Triggering a Subcontractor’s Performance Bond

Does a Contractor Need to Provide Notice to Trigger Liability Under a Subcontractor’s Performance Bond?

The answer depends on whether the performance bond and incorporated subcontracts include language explicitly requiring notice to be given. (International Fidelity Insurance Company and Allegheny Casualty Company v. Americaribe-Moriarty JV, 1 F.Supp. 3d 1 ( S.D. Fla 2016)).  If no language is present under the terms of the performance bond explicitly requiring notice to be given, then the contractor may remedy the default itself and then later sue the surety to cover the shortfall.

In the recent case of International Fidelity Insurance Company and Allegheny Casualty Company v. Americaribe-Moriarty JV, AMJV, the general contractor, entered into a subcontract with Certified Pool Mechanics, Inc., to perform pool work for a project. International Fidelity Insurance Company (Surety) issued a performance bond in connection with the subcontract with Certified Pool, as principal.  AMJV was not satisfied with Certified Pool’s performance on the subcontract and obtained a proposal from a different subcontractor to complete Certified Pool’s work.

AMJV only notified Surety of Certified Pool’s default two days prior to the replacement subcontractor starting its work.  Surety sued AMJV seeking a declaration that AMJV did not comply with the notice requirements of the performance bond.

The U.S. District Court found in favor of Surety holding that the surety “had a right to reasonable notice before [the contractor] undertook to arrange for the performance of work to cure the default.” Since the contractor failed to provide such notice to the surety, the surety was relieved of its obligations under the bond per Florida law. Although AMJV may have had a right under the subcontract to hire a replacement subcontractor, it needed to first allow Surety an opportunity to exercise its rights under the performance bond.

Accordingly, it is important that a contractor strictly adheres to the conditions and notice requirements of a performance bond when attempting to trigger liability of a surety.