Not All Bonds Are Created Equal: Distinguishing a Common Law Bond From a Statutory Bond
Too often in the law, great advancements are encountered by greater obstacles. It is no secret that Florida’s construction industry is booming, yet so is the litigious nature of the Sunshine State. While construction litigation may be spawned by a variety of sources, the primary path to the courtroom is most often paved by a pen, not a pulley. Ambiguous drafting of documents, including general contracts, subcontracts, performance bonds, and so forth, is the predominant cause for the intimate relationship between the construction industry and the legal system. This article shall serve to facilitate a better understanding of what constitutes a statutory bond issued for the construction or repair of a public building, and a common law performance bond serving the same or a similar purpose. The former is subject to the requirements and limitations of F.S. §255.05; the latter is unfettered by exacting statutory constraints.
F.S. §255.05 requires the acquisition of a payment and performance bond by any person entering into a formal contract with any public authority ( i.e., the state of Florida, city of Miami, Miami-Dade County, etc.) or political subdivision thereof, for the construction or repair of a public building or public work.1 Section 255.05(4) goes on to state that the payment provisions of all bonds furnished for public works contracts shall, regardless of form, be construed and deemed statutory bond provisions. Section 255.05(4), added by the Florida Legislature in 1980 in response to growing concerns of sureties that “common law bond arguments” were frequently being used to evade the notice requirements of §255.05(2),2 seemingly eliminates the sustenance of common law bonds.3 Notwithstanding, Florida case law reveals that common law bonds are still very much a part of today’s construction industry. The real challenge lies in distinguishing a common law bond from a statutory bond.
The primary test in determining whether a bond is a statutory bond or a common law bond depends upon an examination of the obligations imposed upon the principal and its surety. The test requires a comparison of the minimum requirements enunciated in the statute and the language contained within the bond.”4
The solution, in its most rudimentary form, is as follows: “Statutory bonds are those which meet the minimum requirement of §255.05; common law bonds are those which provide coverage in excess of the minimum statutory requirements.”5 This apparently simple solution, however, does not always equate to simple application thereof. An examination of those cases addressing the complexities inherent in such application shall better illustrate the nuances that differentiate statutory from common law bonds.
In United Bonding Insurance Co. v. City of Holly Hill, 249 So. 2d 720 (Fla. 1st DCA 1971), the City of Holly Hill entered into a contract with Rowell Construction Company for the construction of a sanitary sewer system, the terms of which required Rowell to furnish a bond for such work. Rowell procured a performance bond from United Bonding Insurance Company which met the minimum requirements of the contract, but also provided additional coverage agreeing to indemnify and save harmless the city from, among other things, all labor performed in the work, whether by subcontractor or otherwise.6 Martin Brick & Sand Company, as subcontractor, furnished certain materials to Rowell, as contractor, for use in the performance of the contract. Consequent to not receiving payment, Martin instituted suit on the performance bond issued by United for recovery of the amount due from Rowell.
United’s entire defense was predicated upon the time limitations of F.S. §255.05(2), as Martin brought its suit more than one year after delivery of the materials furnished. United’s reliance upon the aforementioned statute, however, was thwarted by appellee’s reliance on the same, §255.05(6). F.S. §255.05(6) states, “All bonds executed pursuant to this section shall make reference to this section by number and shall contain reference to the notice and time limitation provisions of this section.” The First District Court of Appeal opined:
It is our view that had appellant surety company intended that the performance bond which it issued to Rowell be a statutory bond given for the sole purpose of meeting the minimum requirements of F.S. Section 255.05, F.S.A., it would have so provided in the bond itself and specified the time limitation of one year within which suits could be brought against it on the bond as restricted by the statute. granting extensive coverage in excess of that required by the statute, it is not unreasonable to construe the bond involved herein as a common law undertaking subject to liability at the suit of any materialman if commenced within the time allowed by the general statute of limitations.7 Any ambiguity which may exist in this regard must be construed against appellant surety company and in favor of granting the broadest possible coverage to those intended to be benefited by the protection of the bond.8
