National Fire Insurance v. Fortune Construction Co.

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
_________________________ February 07, 2003
THOMAS K. KAHN
No. 01-15124 CLERK
_________________________
D.C. Docket No. 97-02439-CV-JLK
NATIONAL FIRE INSURANCE COMPANY OF HARTFORD,
Plaintiff-Counter-
Defendant-Appellee,
versus
FORTUNE CONSTRUCTION COMPANY,
Defendant-Counter-
Claimant-Third-Party-
Plaintiff-Appellant,
ARKIN CONSTRUCTION COMPANY, INC.,
Third-Party-Defendant.
_________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(February 7, 2003)
Before TJOFLAT and KRAVITCH, Circuit Judges, and VINSON*, District Judge.
VINSON, District Judge:
The primary issue presented by this appeal is whether a surety on construction
contract performance and payment bonds issued on behalf of a subcontractor has
superior rights to retained contract balances in the possession of the general contractor
when the general contractor completed the performance and has unsatisfied claims
against the defaulting subcontractor.
I. BACKGROUND
This case arises out of two construction projects - - - the Winston Park project
in Coconut Creek, Florida, and the West Brickell project in Miami, Florida. As
general contractor on the projects, Fortune Construction Company (“Fortune”) entered
into two separate subcontracts with Arkin Construction Company (“Arkin”) to build
the two apartment complexes, the Winston Park Subcontract and the West Brickell
Subcontract. National Fire Insurance Company (“National Fire”), as surety, issued
on behalf of Arkin, as principal, performance and payment bonds for the two
construction projects. The performance bond and payment bond documents for the
Winston Park project were standard forms issued by the American Institute of
*
Honorable Roger Vinson, United States District Judge for the Northern
District of Florida, sitting by designation.
2
Architects.1 The performance bond and payment bond documents for the West
Brickell project were drafted by National Fire with language that materially differed
from the Winston Park bonds. Each of the performance bonds and each of the
payment bonds incorporated the appropriate subcontract between Fortune and Arkin
by reference.
During construction of the two projects, Arkin began experiencing financial
difficulty. National Fire provided financing to Arkin for a short time, but later refused
to continue to finance Arkin. Both projects were behind schedule by this time.
Arkin’s financial difficulties prompted Fortune and National Fire to enter into
negotiations about what to do when Arkin defaulted. There was some discussion
about National Fire procuring a completion contractor and about the possibility that
Fortune could complete construction. The West Brickell project was near completion,
but a substantial amount of work still needed to be done on the Winston Park project.
Negotiations were still ongoing when, on May 29, 1997, Arkin abandoned both
construction projects. On June 12, 1997, Fortune declared Arkin in default and
notified National Fire accordingly.
A flurry of letters between the attorneys for Fortune and National Fire ensued.
During this increasingly acrimonious exchange, National Fire contends that it
1
AIA Document A311.
3
tendered, or offered to tender, a completion contractor. While National Fire asserts
that Fortune rejected this tender because Fortune wanted to complete construction
itself, Fortune maintains that the tender was never made. Fortune demanded that
National Fire perform its obligations under both performance bonds by completing the
subcontracts. National Fire did not do so. While National Fire made payments to
payment bond claimants on both projects, both of the construction projects were
actually completed by Fortune as the general contractor, and Arkin is now a dissolved
corporation.
The construction subcontracts between Fortune and Arkin each contained a
clause obligating Arkin to pay liquidated damages for delays in completing the
projects. The Winston Park Subcontract provided for liquidated damages of $35 per
day per incomplete apartment and $1,000 per day for incomplete common areas. The
West Brickell Subcontract provided for liquidated damages after a specified date of
$30 per day per incomplete apartment. Due to Arkin’s dilatory performance during
the Winston Park and West Brickell construction, Fortune invoked these liquidated
delay damages clauses before Arkin abandoned the projects. By the time Arkin
defaulted, Arkin owed $1,693,500 in liquidated delay damages on the Winston Park
project and $93,600 in liquidated delay damages on the West Brickell project. The
subcontracts also made Arkin responsible for the acts and omissions of its own sub-
4
subcontractors. Allied Fire Protection Systems (“Allied”), one of Arkin’s sub-
subcontractors, failed to pay Davis-Bacon Act wages to its laborers for work
performed on the West Brickell project, which apparently involved federally
subsidized housing. Consequently, the Department of Labor jointly charged Fortune,
Arkin, and Allied a total of $71,126 in back wages attributable to Allied’s improper
payments, which Fortune paid.
In addition to the West Brickell Subcontract between Fortune and Arkin, the
parties entered into a letter agreement dated January 15, 1996 (the same date as the
West Brickell Subcontract). This letter agreement recognized that the electrical work
had been excluded from Arkin’s subcontract on the West Brickell project, but that
Arkin had full responsibility for cost overages if the cost of the electrical work
exceeded $669,000. Arkin’s responsibility was “either finding a replacement
subcontractor” for the electrical work at $669,000 or “issuing a credit change order
to Fortune” for any amount incurred over and above $669,000.2 However, this letter
2
The typed letter, dated January 15, 1996, signed by both Fortune and Arkin,
stated in pertinent part:
RE: Construction Contract dated January 15, 1996 for
West Brickell Apartments
Dear Mr. Arkin:
The Schedule of Values attached to the . . .
contract . . . states that the electrical, elevator and cabinet
5
agreement was not listed as part of the contract documents in the West Brickell
Subcontract, which contained two merger and integration clauses. During the West
Brickell construction, Fortune’s original electrical subcontractor, Monohan’s Electric
Co., defaulted and did not complete the electrical work. Arkin failed to provide
another electrical contractor to complete the project within the fixed $669,000 price.
In hiring another electrical contractor, Fortune incurred additional costs amounting to
$404,118.81 in excess of $669,000,3 for which Fortune claims a credit against Arkin.
trades have been excluded from said contract. The
agreement between Fortune and Arkin is that even though
these items have been excluded from said Contract, and
despite the fact that the contracts with these trades are to be
signed by Fortune (not Arkin), Arkin takes full
responsibility for cost overages should the contract amounts
for each of these trades exceed the following figures: (a)
electrical – $669,000, (b) elevator – $185,000 and (c)
cabinets – $110,916.
This responsibility on the part of Arkin includes, but is not
limited to, either Arkin finding a replacement subcontractor
to contract for the specific trade at the above referenced
amounts, or Arkin issuing a credit change order to Fortune
for any amounts over and above the above referenced
figures. . . .
(R.85, Ex. C.)
