Surety Can Use Defaulting General Contractor to Complete Project Without Owner’s Concurrence

B. Michael Clark, Jr.
February 5, 2021


When a property owner finds defects in its general contractor’s work, declares the contractor to be in default and terminates the construction contract, perhaps the last thing it expects is to be forced to rely on the defaulting contractor to complete the project. Yet that is exactly what happened to a Marathon, Fla. condominium association after the provider of its surety bond elected to retain the original contractor to complete the project.

In Seawatch at Marathon Condominium Association v. The Guarantee Company of North America et al., the Florida Keys condominium association retained Complete Aluminum General Contractors for a $5.4 million construction contract for extensive renovations to the community’s three condominium buildings (pictured here). The Guarantee Company of North America executed a surety bond to secure CAGC’s performance under the contract for the association.

When the association discovered defects in the renovations, it declared the contractor in default and terminated the contract. It then requested Guarantee to promptly exercise one of its options pursuant to the performance bond.

Guarantee and Seawatch were unable to reach a mutually agreed upon resolution to complete the renovation. Eventually, the surety decided to assume and complete the contract, and it designated CAGC as its completion contractor.

The association rejected the surety’s takeover agreement, contending that it materially modified the original project terms, and that language within the performance bond prohibited Guarantee from retaining CAGC as its completion contractor.

Guarantee altered some of the objectionable provisions of its takeover agreement, but it stood firm on its decision to retain CAGC. The association filed a claim for declaratory relief, seeking a declaration that, in the absence of its consent, Guarantee was prohibited from hiring CAGC as the completion contractor under the performance bonds.

The trial court determined that under the terms of the surety bonds, Guarantee was within its rights to hire CAGC.

In the subsequent appeal, Florida’s Third District Court of Appeal found the terms of the bond to be clear and unambiguous. In the event of default, the surety is permitted to “[u]ndertake to perform and complete the Contract itself, through its agents or through independent contractors.” By its express language, the provision does not reflect any requirement of mutual assent in the selection of the completion team, and it places no restriction on whom the surety can use to complete the project.

Accordingly, the appellate panel declined to write a new requirement into the contract, and it unanimously affirmed the lower court’s decision.

As this and other similar cases illustrate, sureties have the option to takeover a construction project to complete it. Often, there is no requirement in the bond that the obligee (in this case, the association) enter into an actual “takeover agreement,” but sureties may seek to impose one. The obligee should beware of such a demand. However, this decision illustrates that once the surety elects to complete the work, it may control the manner in which the work is completed, including electing to retain the original contractor. That said, the surety does so at its own peril, because if the original contractor defaults again, the surety’s liability exposure may be increased.

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