In affirming the trial court’s construction of the bond in question as a common law bond not subject to the time limitations of F.S. §255.05(2), the United Bonding ruling stands, in pertinent part, for the proposition that ambiguous language within a bond will be construed strongly against a compensated surety and in favor of the obligees or beneficiaries under the bond, i.e., the owner, laborers, and materialmen for whose benefit the bond was executed.9 As a general rule of construction, Florida views construction bonds as contracts of insurance, and therefore, in constructing the terms of these contracts, they must be read and interpreted strictly against the bonding company which prepared them.10
The proclivity for narrow interpretation of construction bonds continued in Southwest Florida Water Management District ex rel. Thermal Acoustic Corp. v. Miller Construction Co., Inc. of Leesburg, 355 So. 2d 1258 (Fla. 2d DCA 1978). In Southwest Florida, an unpaid material supplier to a subcontractor initiated suit against a performance, payment, and guaranty bond furnished pursuant to a public works contract. Citing a number of fallacies exemplifying the bond’s failure to comply with the requirements of F.S. §255.05, including its lack of specific reference to §255.05, and the absence of any notice requirement or time limitations for bringing an action on the bond, the Second District Court of Appeal reversed the trial court’s dismissal of the complaint, holding that the second amended complaint alleged sufficient ultimate facts to establish a claim under a common law bond.11 In so holding, the court declared:
The primary purpose of [F.S. § 255.05] is to afford additional protection to persons who perform labor or furnish materials to a public works project on which they cannot acquire a lien. But not every bond furnished incident to a public works project falls within the ambit of the statute. Rather, the courts recognize a distinction between a statutory bond issued in connection with such a project and a common law bond. A bond, even though furnished pursuant to a public works contract, will be construed as a common law bond if it is written on a more expanded basis than required by Section 255.05, Florida Statutes (1975). Moreover, ambiguities in the form of such a bond must be construed in favor of granting the broadest possible coverage to those intended to be benefited by its protection.12
The strict constructionist view did appear to loosen its reign over construction bonds with the First District Court of Appeal’s ruling in State of Florida, Department of Transportation ex rel. Consolidated Pipe & Supply Company, Inc. v. Houdaille Industries, Inc., 372 So. 2d 1177 (Fla. 1st DCA 1979). In Houdaille, the court held that the failure of a performance bond to include specific reference to the notice provisions and time limitations of F.S. §255.05(2) did not recast a statutory bond into the common law arena. The court distinguished the facts in Houdaille from those in United Bonding and Southwest Florida, noting that the performance bonds in both of the later cases failed to refer to §255.05, failed to include time limitations for bringing suit on the bond, and granted broader coverage than that required under §255.05.13 The bond in Houdaille, however, specifically cited §255.05 and did not expand the principal’s obligation to laborers and suppliers beyond that which is required under §255.05.14 Notwithstanding, the Houdaille court may have reached a different conclusion had this case come before it subsequent to the 1980 amendments to F.S. §255.05. Included in said amendments was the aforementioned subsection (6), which requires that all bonds executed pursuant to §255.05 include reference to the notice and time limitation provisions of §255.05(2).15
In Motor City Electric Co. v. The Ohio Casualty Insurance Co., 374 So. 2d 1068 (Fla. 3d DCA 1979), a material supplier to a subcontractor asserted a claim against a bond furnished in accordance with a public works project. The bond in question did contain language incorporating F.S. §§255.05 and 713.23, and as such, the trial court dismissed the complaint for failure to initiate the action within the one-year statute of limitations provided for in those statutes. The Third District Court of Appeal reversed, noting that §255.05 only applies to those persons in direct privity with the designated public authorities; it does not apply to those instances where the principal on the bond is not in privity with the owner but rather was required to secure the bond as a condition of its subcontract. The court held that the bond in question was a common law bond, permitting the material supplier to seek recovery as a third-party beneficiary.16 “A third party may recover on a surety bond under appropriate circumstances where that bond is intended for his benefit as well as for the benefit of the formal parties thereto.”17 In other words, subcontractor and lower tier payment bonds furnished pursuant to a public works contract are, due to a lack of privity, inherently common law bonds, not subject to the notice provisions and time limitations of F.S. §255.05.