3
The affidavits of Michael Spetko, the Project Manager for the West Brickell
project, and Ernesto Gordo, an employee of Fortune who participated in negotiating
the West Brickell Subcontract with Arkin are in the record. (R.89.) In these affidavits,
Spetko and Gordo assert that they were involved in negotiating the subcontract and
that the letter agreement was intended by both Arkin and Fortune to be an integral part
6
After Fortune completed the two construction projects, Fortune presented
National Fire with an accounting of its “performance” costs to complete the Arkin
subcontracts. National Fire then prepared an accounting of the net remaining contract
proceeds.4 According to National Fire, the remaining contract proceeds exceeded
Fortune’s costs of completion. National Fire requested that, according to the terms
of the bonds, the unpaid contract balances be credited to the respective subcontracts
and paid to National Fire, as the subrogee of Arkin. Fortune refused to pay National
Fire the contract balances, claiming that it had superior right to the contract balances
due to National Fire’s failure to perform on its performance bonds and because of
Fortune’s right to set off the remaining contract claims Fortune had against Arkin.
National Fire initiated this civil action against Fortune alleging assignment of Arkin’s
rights under the subcontracts, equitable subrogation, and breach of the bond contracts.
Fortune filed a counterclaim against National Fire for failure to perform under the
performance bonds and failure to make the required payments under the payment
of the subcontract on the West Brickell project. Gordo added that the letter agreement
was made an addendum to the subcontract. There is nothing in writing evidencing
incorporation of the letter agreement.
4
Fortune retained possession of certain proceeds from the two subcontracts
pursuant to retainage and progress-payment provisions of the subcontracts. However,
the exact amount of contract balances remaining is a matter of dispute between the
parties.
7
bonds with respect to payments for Davis-Bacon Act violations, electrical overages,
and the liquidated delay damages. Fortune also joined Arkin as a third party
defendant responsible for the same damages, due to its breach of the two subcontracts.
Before trial, National Fire filed seven different motions for partial summary
judgment.5 The district court entered three separate orders granting partial summary
judgment with respect to several of National Fire’s motions and granted the remainder
in a pretrial conference order. In its first partial summary judgment order, the district
court pointed to the language of the “Performance Bond Contract,” although the court
did not specify which performance bond,6 and held that National Fire had a right to
equitable subrogation “under the payment and performance bonds.” Thus, the district
court held that National Fire’s equitable subrogation right to the contract balances was
superior to Fortune’s right to set off its claims against Arkin under both the payment
5
Each motion addressed a discrete legal issue, and five of the motions were
simultaneously filed. We discourage this practice of unnecessarily filing multiple
motions for partial summary judgment. While the legal issues in this case are
complex, combining the various legal issues into a single motion would have helped
the trial court achieve a broader understanding of the entire case. National Fire’s
attempt to break this case into little pieces seems to have contributed to the confusion
below. See also S.D. Fla. Loc. R. 7.1(C)(2).
6
As noted earlier, the documents were different for each project. From
examining the language quoted by the district court, we determine that the court cited
the Winston Park performance bond. The district court made reference to neither the
language of the West Brickell performance bond nor either of the two payment bonds.
8
and the performance bonds. In its pretrial conference order, the district court
characterized this ruling as establishing that, to the extent the contract balances
exceeded Fortune’s reasonable costs to complete construction after Arkin’s default,
“the excess is to be paid to National Fire up to the amount of National Fire’s payment
bond expenditures.” (R.67 at 2.) In that same order, the district court held that
“National Fire had no obligation to complete [construction itself] or to tender [a
completion contractor], but rather its obligation was to pay the excess of the costs to
complete the contract over the contract balance, if any.”7 (R.67 at 3.) According to
the district court, as a matter of law, National Fire’s failure to complete construction
or to arrange for the completion of construction was not a breach of National Fire’s
performance bond obligations, and thus Fortune was not entitled to consequential
damages from National Fire for the costs that Fortune incurred due to Arkin’s default
under the subject subcontracts.
In its second order granting National Fire partial summary judgment, the district
court held that the letter agreement between Fortune and Arkin concerning liability
for electrical overages was a separate agreement that had not been integrated into the
contracts on which the bonds had been issued. In its third order granting National Fire
7
Again, in making this determination, the district court did not cite any of the
operative language from any of the bonds in support of its ruling. National Fire’s
performance obligations materially differed under the two performance bonds.
9
partial summary judgment, the district court summarily dismissed with prejudice
Fortune’s Davis-Bacon wage claim against National Fire, without explanation.
At trial, the district court directed judgment as a matter of law in favor of
Fortune on its third party claim against Arkin in the amount of $1,748,150 as to the
Winston Park project and $432,000 as to the West Brickell project. These amounts
included the Davis-Bacon wage claim, the electrical overage costs, and the liquidated
delay damages.8 After this ruling, the only issues that remained for the jury at trial
were: a determination of the reasonable costs Fortune incurred in completing
construction,9 the amount of unpaid contract balances at the time of Arkin’s default,
and the amount of payment bond claims paid by National Fire. The district court
instructed the jury to this effect, incorporating several of the court’s prior rulings.10
8
Because National Fire did not pursue its assignment claim, the district court
granted Fortune judgment as a matter of law as to that claim.
9
The district court instructed the jury that, in making this determination, the jury
was not to include unreasonable costs Fortune could have avoided, costs related to
correcting design defects, the liquidated delay damages, costs for electrical overages,
and the Davis-Bacon wage claims. (R.133 at 9, 10, 12.)
10
Specifically, the district court instructed the jury:
The Court has found, as a matter of law, that National Fire has a right to
recoup payments it made under the payment bonds from the unpaid
balance of the subcontract. This right is superior to Fortune’s right to
apply the unpaid balance of the subcontract to claims that it might have
against Arkin. The Court having so determined, this issue is not for your
consideration.
10
The jury returned a verdict in favor of National Fire, finding that contract balances
remained on both projects after the deduction of Fortune’s reasonable costs to
complete construction,11 and awarded National Fire $255,774 as to the West Brickell
The Court has also previously determined that, at this juncture, the
reasonable costs of completing construction are to be credited against
the contract balance....[T]o the extent the contract balance exceeds the
reasonable costs of completing construction, the excess is to be paid to
National Fire up to the amount of National Fire’s payment bond
expenditures.
***
In determining the reasonable cost to complete the projects, the Court
has previously determined that certain damages and consequential post
default costs that may have been incurred by Fortune must not be
considered part of the reasonable cost to complete the projects and may
not be assessed against National Fire. These include: (1) delay damages,
including liquidated damages specified in the Arkin subcontracts; (2)
damages relating to Fortune’s electrical overage claim; (3) damages
relating to Fortune’s Davis-Bacon Act claim. While these items may
constitute proper claims against Arkin, they are not to be considered part
of the reasonable cost to complete the projects and may not be applied
against National Fire.
