Eleventh Circuit Affirms Decision Under Florida Law Barring Contractor’s Performance Bond Claim for Failure to Comply With Notice Provisions in the Bond and in the Subcontract

by Pepper Hamilton LLP
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Int’l Fidelity Ins. Co. v. Americaribe-Moriarty JV, 2017 U.S. App. LEXIS 3628 (11th Cir. Feb. 28, 2017)

Americaribe-Moriarty Joint Venture (“Americaribe”) entered into a subcontract with Certified Pool Mechanics I, Inc. (“CPM”) for construction of a pool in a mixed-use development that Americaribe was building in Miami, Florida. CPM provided a performance bond, issued by International Fidelity Insurance Company and Allegheny Casualty Company (collectively, “Fidelity”) as security for performance of the pool subcontract.  According to Americaribe, CPM failed to perform its obligations under the pool subcontract.  As a result, Americaribe terminated CPM, made a claim on the performance bond, and contemporaneously hired a replacement contractor (“Dillon”) to complete CPM’s scope of work.

In the event of default by CPM, the subcontract required three days’ written notice before undertaking completion of CPM’s work. The bond incorporated the subcontract by reference and also required a further, but undefined, period of time after CPM’s termination during which Fidelity could evaluate options for responding to CPM’s alleged default.  In the event that Fidelity did not conduct such an evaluation with reasonable promptness, Americaribe could declare a default by Fidelity upon seven days’ written notice.  Although Americaribe provided the written notices of default, it proceeded to complete CPM’s work with Dillon before the notice periods expired.

Fidelity denied the performance bond claim on the basis that Americaribe had hired Dillon without providing proper notice and opportunity to remedy any alleged default by CPM. Fidelity then filed an action for declaratory judgment alleging that, by failing to comply with the notice provisions, Americaribe breached the bond and failed to satisfy conditions precedent to any rights under the bond.  The United States District Court for the Southern District of Florida agreed and granted summary judgment in Fidelity’s favor.  Americaribe appealed to the Eleventh Circuit.

The Eleventh Circuit affirmed on appeal. Applying Florida law, it ruled that a bond claimant must comply with notice provisions in the bond and, where the bond incorporates the bonded subcontract by reference, with notice provisions in the subcontract as well.  Americaribe provided the required notice of default and termination, but it concurrently commenced corrective work with its replacement contractor, Dillon.  In doing so, Americaribe breached the subcontract’s requirement for three days’ notice before undertaking corrective action and the bond’s requirement that Fidelity be given a period of time to evaluate the alleged default and its options for completing the work.  By depriving Fidelity of its right to evaluate options for completing the work, Americaribe discharged Fidelity’s liability for the costs that Americaribe and Dillon incurred.

To view the full text of the court’s decision, courtesy of Lexis®click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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