As the statutory scheme for construction bonds issued for public works continued to develop through various amendments to F.S. §255.05, aforementioned subsection (4), cloaked in its potent, almost threatening verbiage,18 seemingly lost some of its virility following the Fifth District Court of Appeal’s holding in Martin Paving Company v. United Pacific Insurance Company, 646 So. 2d 268 (Fla. 5th DCA 1994). In Martin Paving, a sub-subcontractor brought an action against the surety for the general contractor under a public construction payment bond. The bond, however, had not been recorded in the public records of the county where the improvement was located, a requirement under F.S. §255.05(1).19 In reversing summary judgment granted in favor of United Pacific, the court stated that subparagraph (4) of §255.05 is expressly limited to “bonds furnished for public work contracts described in subsection (1).” The court held that “unless subsection (1) is complied with, subsection (4) does not operate to require the claimant’s compliance with subsection (2).”20 The court went on to declare:
The same result is reached by application of common sense. Here Martin claims to have followed the statutory path to discover the bond in order to comply with the requirements for perfecting a claim. Because of the failure of others, Martin did not find the bond in time to timely assert its claim. The current statutory scheme plainly does not contemplate that the principal and surety can defeat a payment bond claim by avoiding detection. The amended statutory procedure is simple enough for the surety and principal to follow in order to insure the coveted protections of subsection (2) of 255.05. If they cannot follow the procedure, they cannot expect the claimant to do so either. In such a case, the claim is governed by the terms of the bond.21
Notwithstanding its ruling in Martin Paving, the Fifth District Court of Appeal regressed from its strict constructionist view of §255.05 in Florida Crushed Stone Company v. American Home Assurance Company, 815 So. 2d 715 (Fla. 5th DCA 2002). The court professed that its statement in Martin Paving, that “unless subsection (1) is complied with, subsection (4) does not operate to require the claimant’s compliance with subsection (2),” does not mean “that in all cases in which the bond fails to provide all statutorily required information that the provisions of subsection (2) automatically become inapplicable.”22 With knowing recognition of the surety’s failure to include within its bond certain provisions required by subsections (1) and (6) of F.S. §255.05, the court affirmed final judgment in favor of the surety, reasoning that the claimant’s failure to comply with the requirements of §255.05(2) was not a result of the surety’s prior noncompliance.
In American Home Assurance Co. v. APAC-Florida, Inc., 834 So. 2d 369 (Fla. 2d DCA 2003), the Second District Court of Appeal certified that its decision conflicts with that of the Fifth District in Florida Crushed Stone. The Second District reaffirmed its position in American Home Assurance Co. v. Plaza Materials Corp., 826 So. 2d 358 (Fla. 2d DCA 2002), by holding that “a surety may not invoke the notice requirements and the shorter statute of limitations provided in section 255.05(2), Florida Statutes (1995), if it agrees to be surety on a bond that fails to comply with the mandatory notice provisions in §255.05(6).”23 The court went on to express its concern: “We do not believe that the surety should be entitled to force claimants to participate in a jury trial on the issue of whether the omission in the bond misled them when the surety could have avoided the entire issue by requiring a bond in compliance with the notice provisions.”24
The Second District’s concern is one that should be embraced by every contracting member of the construction industry. Each of the cases referenced above might never had reached the courthouse steps had it not been for ambiguous drafting. Recall, ambiguities will be construed in favor of granting the broadest possible coverage to those intended to be benefited by its protection. A minor error in drafting could lead to a major transition in form: statutory bond to common law bond; one-year statute of limitations to five-year statute of limitations. The maxim “time equals money” has forced its way into every facet of the business world, and the construction industry is certainly no different. Take the time to read applicable Florida Statutes and draft documents accordingly; the money you save is your own.
1 When the contract is for $100,000 or less, no payment and performance bond is required. In addition, note that Fla. Stat. §713.23 governs any form of bond (as opposed to a bond exclusively associated with public entities) given by a contractor for the improvement of real property, conditioned to pay for labor, services, and material used for said improvement.
2 Fla. Stat. §255.05 (2) provides in pertinent part: “A claimant, except a laborer, who is not in privity with the contractor shall, before commencing or not later than 45 days after commencing to furnish labor, materials, or supplies for the prosecution of the work, furnish the contractor with a notice that he or she intends to look to the bond for protection. A claimant who is not in privity with the contractor and who has not received payment for his or her labor, materials, or supplies shall deliver to the contractor and to the surety written notice of the performance of the labor or delivery of the materials or supplies and of the nonpayment. The notice of nonpayment may be served at any time during the progress of the work or thereafter but not before 45 days after the first furnishing of labor, services, or materials, and not later than 90 days after the final furnishing of the labor, services, or materials by the claimant or, with respect to rental equipment, not later than 90 days after the date that the rental equipment was last on the job site available for use. No action for the labor, materials, or supplies may be instituted against the contractor or the surety unless both notices have been given. . . . An action, except for an action exclusively for recovery of retainage, must be instituted against the contractor or the surety on the payment bond or the payment provisions of a combined payment and performance bond within 1 year after the performance of the labor or completion of delivery of the materials or supplies. . . . The time periods for service of a notice of nonpayment or for bringing an action against a contractor or a surety shall be measured from the last day of furnishing labor, services, or materials by the claimant. . . . ”