***
In determining whether National Fire breached the performance bond,
you must accept that the Court has previously determined that National
Fire had no obligation to complete the project itself or to tender a
completion contractor. Rather, National Fire’s only performance bond
obligation is to pay any excess, should it exist, of the reasonable cost to
complete by Fortune over the contract balance at the time of default by
Arkin.
(R.133 at 7, 12, 20).
11
Part of the jury’s consideration in awarding National Fire damages was the
determination of the reasonable costs of completion. However, the verdict form did
not require the jury to make a specific finding as to the reasonable completion costs
11
project and $336,896.28 as to the Winston Park project, to which the district court
added prejudgment interest. This appeal followed.
II. STANDARD OF REVIEW
The standard of review for a district court’s rulings on motions for summary
judgment is de novo, and an appellate court is to apply the same legal standards that
bound the district court. See Sarfati v. Wood Holly Assocs., 874 F.2d 1523, 1525
(11th Cir. 1989); Carlin Communication Inc. v. Southern Bell Tel. & Tel. Co., 802
F.2d 1352, 1356 (11th Cir. 1986). Likewise, de novo review is appropriate when
addressing the construction of written contracts. See Securities & Exchange Comm’n
v. Elliott, 953 F.2d 1560, 1582 (11th Cir. 1992). A jury’s verdict is reviewed for
sufficiency of the evidence and will not be overturned unless no rational trier of fact
could have reached the same conclusion based upon the evidence in the record. See
Quick v. Peoples Bank of Cullman County, 993 F.2d 793, 798 (11th Cir. 1993).
A motion for summary judgment should be granted when “the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that
or as to the contract balances remaining before deductions. Instead, the jury merely
calculated the remaining contract balances after reasonable completion costs and other
costs were deducted. We have labored to try to infer the completion costs and
remaining balances in light of the jury’s verdict, but we have been unable to do so.
12
the moving party is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c).
“[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after
adequate time for discovery and upon motion, against a party who fails to make a
showing sufficient to establish the existence of an element essential to that party's
case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v.
Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265, 273 (1986); see
also Morisky v. Broward County, 80 F.3d 445, 447 (11th Cir. 1996). On a summary
judgment motion, the record and all reasonable inferences that can be drawn from it
must be viewed in the light most favorable to the non-moving party. See Whatley v.
CNA Ins. Cos., 189 F.3d 1310, 1313 (11th Cir. 1999).
We review a district court’s grant of judgment as a matter of law de novo,
evaluating “whether such sufficient conflicts exist in the evidence to necessitate
submitting the matter to the jury or whether the evidence is so weighted in favor of
one side that one party must prevail as a matter of law.” Thosteson v. United States,
304 F.3d 1312, 1316 (11th Cir. 2002). The evidence is evaluated in the light most
favorable to the non-moving party. Id.III. DISCUSSION
A. Equitable Subrogation and Entitlement to Set-Off
13
The major issue raised in this appeal is National Fire’s equitable subrogation
rights under the two performance bonds and the two payment bonds. National Fire
asserts that it possesses a superior right to the unpaid contract balances in light of a
surety’s recognized right to equitable subrogation.12 The District Court agreed and
ruled below that National Fire had superior equitable subrogation rights under both
its payment and its performance bonds. However, Fortune argues that the liquidated
delay damages, Davis-Bacon Act violations, and the electrical overage costs incurred
by Arkin should be set off against any unpaid contract balances that National Fire is
claiming through equitable subrogation.
Fortune relies primarily upon United States v. Munsey Trust Co., 332 U.S. 234,
236, 67 S. Ct. 1599, 1600, 91 L. Ed. 2022, 2023 (1947), in which the Supreme Court
of the United States addressed the issue of “whether percentages retained pursuant to
contract by the United States may be subjected to its set-off claims despite the claims
12
Fortune contends that equitable subrogation is not appropriate because
National Fire did not complete, pursuant to its performance bonds, either the West
Brickell or the Winston Park projects, and issues of fact exist concerning whether
National Fire paid all of its payment bond obligations. See Affidavit of Michael J.
Getz (listing unpaid subcontractors, laborers, and materialmen) (R.44.) From the
record, it appears that one sub-subcontractor, Aurora Plumbing Corp., was pursuing
a payment claim in state court at the time of trial. (R.149 at 55-59.) National Fire,
however, represents that it fully satisfied its payment obligations by paying over $1.4
million in payment bond claims, which amounted to every claim timely submitted.
For purposes of this appeal, we have assumed that the district court has resolved all
factual issues with respect to the payment bond claims.
14
of a surety who has paid laborers and materialmen.” In Munsey Trust, the
Government had entered into six contracts with a contractor to paint and repair certain
federal buildings. Each contract was subject to both a performance bond and a
payment bond. Although the contractor completed the work on the contracts so that
the surety did not have to perform under the performance bond, the surety did pay
$13,065.93 on payment bond claims made by laborers and materialmen. Under the
terms of the contracts, the Government had retained percentages of the progress
payments due to the contractor, amounting to $12,445.03. Subsequently, the same
contractor submitted a bid to the Government for another project, which the
Government accepted. However, the contractor failed to enter into a contract for the
work, and another contractor performed the job at a price considerably higher than the
bid price accepted by the Government, which resulted in damages to the Government
in the amount of $6,731.50. In paying over the contract amount that it had retained
on the other six contracts to the surety, the Government set off the $6,731.50 it
claimed. The surety protested the set-off and asserted its right to an additional
$3,568.23. See id. at 332 U.S. 237-39, 67 S. Ct. at 1600-01.
With respect to any claims that may have been asserted by the contractor
against the Government, the Supreme Court recognized that “[t]he government has the
same right ‘which belongs to every creditor, to apply the unappropriated moneys of
15
his debtor, in his hands, in extinguishment of the debts due to him.’” Id. at 239, 67 S.
Ct. at 1602 (quoting Gratiot v. United States, 40 U.S. 336, 370, 10 L. Ed. 759 (1841)).
However, the surety argued that it had subrogation rights superior to both the laborers
and materialmen to whom the surety had paid and to the Government, the bond
obligee. In response to this argument, the Supreme Court observed that:
[O]ne whose own appropriation and payment of money is
necessary to create a fund for general creditors is not a
general creditor. He is not compelled to lessen his own
chance of recovering what is due him by setting up a fund
undiminished by his claim, so that others may share it with
him. In fact, he is the best of secured creditors; his security
is his own justified refusal to pay what he owes until he is
paid what is due him.
Id. at 332 U.S. 240, 67 S. Ct. at 1602 (emphasis added). Therefore, the Court held that
the Government could set off the amount it claimed. See also United States ex rel. P.J.
