The work by Dick Corporation at the Pensacola Naval Air Station beginning in 2005 has spawned a number of disputes and pieces of litigation. In a ruling issued on January 28, 2011, the federal district judge allowed Dick Corporation (“DC”) as the obligee under a payment bond to pursue a claim against the surety for a subcontractor and also enable DC to utilize proceeds from a bonded contract to offset losses on unbounded work. This holding provides a note of caution for contractors and sureties alike. See Order filed January 28, 2011 in United States of America for the use and benefit of L&W Supply Corporation, d/b/a Seacoast Supply v. Dick Corporation, et al., Case No. 3:08cv56/MCR/MD, United States District Court of the Northern District of Florida, Pensacola Division.
DC had a contract with the naval facilities engineering command to design and build the Visitors Quarters, an Aviation Rescue Swimmers School, and a Physical Fitness Center. As the prime contractor, DC entered into a series of subcontracts with S&S Construction Co., LLC (“S&S”) to perform some of the work. The contract sums for three of the four contracts were beyond the bonding capacity of S&S so no bonds were obtained by DC. The fourth contract was for drywall labor and acoustical ceiling materials in the amount of $1,200,000, and this was the only bonded obligation on the project for S&S (“Subcontract 152”).
As described in the ruling of the court, S&S abandoned the work and DC thereafter asserted both performance and payment claims alleging that it incurred $2,500,000 in costs and expenses to complete the work for which S&S was responsible. The opinion does not delineate how these costs were allocated between bonded and unbonded work. Presumably there were expenses on more than merely the bonded contract. The surety filed a motion for partial summary judgment, contending that DC could not assert a claim under the payment bond and also that DC should not be able to use the offset clause found in Subcontract 152 to cover unbonded obligations. The court denied both of the surety’s motions.
With regard to the claim asserted by Dick under the payment bond, the surety reasoned that Dick as the obligee did not satisfy the definition of a claimant and therefore could not assert a claim. The analysis undertaken by the court began with the assessment that a surety bond is, in essence, a contract and subject to the basic rules of contract interpretation. Assuming that the contract terms are unambiguous, interpretation of the contract is a matter of law and thus subject to summary disposition. Applying these principles, the court noted that under the payment bond S&S was the principal and DC was the owner/obligee. Further, the payment bond contained an undisputed definition of a “claimant” which provided as follows:
One having direct contract with the principal or with a subcontractor of the principal for labor, material, or both, used or reasonably required for use in the performance of, and directly attributable to the contract.
The opinion does not specify the precise nature of the bond, and since it was a subcontract bond, the language set forth in the Miller Act did not apply. Accordingly, the court noted that the language in the payment bond plainly distinguished between entities with the status of “claimant” and DC and its status as the owner/obligee. The court went on to hold that under the 1938 case decided in Florida styled Standard Accident Ins. Co. v. Bear, 184 So. 2d 97, that, while an owner/obligee typically cannot recover on a claim against a payment bond it may do so once it has been compelled to pay the claim of a materialman or supplier which satisfies the bond’s definition. According to the opinion, DC (or its surety which then looked to DC for indemnity) had been compelled to pay one of the suppliers of S&S by virtue of its obligations under the bond provided by the Miller Act. While the term is not used in the opinion, it appears that DC was asserting its claim against the surety for S&S by way of assignment or subrogation from this supplier. On this basis, DC could satisfy the definition of a claimant.
The second issue presented to the court by the surety for S&S was whether DC should be allowed to utilize bonded proceeds to satisfy unbonded obligations. In a footnote, the court noted that the surety sought a finding that its payment and performance obligations only apply to Subcontract 152 but the court noted further that neither party had addressed this issue in oral argument but that it was not disputed by DC. Subcontract 152 contained an “offset” clause which would allow DC to retain and use funds otherwise due S&S to offset back charges or other losses on contracts unrelated to the contract that was bonded. The surety argued that it was entitled to have the contract proceeds of the bonded contract applied to cover bonded claims before such funds would be used to cover claims arising on unbonded projects. The court noted, however, that the surety cited no contractual provision providing this assurance. To the contrary, Subcontract 152 was incorporated by reference into the bond such that the surety was bound to honor the terms of this contract. Further, the court noted that any dispute as to the propriety of any offset or the amount of the actual offset would have to be resolved at trial.
In a footnote the court commented that the surety had not undertaken to complete the performance of its principal after it ceased work on the subcontract. The court noted that the role of the surety as a completing contractor would put it in a different position regarding its right to look to remaining the contract funds from the bonded contract to reimburse it for expenses incurred in completing the work or paying claims.
While not written with an abundance of clarity, the decision highlights two important points for sureties and contractors. First, an owner/obligee may, under certain circumstances, gain the status of a “claimant” and thereby pursue claims under the payment bond so long as it can satisfy the required terms and become a claimant. Secondly, a surety could by operation of an offset clause contained in the bonded contract lose its right to look to bonded contract proceeds for reimbursement of losses it has suffered or may incur. While not always common in construction contracts, offset clauses can be enforced and therefore work to the detriment of a surety with limited sources of salvage recovery.