3 See Martin Paving Co. v. United Pacific Insurance Co., 646 So. 2d 268, 271 (Fla. 5th D.C.A. 1994).
4 See Florida Keys Community College v. Insurance Company of North America, 456 So. 2d 1250, 1252 (Fla. 3d D.C.A. 1984) (citing State ex rel. Consolidated Pipe & Supply Co. v. Houdaille Industries, Inc., 372 So. 2d 1177 (Fla. 1st D.C.A. 1979)).
5 Id. at 1251 (citing United Bonding Insurance Co. v. City of Holly Hill, 249 So. 2d 720 (Fla. 1st D.C.A. 1971)).
6 United Bonding, 249 So. 2d 720.
7 The court’s reference is to the five-year statute of limitations provided under Fla. Stat. §95.11 (2)(b). Such statute provides a five-year limitations period for “[a] legal or equitable action on a contract, obligation, or liability founded on a written instrument, except for an action to enforce a claim against a payment bond, which shall be governed by the applicable provisions of ss. 255.05(2)(a)2 and 713.23(1)(e).”
8 United Bonding, 249 So. 2d at 724–25 (citing New Amsterdam Casualty Company v. Addison, 169 So. 2d 877 (Fla. 2d D.C.A. 1964); Griffin v. Speidel, 179 So. 2d 569 (Fla. 1965)).
9 See generally 7 Fla. Jur. 2d Bonds §19.
10 See Travelers Indemnity Co. v. Housing Authority of the City of Miami, 256 So. 2d 230, 234 (Fla. 3d D.C.A. 1972) (citing Phoenix Indemnity Co. v. Board of Public Instruction, 114 So. 2d 478 (Fla. 1st D.C.A. 1959); Development Corp. of America v. United Bonding Insurance Co., 413 F.2d 823, 826 (S.D. Fla. 5th Cir. 1969); and National Union Fire Insurance Co. of Pittsburg, Penn. v. Robuck, 203 So. 2d 204 (Fla. 1st D.C.A. 1967)).
11 Miller Construction, 355 So. 2d 1258.
12 Id. at 1259 (citing United Bonding Insurance Co. v. City of Holly Hill, 249 So. 2d 720 (Fla. 1st D.C.A. 1971)).
13 Houdaille Industries, 372 So. 2d 1177.
15 See American Home Assurance Co. v. Plaza Materials Corp., 826 So. 2d 358 (Fla. 2d D.C.A. 2002) (concluding that a surety that issues a bond that does not contain notice of the restrictions of §255.05(2), as required by §255.05(6), is not entitled to enforce those restrictions, i.e., the violation of subsection (6) transforms the statutory bond into a common law bond, or at least renders the restrictions of subsection (2) unenforceable).
16 Motor City Electric, 374 So. 2d 1068.
17 Id. at 1070 (citing National Union Fire Insurance Co. v. Westinghouse Electric Supply Co., 206 So. 2d 60, 61 (Fla. 3d D.C.A. 1968)).
18 Fla. Stat. §255.05(4) reads: “The payment provisions of all bonds furnished for public work contracts described in subsection (1) shall, regardless of form, be construed and deemed statutory bond provisions, subject to all requirements of subsection (2).”
19 This requirement has been interpreted to mean that a payment bond on a public construction contract must be recorded in the “official records” of the county where the improvement is located as maintained by the clerk of the court. See WPC, Inc. v. Hartford Accident & Indemnity Co., 698 So. 2d 1324, 1326 (Fla. 1st D.C.A. 1997) (citing Fla. Stat. §28.222 (1995)).
20 Martin Paving, 646 So. 2d at 271.
22 Florida Crushed Stone, 815 So. 2d at 717.
23 American Home v. APAC, 834 So. 2d at 370 (citing American Home Assurance Co. v. Plaza Materials Corp., 826 So. 2d 358 (Fla. 2d D.C.A. 2002)).
Brian Scott Dranoff is an associate with The Barthet Firm in Miami, practicing primarily in the areas of commercial and construction litigation.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Laird A. Lile, chair, and William P. Sklar and Richard R. Gans, editors.