Keating Co. v. Warren Corp., 805 F.2d 449, 452 (1st Cir. 1986) (recognizing that
“Government’s set off right is superior to a claim by a Miller Act surety under its
payment bond to the same contract earnings”); Marriott Corp. v. Dasto Constr. Co.,
26 F.3d 1057, 1070-71 (11th Cir. 1994) (recognizing owner’s right to set-off against
unpaid contract balance).
National Fire relies on the subsequent Supreme Court decision in Pearlman v.
Reliance Ins. Co., 371 U.S. 132, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962), in which the
Court addressed the issue of whether a government contractor’s trustee in bankruptcy
16
or the contractor’s payment bond surety had the superior right to a fund withheld by
the Government out of earnings due to the contractor. The Court recognized the
clearly established right of subrogation, which provides that “a surety who pays the
debt of another is entitled to all the rights of the person he paid to enforce his right to
be reimbursed,” and held for the surety. Id., 371 U.S. at 137, 83 S. Ct. at 235. The
Supreme Court also noted that the Munsey Trust decision had no effect upon its prior
holdings in Prairie State Bank v. United States, 164 U.S. 227, 17 S. Ct. 142, 41 L. Ed.
412 (1896), and Henningsen v. United States Fid. & Guar. Co., 208 U.S. 404, 28 S.
Ct. 389, 52 L. Ed. 547 (1908), that “there is a security interest in a withheld fund . .
. to which the surety is subrogated.” Pearlman, supra, 371 U.S. at 137, 83 S. Ct. at
235. The Supreme Court construed Munsey Trust as limited to the narrow proposition
that “the Government could exercise the well-established common-law right of
debtors to offset claims of their own against their creditors.” Id. at 140, 83 S. Ct. at
237. Otherwise, the equitable rights of a surety to subrogation were left undisturbed.
See id. Therefore, the surety had a superior right, vis-a-vis the principal’s trustee in
bankruptcy, to funds held by the Government. Pearlman did not involve the priority
of rights between a surety and the obligee.
We note that neither Munsey Trust nor Pearlman attempted to differentiate the
surety’s equitable subrogation rights on the basis of whether a payment or a
17
performance bond obligation had been fulfilled. Under Florida law, which applies
here, a performance and payment bond surety’s rights to equitable subrogation depend
upon the nature of the obligation fulfilled by the surety under the terms of the bonds.
In Transamerica Ins. Co. v. Barnett Bank of Marion County, 540 So. 2d 113, 115 (Fla.
1989), the Supreme Court of Florida addressed the issue of “whether a surety’s
equitable subrogation rights are limited to rights it obtains by standing in the shoes of
the defaulting contractor. ” In considering this issue, the court observed:
[T]he surety in cases like this undertakes duties which
entitle it to step into three sets of shoes. When, on default
of the contractor, it pays all the bills of the job to date and
completes the job, it stands in the shoes of the contractor
insofar as there are receivables due it; in the shoes of
laborers and material men who have been paid by the surety
– who may have had liens; and, not least, in the shoes of the
[obligee], for whom the job was completed.
Id. at 115-16 (quoting National Shawmut Bank v. New Amsterdam Cas. Co., 411 F.2d
843, 844-45 (1st Cir. 1969)). Therefore, “[a] surety who performs or pays on behalf
of a [sic] obligee steps into the shoes of the obligee to the extent of performance or
payment.” Id. at 116 (emphasis added). Thus, only a performance and payment bond
surety who pays all of the bills of the job to date and completes the job is entitled to
stand in the contractor-principal’s shoes and demand payment of unpaid balances from
the obligee. The surety’s rights, “as subrogee, are not inferior even to the rights of the
obligee and may be asserted against the obligee.” Id. The Transamerica opinion of
18
the Supreme Court of Florida recognizes that a performing surety may assert a right
to contract proceeds superior to the obligee because, by completing the project, the
surety conferred a benefit on the obligee and, therefore, stepped into the shoes of the
obligee. See id. at 115-16. Where a surety pays the claims of laborers and
materialmen, the surety is only entitled to stand in the shoes of those laborers and
materialmen who might have had liens, “but for” the surety’s payment. Of course, in
both cases, the surety’s subrogation rights exist only to the extent of the surety’s
performance. The fact that the surety in this case, National Fire, did not complete
performance distinguishes this case from Transamerica.13
We conclude that National Fire’s right to subrogation is controlled by the
rationale of the former Fifth Circuit’s decision in Trinity Universal Ins. Co. v. United
States, 382 F.2d 317 (5th Cir. 1967).14 In Trinity Universal, the former Fifth Circuit
addressed “whether, when a Miller Act surety completes a defaulted contract pursuant
13
“‘Subrogation rights place a party . . . in the legal position of one who has
been paid money because of the acts of a third party. Thus, the subrogee ‘stands in
the shoes’ of the subrogor and is entitled to all of the rights of its subrogor, but also
suffers all of the liabilities to which the subrogor would be subject.’” Cleary Bros.
Constr. Co. v. Upper Keys Marine Constr., Inc., 526 So. 2d 116, 117 (Fla. 3d DCA
1988) (quoting Allstate Ins. Co. v. Metropolitan Dade County, 436 So. 2d 976, 978
(Fla. 3d DCA 1983)).
14
The Eleventh Circuit has adopted as precedent decisions of the former Fifth
Circuit rendered prior to October 1, 1981. See Bonner v. Prichard, 661 F.2d 1206(11th Cir.1981).
19
to its performance bond, the government may set off taxes owed by the contractor
against the surety’s claim to the fund retained by the government to insure
performance.” Id. at 318. Finding that there was no right to set-off, the former Fifth
Circuit recognized that, in Munsey Trust, the rights of the surety were limited to those
of subrogee of the contractor because the surety had only performed under a payment
bond. Id. at 319. Having made payments pursuant to its payment bond, the surety in
Munsey Trust became a creditor of the Government with respect to the funds retained
by the Government, and the Government could exercise the well-established common
law right to set-off claims against its creditors. Id. at 319-20.
However, the former Fifth Circuit noted that, “[a] different situation occurs
when the surety completes the performance of a contract. The surety is not only a
subrogee of the contractor, and therefore a creditor, but also a subrogee of the
government and entitled to any rights the government has to the retained funds.” Id.
at 320. The distinction between a surety’s rights when performing under a payment
bond or a performance bond is important. When a surety completes the project itself
or pays the excess completion costs pursuant to the performance bond, the surety
confers a benefit upon the obligee, whether the obligee is the Government or a private
entity. That benefit relieves the obligee of the burden of completing the construction.
