fla.App.1980), primarily involved damages for
defective, not delayed, performance. Lynch did not hold
that a general contractor's timely completion of the project
absolves the subcontractor from liability for delay damages.
In Tuttle/White Constr., Inc. v. Montgomery Elevator
Co., 385 So.2d 98 (Fla.App.1980), the subcontractor sued the
general contractor for payment under the subcontract, and
the general contractor counterclaimed for late performance.
The court held that the general contractor could offset
against its liability the damages the subcontractor caused
it by not timely performing. The court did not hold,
however, that a delay in the completion of the overall
project was a condition precedent to the subcontractor's
liability for delayed performance.
Finally, Haney v. United States, 676 F.2d 584(Ct.Cl.1982) involved a dispute between the owner and the
general contractor. Obviously, a general contractor is not
liable to the owner for delay damages unless it has untimely
12
In this case, Southern was held liable for its own delay in
completing its obligation to L & A. Southern's untimely
performance imposed unanticipated costs on L & A, and L & A is
entitled to recover those costs regardless of whether it timely
completed its own obligation to the Florida Department of
Transportation.25
B. Southern's Liability for Attorney Fees
Southern challenges the district court's attorney fee award
of $115,048, or half the $230,095 L & A requested. We review an
award of attorney fees for abuse of discretion.26 Southern cites
no authority in its one-page argument on the attorney fee question,
however, and we consider the challenge abandoned for being
inadequately briefed.27
IV.
In conclusion, we VACATE the district court's judgment and
award of damages against F & D in its entirety and RENDER judgment
for F & D. We AFFIRM the award against Southern for $642,269 plus
postjudgment interest as the district court calculated.
performed its obligation to the owner. Haney does not
imply, however, that timely performance by the general
contractor absolves the subcontractor from liability for
untimely performing its own obligations.
25
See District Concrete Co. v. Bernstein Concrete Corp., 418
A.2d 1030, 1038 (D.C.1980).
26
Palmco Corp. v. American Airlines, Inc., 983 F.2d 681, 688
(5th Cir.1993).
27
See Dardar v. Lafourche Realty Co., Inc., 985 F.2d 824,
831 (5th Cir.1993); Fed.R.App.P. 28(a)(5).
13