• Breaking Up with a Contractor is Hard to Do: L&A Contracting and the Parameters of Default Requirements for Performance Bonds
  • July 13, 2009
  • Law Firm: Frost Brown Todd LLC - Office
  • L&A Contracting Co. v. So. Concrete Servs., Inc., 17 F.3d 106 (5th Cir. 1994) stands as the leading case regarding the requirement to clearly declare contractor default in order to trigger a surety’s performance bond obligations. The case has been frequently criticized and distinguished for excusing bond obligations on what a naysayer would deem a technicality. But L&A Contracting has been far more often followed by a variety of circuits and jurisdictions. Through such citations, the parameters of default requirements for performance bonds have been drawn.

    “[A]ny declaration of default sufficient to trigger a surety’s obligation on a performance bond should be direct and unambiguous.” CC-Aventura, Inc. v. Weitz Co., Case No. 06-21598-CIV-HUCK/O’SULLIVAN, 2008 U.S. Dist. LEXIS 49988, at *14-15 (S.D. Fla. June 20, 2008) (citing L&A Contracting Co. v. So. Concrete Servs., Inc., 17 F.3d 106, 111 (5th Cir. 1994)). Nor is every breach sufficient to constitute default and require surety involvement. Liberty Mut. Ins. Co. v. Const. Mgmt. Servs., Case No. 99 C 6906, 2004 U.S. Dist. LEXIS 23635, at *10 (N.D. Ill. Oct. 6, 2004). The requirement of clarity in a declaration of default is based on the ramifications of default. CC-Aventura, Inc., 2008 U.S. Dist. LEXIS 49988, at *16 (citing L&A Contracting, 17 F.3d at 111). Specifically, when default is declared, the surety owes immediate duties, changing the relationship between the parties. CC-Aventura, Inc., 2008 U.S. Dist. LEXIS 49988, at *16 (citing L&A Contracting, 17 F.3d at 111). As a result, it is unsurprising when a bond includes “specific, methodical provisions” to end the contractor’s obligations and trigger the surety’s obligations. CC-Aventura, Inc., 2008 U.S. Dist. LEXIS 49988, at *16.

    The case law is replete with would-be default letters that do not satisfy the bond requirements or case law requirements. For instance, one letter expressed exasperation with the contractor and claimed that the contractor breached the contract, but the letter did “not demonstrate an intent to immediately terminate the contractual relationship.” Memphis-Shelby County Airport Auth. v. Illinois Paving Co., No. 01-3041 B, 2007 U.S. Dist. LEXIS 74146, at *17-18 (W. D. Tenn. Oct. 3, 2007). Instead, the letter revealed a willingness to give the contractor “an additional opportunity to remedy the breach.” Memphis-Shelby County Airport, 2007 U.S. Dist. LEXIS 74146, at *18.

    Similarly, in another case, a series of letters failed to contain the word “default” or an unequivocal declaration of default. Elm Haven Constr. Ltd. P’ship v. Neri Constr. LLC, 376 F.3d 96, 100 (2d Cir. 2004). At most, the earlier letters notified the contractor and surety that the owner “was exercising its rights under the default provisions of the subcontract agreement.” Elm Haven, 376 F.3d at 100. But the letters clearly indicated the owner’s “desire to continue its arrangements” with the contractor and keep the contract in force. Elm Haven, 376 F.3d at 100-01. The court went on to say that the surety “did not breach the implied covenant by failing to respond” to the earlier letters, since none of them constituted a declaration of default that would allow the surety to take action. Elm Haven, 376 F.3d at 102.

    Even when a default is unequivocally declared to the surety, the surety may still be relieved by deficiencies in the declaration to the contractor. Enterprise Capital, Inc. v. San-Gra Corp., 284 F. Supp. 2d 166, 180-81 (D. Mass. 2003). Under L&A Contracting’s default definition, “the obligee must terminate the construction contract, not the principal or surety.” Liberty Mut., 2004 U.S. Dist. LEXIS 23635, at *10. In Enterprise, the letter to the surety provided unequivocal notice to USF&G “that the contractor was in default and terminated.” Enterprise, 284 F. Supp. 2d at 180-81. But there was not “a clear, direct, and unequivocal formal declaration of termination to the contractor.” Enterprise, 284 F. Supp. 2d at 181. Thus, conditions precedent to the performance bond were not met, and the surety was “relieved of its obligations to perform under it.” Enterprise, 284 F. Supp. 2d at 181.

    In one case, the owner was found to have acted reasonably in treating the contractor’s “late payment as a minor breach not requiring a declaration of default or notice” to the surety. Lyndon Prop. Ins. Co. v. E. Kentucky Univ., 200 Fed. Appx. 409, 414 (6th Cir. 2006). The court concluded that “the bond should not be excused” because the owner reasonably determined that the contractor had not defaulted on its obligations. Lyndon, 200 Fed. Appx. at 414.

    In another case, an insurer pushed for a broader definition of default than that provided by L&A Contracting. John A. Russell Corp. v. Fine Line Drywall, Inc., No. 2:05-cv-321, 2008 U.S. Dist. LEXIS 13098, at *6 (D. Vt. Feb. 21, 2008). In Russell Corp., the bond imposed no specific notice requirements and did not actually use the word “default.” Russell Corp., 2008 U.S. Dist. LEXIS 13098, at *7. The court, nonetheless, noted that L&A Contracting’s default definition is not premised “on the notice provisions in that particular bond.” Russell Corp., 2008 U.S. Dist. LEXIS 13098, at *8. Nor is the definition’s reach limited to such provisions. Russell Corp., 2008 U.S. Dist. LEXIS 13098, at *8. Instead, L&A Contracting’s default definition “offers a clear benchmark for determining whether a default has occurred by requiring a material breach.” Russell Corp., 2008 U.S. Dist. LEXIS 13098, at *8. Such a precise definition is particularly appropriate due to “the tripartite nature of the suretyship relationship.” Russell Corp., 2008 U.S. Dist. LEXIS 13098, at *8.

    While there is controversy and disagreement surrounding L&A Contracting and the unequivocal default requirement, the general parameters of the law in this area are clear. In order to trigger a surety’s performance bond obligations, the declaration of default should be stated in no uncertain terms to both the contractor and the surety. The declaration should also be based on a serious breach that clearly constitutes default. There should be no lingering opportunity to correct the breach, and the relationship should be immediately and unquestionably severed, with the contract terminated. Literal language should be used, including words such as “default” and “immediate.” Anything less than such a clear statement of default risks running afoul of L&A Contracting and its progeny