In such circumstances, an implicit agreement exists that the surety has a right to all
20
retained funds and any remaining progress sums, and the obligee does not possess a
right to set-off.15 See id. at 320-21; see also Aetna Cas. & Surety Co. v. United States,
435 F.2d 1082, 1083-84 (5th Cir. 1970) (finding that surety’s payments made under
performance bond were not subject to set-off).
Courts often fail to address the distinction between a surety’s right to
subrogation when the surety makes payments under a payment bond, as compared to
the surety’s rights when it performs its performance bond obligations. The payment
bond surety, who stands in the shoes of laborers and materialmen, normally has
priority with respect to remaining contract balances because those laborers and
materialmen would have high priority liens against the property under state law.
15
In Dependable Ins. Co. v. United States, 846 F.2d 65 (Fed. Cir. 1988), the
Federal Circuit also recognized that a surety’s subrogation rights, with respect to set-
offs asserted by the Government, vary depending upon whether the surety performed
under a performance bond or a payment bond. In that case, the surety acknowledged
that, under Munsey Trust, “the government’s right to retained contract proceeds are
generally superior to those of a payment bond surety.” Id. at 67. The Federal Circuit
further explained why performing performance bond sureties have superior rights to
the obligee, while payment bond sureties do not:
[W]hen a surety finances completion of a project, it confers
a benefit upon the government by relieving it of the task of
completing performance itself. It therefore becomes
subrogated not only to the rights of the prime contractor but
to those of the government. Accordingly, a completing
performance bond surety has the right to accumulated
contract proceeds free from setoff by the government.
Id. at 67.
21
Under Florida law, construction liens of laborers and materialmen have priority over
all subsequently recorded encumbrances on the owner’s property. Fla. Stat. §
713.07(3) (1997). Of course, the payment bond surety’s subrogation is limited to
proper payments made to valid lien claimants. Likewise, the performance bond surety
who actually performs stands in the principal’s shoes and can demand payment of the
remaining contract balances. Further, such a performance bond surety’s rights to
contract balances are superior to the obligee’s and any claims the obligee may have
against the principal. Where, as in this case, the surety makes payments under the
payment bonds, but does not fulfill its performance bond obligations, this distinction
is critical to an equitable prioritization of rights, particularly where it is the obligee
who performs in the face of the surety’s possible breach of the performance bond.
The rationale of Trinity Universal controls the respective rights of National Fire
and Fortune to any retained contract balances in Fortune’s possession. To further
analyze the surety’s subrogation rights, it is necessary to differentiate between what
claims are covered by each of the respective bonds. Since National Fire did not
complete construction under its performance bonds, it has acquired equitable
subrogation rights only with respect to its payment bonds. The district court erred to
the extent that it granted summary judgment for National Fire on its claim of equitable
subrogation arising out of the performance bonds. Further, the extent of National
22
Fire’s subrogation under the payment bonds to Fortune is limited to the amount of the
valid claims National Fire properly paid on a particular project after Fortune’s
reasonable costs to complete construction on the project are deducted from the
remaining contract balances.
Our holding that National Fire is not entitled to equitable subrogation for any
performance bond related claims is also based upon our conclusion that the district
court erred in its partial summary judgment ruling that National Fire had no obligation
under the performance bonds for either project to complete construction itself or to
arrange for the completion of construction.16 Such a ruling would have been correct
if the bonds were indemnity-type, but it is undisputed in the record that the
performance bonds in this case were not merely indemnity bonds. The touchstone of
any right to subrogation under a performance bond is actual and full performance of
16
National Fire could not, as the district court ruled, simply “do nothing” and
pay for any excess construction costs. As noted in one treatise:
The seductive enticement of the ‘do nothing’ option to the
surety is avoiding the immediate cost of completion, but
this course of action remains advantageous only if the
surety is correct in its analysis that it has no liability to the
obligee....Some bond forms remove the surety’s ‘do
nothing’ option. These instruments require the surety to
act. If the surety believes it has a defense, it may reserve its
rights and litigate -- but it must perform.
Phil Bruner & Patrick O’Connor, 4 BRUNER & O’CONNOR ON CONSTRUCTION LAW
§ 12:82 n.5 (2002), WL BOCL § 12:82.
23
the bond’s obligations. RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY § 27
(1995). The language of the two performance bonds plainly contravenes the district
court’s ruling. The Winston Park performance bond provided that:
Whenever [Arkin] shall be, and declared by [Fortune] to be
in default under the [Winston Park Subcontract], [Fortune]
having performed [Fortune’s] obligations thereunder,
[National Fire] may promptly remedy the default, or shall
promptly
1) Complete the [Winston Park Subcontract] in accordance
with its terms and conditions, or
2) Obtain a bid or bids for completing the [Winston Park
Subcontract] in accordance with its terms and conditions,
and upon determination by [National Fire] of the lowest
responsible bidder, or if [Fortune] elects, upon
determination by [Fortune] and [National Fire] jointly of
the lowest responsible bidder, arrange for a contract
between such bidder and [Fortune], and make available as
Work progresses...sufficient funds to pay the cost of
completion less the balance of the contract price; but not
exceeding, including other costs and damages for which
[National Fire] may be liable hereunder, the amount [of the
bond].
Under the terms of this bond, when Arkin was declared in default, National Fire had
three options: (1) it could remedy the default; (2) it could complete construction itself;
or (3) it could arrange for the completion of construction by selecting, either by itself
or jointly with Fortune, a completion contractor and by making funds available to the
completion contractor for completion costs in excess of the contract price. National
24
Fire could not, as the district court held, merely ignore Fortune’s demands that
National Fire perform, force Fortune to complete construction, and then pay Fortune
for reasonable costs in excess of the contract price. The express terms of the Winston
Park performance bond placed the burden of performance on National Fire. Because
National Fire did not perform, it is not entitled to subrogation with respect to the
Winston Park performance bond.
The district court also erred in applying the same analysis to National Fire’s
West Brickell performance bond obligation as to the Winston Park performance bond
obligation. Unlike the Winston Park performance bond, the West Brickell
performance bond’s terms potentially contemplated completion of construction by
Fortune. The West Brickell performance bond stated:
Whenever [Arkin] shall be, and be declared by [Fortune] to
be in default under the subcontract, [Fortune] having
performed [Fortune’s] obligations thereunder:
(1) [National Fire] may promptly remedy the default
subject to the provisions of paragraph 3 herein; or
(2) [Fortune] after reasonable notice to [National Fire] may,
or [National Fire] upon demand of [Fortune] may arrange
for the performance of [Arkin’s] obligation under the
subcontract subject to the provisions of paragraph 3 herein;
(3) The balance of the subcontract price ... shall be credited
against the reasonable cost of completing performance of
the subcontract. If completed by [Fortune], and the
reasonable cost exceeds the balance of the subcontract
25
price, [National Fire] shall pay to [Fortune] such excess,
but in no event shall the aggregate liability of [National
Fire] exceed the amount of this bond.
