Florida Appellate Court Upholds Jury Finding that Surety Was Not Given Proper Notice to Trigger Bond Obligation and Holds that Surety IE Entitled to All Attorneys' Fees

In Current Builders of Florida, Inc. v. First Sealord Surety, Inc., 2008 Fla. App. LEXIS 4698 (April 2, 2008), the Fourth District Court of Appeals in Florida reviewed a judgment rendered in favor of a contractor against its subcontractor for breach of contract. The jury had also found no liability on behalf of the subcontractor’s surety based upon a failure to give proper notice to the surety. The appellate court affirmed in part and reversed in part the ruling of the trial court.

urrent Builders of Florida, Inc. (“CBF”) was a general contractor and had engaged Morgado Plumbing Corporation (“Morgado”) to install plumbing fixtures. First Sealord Surety provided the surety bond on behalf of Morgado with CBF as the obligee. CBF questioned the performance by Morgado on the project and wrote several letters to Morgado and the surety regarding this poor performance. In each letter, CBF declared Morgado in default and demanded that the surety pay for delays and damages. CBF did not, however, terminate Morgado for more than a year. It then hired another plumbing contractor to correct deficiencies and complete the work.

CBF filed a complaint against First Sealord for breach of the performance bond, and ultimately Morgado filed a complaint against CBF alleging breach of contract. CBF then counterclaimed against Morgado also for breach of contract. In response to CBF’s complaint, Morgado presented the defense that the subcontract had not been properly terminated according to its terms. The court consolidated all of the actions and then ordered the parties to arbitrate. The arbiter had found in favor of Morgado and First Sealord and against CBF. Therefore CBF proceeded to trial.

Conflicting evidence was presented at the trial on the issue of breach of contract. CBF presented evidence that Morgado had problems from the start of the project. Morgado, on the other hand, presented evidence that CBF had delayed its performance and wrongfully terminated the subcontract. In the default letter sent to the surety, CBF outlined its claimed elements of default but did not agree to pay the surety the contract balance, and the surety argued that this step was required to present a valid claim under the bond.

The surety’s primary witness testified that the appropriate trigger for the surety’s liability had not been pulled. The surety testified that its principal continued to work even after the notice of default had been sent such that the principal had not been truly terminated. Further, the surety argued that CBF had not followed the terms of the contract in its attempt to terminate Morgado.

CBF had paid more than $800,000 to complete and correct the plumbing work on the contract, incurring a cost overrun of more than $680,000. The jury returned a verdict holding that Morgado breached the subcontract but awarded CBF only $30,000 in damages. The jury also held that the surety had not received proper notice under the terms of the performance bond such that its bond obligation had been discharged. Finally, the jury held that CBF had breached the subcontract with Morgado but was not liable for any damages. The court entered judgment according with the jury’s verdict. After the trial, CBF moved for a judgment N.O.V. claiming that it was entitled to an additur to increase the damages award to the amount proved at trial. The trial court denied the motion of CBF and also Morgado’s motion for judgment N.O.V. on the verdict in favor of CBF. The surety also moved for an award of fees and costs under the Florida statute which provides that a party seeking a trial after an arbitration award is liable for attorneys’ fees and costs if the judgment at trial is not more favorable than the arbitration decision.

The appellate court analyzed the issue regarding the notice to the surety by reviewing the terms of the surety bond issued on the project. The appellate court found that there was credible evidence for the jury to conclude that CBF had not followed the terms of the construction contract in order to properly discharge and terminate Morgado. As a result, the jury found that the surety had not received proper notice under the terms of the bond. The bottom line was that the appellate court did not find that the trial court had abused its discretion in denying the motion for new trial on the issue of notice to the surety.

While the surety was not liable under the terms of its bond, the jury had found Morgado liable for breach of contract. The court then turned to the issue of additur and found that the award of $30,000 in damages in light of the evidence produced at trial as to the amount of cost overrun was improper and inadequate. The appellate court held that the trial court had abused its discretion by failing to award additur or, in the alternative, a new trial.

With regard to the issue of attorneys’ fees, the Florida statute required a finding that the trial resulted in a more favorable award rendered in the arbitration. The court found that the surety had received a more favorable ruling but had not received a full award of its attorneys’ fees. Morgado and the surety had been represented by the same counsel. On this basis, the trial court had split the award of attorneys’ fees, holding that the defense by the two parties were inextricably linked such that it was impossible to distinguish which fees were incurred on behalf of the surety and which were incurred on behalf of the principal. The appellate court rejected this reasoning and held that the trial court erred in making an arbitrary division of the fees and awarded the surety its full fees as well as costs.

Posted by: David C. Olson