Allegheny Casualty Co. v. Archer-Western/DeMaria Joint Venture III, 2014 WL 4162787 (USDC M.D. Florida, Tampa Division, August 21, 2014)

This case arises out of a dispute by the prime contractor (Archer-Western) and the performance bond surety for the drywall subcontractor (Allegheny Casualty) on a $52,000,000 expansion to the VA hospital in Tampa.  The drywall subcontractor defaulted after performing about 30% of its work, and Allegheny elected to complete the remaining obligations of its principal under the terms of a Takeover Agreement with Archer.  When the drywall work was about 94% complete, Allegheny walked off the job because it allegedly had expended the penal sum of the performance bond. 

Thereafter, Archer sued Allegheny for the cost to complete the drywall work, including allegedly deficient work under the performance bond and Takeover Agreement.  Allegheny sued Archer for, among other claims, rescission of the performance bond based on allegedly false representations made by Archer to Allegheny when it was investigating whether to issue the performance bond or not.  Cross motions for summary judgment led to an 18-page order by Federal District Court Judge Susan Bucklew. Two of the issues she addressed in her well-written order are addressed below.

Court finds that a performance bond surety that elects to complete performance of its principal’s work may limit its liability to the penal sum of the bond. The facts in the order reveal that Archer paid $1,125,000 to complete the drywall work, including the cost to correct defective work, after Allegheny ceased performance. Archer argued that a performance bond surety that elected to complete performance is not entitled to cap its liability at the penal sum of the bond and cited case law from non-controlling jurisdictions that have held that “when a surety elects to directly undertake performance of a principal’s obligations, the surety’s liability is no longer limited by the amount of the bond.” The Court found no controlling law in Florida. Fortunately for the surety, the parties included a term in the Takeover Agreement that expressly limited the surety’s liability in completing the drywall work to the penal sum of the bond. The Court found that “even if a performing surety’s liability can exceed the penal sum, a performing surety can limit its liability by expressly so providing in a contract with the benefitted obligee.” The Court also found no conflict between this express limitation and the surety’s promise to “cause the performance of each and every one of the terms, covenants, and conditions of the Original Contract.” 

From:  Florida Bar: Construction Law Committee

Trenton H. Cotney

Florida Bar Certified Construction Lawyer

Trent Cotney, P.A.

1211 N Franklin St

Tampa, FL 33602

www.trentcotney.com