(Emphasis added).
Under this provision, National Fire also had three alternatives: (1) it could remedy the
default; (2) if Fortune provided National Fire reasonable notice that Fortune wished
to arrange for completion, it could allow Fortune to arrange for the completion of
construction; or (3) if Fortune demanded that National Fire arrange for completion of
construction, it could arrange for completion of construction itself. According to the
evidence in the record (and construing the record in the light most favorable to
Fortune since it appears to be a genuine factual dispute), Fortune did not wish to
complete construction of the West Brickell project itself after Arkin defaulted.
Instead, Fortune demanded that National Fire arrange for completion of construction
of the West Brickell project, and National Fire refused to do so. Paragraph three of
the West Brickell performance bond does contemplate the possibility that Fortune
could have completed the subcontract itself. However, this contingency would only
occur if, under the second alternative, Fortune sought to complete construction itself
or, under the third alternative, National Fire arranged for Fortune to complete
construction. In either of these cases, Fortune (not National Fire) could choose
whether Fortune would voluntarily complete construction. Because it appears
National Fire did not perform, it is not entitled to subrogation with respect to the West
26
Brickell performance bond.
We also find that disputed issues of material fact exist in the record about
whether National Fire’s failure to perform amounted to a breach of its performance
bond obligations, as described above. National Fire claims it appropriately tendered
a completion contractor and that Fortune refused this tender. (Aff. of Raymond
Lemming, R.27 at 4-5.) Fortune claims a completion contractor was never tendered
despite its demands. (Aff. of Michael Getz, R.44 at 2.) This obvious factual conflict
was presented to the district court in the parties’ arguments on National Fire’s motions
for partial summary judgment. The only way the district court avoided confronting
this conflict was by erroneously ruling that, as a matter of law and without reference
to the language of the performance bonds, National Fire had no obligation to tender
a completion contractor or to complete performance itself. Summary judgment on
Fortune’s breach of contract claim against National Fire was improper and we remand
for further proceedings on this issue.17
B. Fortune’s Setoff Claims
Having concluded that National Fire is only entitled to equitable subrogation
17
Determination of the factual dispute about whether National Fire actually
breached the performance bonds is unnecessary to our ruling on National Fire’s claim
of equitable subrogation. It is undisputed that National Fire did not, in fact, complete
construction, and for that reason National Fire cannot claim subrogation under the
performance bonds.
27
with respect to valid payments made under its payment bonds, and that Fortune is
entitled to a setoff for all items encompassed within the scope of the performance
bonds, we now must consider the specific claims for which Fortune seeks setoff.
1. Liquidated Delay Damages
Fortune contends that National Fire is responsible for liquidated delay damages
that had accrued prior to Arkin’s default due to Arkin’s failure to timely perform on
both projects. Although Fortune obtained judgment as a matter of law against Arkin
for these damages, Fortune seeks to set these damages off against the retained contract
balances. Fortune also argues that National Fire is contractually liable for these
damages because the bonds incorporated by reference the underlying subcontracts
which expressly provided for delay damages. However, National Fire denies any
responsibility for delay damages, arguing that such damages are unrelated to the
completion of the bonded construction projects and that the performance bonds do not
expressly recognize liability for delay damages.
We look to Florida law to see what a surety’s obligations are in the
circumstances of this case. As a general proposition, the true performance bond
requires a surety to guarantee the performance through completion of the underlying
contract. See Federal Ins. Co. v. Southwest Fla. Retirement Ctr., Inc., 707 So. 2d
1119, 1121 (Fla. 1998). However, in American Home Assurance Co. v. Larkin
28
General Hospital, Ltd., 593 So. 2d 195 (Fla. 1992), the Supreme Court of Florida held
that “a surety cannot be held liable for delay damages due to the contractor’s default
unless the bond specifically provides coverage for delay damages.” Id. 593 So. 2d at
196 (footnote omitted). In Larkin General Hospital, the contractor had not
substantially completed the project by the target date, but the owner did not declare
the contractor in default. Nearly eighteen months later, after a dispute arose between
the owner and contractor, the owner declared the contractor in default and notified the
surety. The surety elected not to complete performance and the owner used another
contractor to complete the job. In the owner’s action against the surety for breach of
the performance bond, the trial court included in its damage award the owner’s
consequential delay damages for the contractor’s tardy performance. Importantly for
purposes of our analysis, there was no liquidated or other type of damages provision
in the underlying contract. The Larkin General Hospital court noted:
[t]he purpose of a performance bond is to guarantee the
completion of the contract upon default by the contractor.
Ordinarily a performance bond only ensures the completion
of the contract. The surety agrees to complete the
construction or to pay the obligee the reasonable costs of
completion if the contractor defaults.
Id. at 198 (citations omitted). Although a surety’s liability is coextensive with that of
the principal, “the surety’s liability for damages is limited by the terms of the bond.”
Id. Therefore, the Supreme Court of Florida found that “[t]he language in the
29
performance bond, construed together with the purpose of the bond, clearly explains
that the performance bond merely guaranteed the completion of the construction
contract and nothing more.” Id. (emphasis added); see also Mycon Constr. Corp. v.
Board of Regents, 755 So. 2d 154, 155 (4th DCA 2000) (“Because the performance
bond contains no provision for damages for delay, the surety cannot be held liable for
such damages.”). However, unlike the performance bond in Larkin General Hospital,
the bonds at issue in this case expressly incorporated the subcontracts, which, in turn,
do expressly provide for liquidated delay damages.
Larkin General Hospital could possibly be interpreted to mean that a
performance bond surety cannot be held liable for, or denied subrogation for, delay
damages, whether liquidated or unliquidated, unless the responsibility for delay
damages is specified on the face of the performance bond. However, we do not read
the decision that broadly.18 The “purpose of the bond” must be considered, which
requires reference to the contract secured by the bond. Where a provision for
liquidated delay damages is clearly delineated in the underlying contract and
incorporated by reference into the bond, the surety is on notice of the time element of
performance and the contractual consequences of failure to timely perform in
18
The Supreme Court of Florida has since declined to extend Larkin General
Hospital beyond delay damages. Federal Ins. Co. v. Southwest Fla. Retirement Ctr.,
707 So. 2d 1119, 1121 (Fla. 1998).
30
accordance with the contract. Once the liquidated damages accrue, the contractor-
principal owes a debt to the obligee which is, in effect, a reduction of (or contractual
off-set to) the contract price. In such event, the obligee becomes the creditor of the
principal and the performance bond surety should not have superior rights to the
obligee in the remaining contract balances where liquidated damages have been
suffered. This is especially true where, as here, the surety does not remedy the
principal’s delay by performing the surety’s obligations under the performance bond.
While it is true that the terms of the bonds in this case do not expressly require
the surety to assume responsibility for delay, “[i]t is the general rule of contract law
that where a writing expressly refers to and sufficiently describes another document,
the other document is to be interpreted as part of the writing.” Lord & Son Constr.,
Inc. v. Roberts Electrical Contractors, Inc., 624 So. 2d 376, 377 n.2 (Fla. 1st DCA
1993). Even after Larkin General Hospital, Florida courts have continued to utilize
the well-established doctrine of incorporation by reference to impose liability on a
performance bond surety. See DCC Constructors, Inc. v. Randall Mech. Inc., 791 So.
2d 575, 576-77 (Fla. 5th DCA 2001); Southwest Fla. Retirement Ctr. v. Fed Ins. Co.,
682 So. 2d 1132-33 (Fla. 2d DCA 1996), aff’d, 707 So. 2d 1119 (Fla. 1998). The
“purpose” of the performance bonds was to insure performance in accordance with the
terms of the respective subcontracts, and those terms plainly include adverse direct
31
consequences for delay. Therefore, under the particular facts of this case, the
unequivocal delay damages provisions of the subcontracts are properly considered
part of the bonds issued by National Fire because of the incorporation by reference.
Moreover, the liquidated delay damages are properly considered part of the
performance of the subcontracts, and it is undisputed that Fortune completed the
projects, with no performance-related costs being incurred or paid by National Fire.
Accordingly, Fortune’s claim for set-off of the delay damages is entitled to priority
over National Fire with respect to any of National Fire’s claims related to the
performance bonds.
However, Fortune’s claim for delay damage set-off is not entitled to priority
over National Fire’s valid payment bond claims. A performing payment bond surety
stands in the shoes of the laborers and materialmen who might have had liens on the
property. That right is generally superior to the rights of either the principal or the
obligee. To the extent of the payment bond claims actually and properly paid,
National Fire’s right to any unpaid contract balances is superior to Fortune’s
liquidated delay damages claim.19 We express no opinion about whether National Fire
may be responsible for delay damages related to Fortune’s breach of contract claims
19
It is not clear from the record, but it appears that National Fire’s payment bond
equitable subrogation claims may exhaust the contract balances retained by Fortune.
32
on the performance bonds.
2. Davis-Bacon Wages
The district court granted National Fire partial summary judgment on Fortune’s
counterclaim for set-off of the amount of back wages Fortune paid due to violations
of the Davis-Bacon Act by one of Arkin’s subcontractors on the West Brickell Project.
The Davis-Bacon Act requires laborers on federally funded projects to be paid not less
than the “prevailing” wages in the locale. See 40 U.S.C. § 276a(a); Walsh v. Schlecht,
429 U.S. 401, 411, 97 S. Ct. 679, 686, 50 L. Ed. 2d 641 (1977). The Act requires that
“every contract based upon these specifications shall contain a stipulation that the
contractor or his subcontractor shall pay all mechanics and laborers” the federally
mandated wages. 40 U.S.C. § 276a(a) (emphasis added). Federal regulations
applicable to contracts and subcontracts under the Davis-Bacon Act provide, “The
prime contractor shall be responsible for the compliance by any subcontractor or
lower tier subcontractor....” 29 C.F.R. § 5.5(a)(6) (1999).
We conclude that the Davis-Bacon wages paid by Fortune are part of Fortune’s
reasonable cost of completion of construction.20 The Davis-Bacon wage claims paid
20
One could evaluate Fortune’s Davis-Bacon Act claim, as Fortune suggests, as
part of National Fire’s performance bond obligation because the West Brickell
performance bond specifically incorporated by reference the West Brickell
Subcontract which imposed on Arkin the responsibility for Arkin’s subcontractors’
acts and omissions. However, we think the Davis-Bacon Act wages are properly
33
by Fortune represent wages of laborers on the West Brickell project that should have
properly been paid as part of the costs of construction. Because of Arkin’s failure to
properly supervise Allied’s compliance with the Davis-Bacon Act, as Arkin was
required to do under the West Brickell Subcontract, federal funds payable to Fortune,
as general contractor, for the West Brickell project sufficient to pay Allied’s
employees could have been withheld. 40 U.S.C. § 276a-2(a). If the remaining federal
funds were insufficient to repay the employees, the Davis-Bacon Act gave Allied’s
employees the right to file a lien on the West Brickell property for the difference. 40
U.S.C. § 276a-2(b); Fla. Stat. § 713.03. We reverse the district court’s grant of partial
summary judgment to National Fire on this issue and hold that Fortune has a right to
set off its $71,126.00 Davis-Bacon Act claim against the remaining contract balances
considered costs of construction because they represent wages that should have
properly been paid, and were paid, through enforcement by the Department of Labor,
to the laborers on the West Brickell project. Such wages were a part of the cost of
completion.
These wages could also be considered as being within National Fire’s payment
bond obligation, but because of unique language in the West Brickell payment bond,
the Davis-Bacon wage claims escape coverage under the bond. National Fire was
only obligated under the West Brickell payment bond to make payments to valid
“claimants”, defined as those persons having a “direct contract” with Arkin. The
Davis-Bacon wage claimants were employees of Allied who did not technically have
a “direct contract” with Arkin.
34
as part of Fortune’s reasonable costs of completion.21
3. Electrical Overages
Fortune also claims the Fortune-Arkin letter agreement gives Fortune a right to
payment from National Fire for the electrical overages Fortune paid on the West
Brickell project. However, the West Brickell performance bond cannot be construed
to cover an agreement that was not identified in the West Brickell Subcontract.22 The
21
The parties also have raised an issue concerning whether public policy favors
holding either the principal contractor or a subcontractor’s surety responsible for
ensuring payment of Davis-Bacon wages. As discussed earlier, Fortune is required
by law, as well as by public policy, to ensure compliance by its subcontractors with
the Davis-Bacon Act. See 40 U.S.C. §276a; 29 C.F.R. §5.5(a)(6). Fortune satisfied
this responsibility in the West Brickell Subcontract, which was incorporated by
National Fire’s performance bond, by requiring Arkin to be responsible for the acts
and omissions of its subcontractors. We first note that Fortune actually paid the
Department of Labor’s Davis-Bacon Act claim for restitution. Fortune only seeks
reimbursement from Arkin and National Fire for their failure to pay the claim when
requested to do so. Moreover, in the West Brickell performance bond, National Fire
necessarily accepted the risk that its principal, Arkin, would not fulfill these
obligations imposed upon it by the Act and its subcontracts. As a result, we conclude
that the policy behind the Davis-Bacon Act will not be frustrated by allowing Fortune
to recover this amount as a part of its reasonable costs of completion.
22
According to Fortune, the letter agreement dated January 15, 1996, is included
in the bonded West Brickell Subcontract as evidenced by the fact that National Fire
admitted its inclusion in its Answer to Fortune’s counterclaim. At oral argument,
counsel for Fortune indicated that this admission by National Fire had not been
brought to the trial judge’s attention prior to the granting of summary judgment
against Fortune. Counsel for National Fire indicated that the admission was
inadvertent. It appears that National Fire did erroneously admit that this agreement
was part of the bonded subcontract, but we do not believe that this inadvertent
admission should control liability for these overage costs when it was not considered
35
West Brickell performance bond specifically incorporated the West Brickell
Subcontract by reference. The list of “Contract Documents” identified in the West
Brickell Subcontract, which sets forth the documents that are part of the bonded
subcontract, does not include the letter agreement. The subcontract made no other
reference to the letter agreement, even though the parties made several other
handwritten alterations to the subcontract. Merger and integration provisions in both
the “Contract Documents” section and in Article 17 of the subcontract provide that the
referenced documents are the entire and complete agreement of the parties. Since the
bond was issued on the subcontract without reference to the letter agreement, the letter
agreement is not within the scope of contract work that National Fire agreed to insure
when it issued the bond. Further, the district court properly rejected Fortune’s offer
of parol evidence that the letter agreement was part of the subcontract because Fortune
produced no evidence that National Fire knew of the letter agreement at the time it
issued the bond. Therefore, Fortune has no right to payment for electrical overages
from National Fire and the district court properly granted summary judgment in favor
of National Fire on this issue.
C. Remaining Issues
1. National Fire’s Breach of Contract Claim
by the district court.
36
Fortune argues that National Fire’s breach of contract claim should not have
been submitted to the jury because Fortune was not a signatory to the performance
bonds on which the claim was based. National Fire asserts that the terms of the bond
obligated Fortune to pay National Fire the balance of the proceeds of the Fortune-
Arkin subcontract after Fortune completed construction. The terms of the bonds
plainly contradict National Fire’s argument. Normally, bond agreements create duties
that run from the surety to the obligee. The obligee is a beneficiary of the agreement
between surety and principal. While there may possibly be some circumstances under
which a bond’s terms might impose duties on the obligee, Fortune was merely a
beneficiary of the performance bonds here.23 As discussed above, bonds are to be
interpreted according to ordinary principles of contract construction. American Home
Assurance Co. v. Larkin Gen. Hosp., Ltd., 593 So. 2d at 195, 197 (Fla. 1992);
Restatement (Third) of Suretyship & Guaranty §§ 17(2), 32(1) (1995).
In the event that Arkin defaulted, under the terms of both performance bonds
National Fire could complete construction itself or agree with Fortune to jointly select
another contractor to finish construction, which could possibly be Fortune if the
parties so agreed. If the latter occurred, the performance bonds obligated National
23
Even if the agreement imposed duties on Fortune, we find it difficult to
understand how a principal and surety could bind an obligee to perform those duties
without expressly obtaining the obligee’s consent.
37
Fire to make available funds for the completion of construction to the extent the costs
exceeded the balance of the contract price. This provision does not require Fortune
to tender to National Fire the remaining contract price if Fortune completed
construction at a cost less than the contract price. Our interpretation of the bonds’
terms is consistent with the surety’s traditional duty to complete construction in the
event of the principal’s default. The purpose of a performance bond is to assure the
obligee that construction will be completed and that it will not be liable for
construction costs in excess of the contract price in the event the contractor defaults.
If National Fire had completed construction, it would have been entitled to payment
of the contract price, or under equitable subrogation, entitled to the remaining contract
balances held by Fortune. However, National Fire did not complete construction
under the bond’s terms. Instead, Fortune completed construction and, luckily for
National Fire, at a cost less than the contract price. Under no reasonable construction
of the performance bonds’ terms can a contractual duty be found for Fortune to pay
National Fire the remaining balance after Fortune completed construction. Therefore,
the district court erred in allowing National Fire’s breach of contract claim to be
submitted to the jury. Further, even if (as National Fire claims) Fortune did prevent
National Fire from completing construction by refusing to accept National Fire’s
tender of a completion contractor, National Fire could only assert this fact as an
38
affirmative defense that its liability under the performance bonds was discharged, not
as a breach of contract claim against Fortune. See Ins. Co. N. Amer. v. Metro. Dade
County, 705 So. 2d 22, 34-35 (Fla. 3d DCA 1997)(obligee’s failure to timely notify
surety of latent defects discharged surety). See also St. Paul Fire & Marine Ins. Co.
v. City of Green River, 93 F. Supp. 2d 1170 (D. Wyo. 2000), aff’d, 2001 WL 369831(10th Cir. 2001).
2. Prejudgment Interest
Finally, we consider the district court’s award of prejudgment interest on the
jury’s damages verdict in favor of National Fire, retroactive to January 30, 1998.
Fortune notes that National Fire did not pay one payment bond claimant on the West
Brickell project until March 19, 2001, and last paid a like claimant on the Winston
Park project on May 15, 2001. Fortune argues that any equitable subrogation rights
did not accrue until those dates, when performance under the bonds was complete.
Therefore, Fortune contends that prejudgment interest should have been calculated
from those dates on the respective projects, and not over three years earlier.
We agree. Prejudgment interest in an action for breach of contract is allowable
from the date the debt is due. See, e.g., Paoli v. Natherson, 732 So. 2d 486, 488 (Fla.
2d DCA 1999). Where the judgment liquidates the plaintiff’s damages, the plaintiff
is entitled, as a matter of law, to prejudgment interest from the date of that loss.
Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 215 (Fla. 1985). However,
39
in this case, National Fire’s right to equitable subrogation under its payment bonds
with respect to the remaining contract balances did not arise until all of its payment
bond obligations had been performed. RESTATEMENT (THIRD) OF SURETYSHIP &
GUARANTY § 27 (1995). Further, any entitlement to equitable subrogation on the
remaining contract balances could not be determined until after Fortune had
completed the construction. If, as is usually the case, the cost of completion by
Fortune had equaled or exceeded the contract price, there would have been no
remaining balances and National Fire would not have been entitled to any equitable
subrogation with respect to them. The district court erred when it awarded
prejudgment interest on National Fire’s equitable subrogation claim prior to the
completion of its payment bond obligations.
IV. CONCLUSION
For the above reasons, the judgment of the district court is AFFIRMED IN
PART and REVERSED IN PART and this case is REMANDED for further
proceedings consistent with this opinion.
40