Opinion ID: 781023
Heading Depth: 2
Heading Rank: 2

Heading: Fortune's Setoff Claims

Text: 45 Having concluded that National Fire is only entitled to equitable subrogation with respect to valid payments made under its payment bonds, and that Fortune is entitled to a setoff for all items encompassed within the scope of the performance bonds, we now must consider the specific claims for which Fortune seeks setoff.
46 Fortune contends that National Fire is responsible for liquidated delay damages that had accrued prior to Arkin's default due to Arkin's failure to timely perform on both projects. Although Fortune obtained judgment as a matter of law against Arkin for these damages, Fortune seeks to set these damages off against the retained contract balances. Fortune also argues that National Fire is contractually liable for these damages because the bonds incorporated by reference the underlying subcontracts which expressly provided for delay damages. However, National Fire denies any responsibility for delay damages, arguing that such damages are unrelated to the completion of the bonded construction projects and that the performance bonds do not expressly recognize liability for delay damages. 47 We look to Florida law to see what a surety's obligations are in the circumstances of this case. As a general proposition, the true performance bond requires a surety to guarantee the performance through completion of the underlying contract. See Federal Ins. Co. v. Southwest Fla. Retirement Ctr., Inc., 707 So.2d 1119, 1121 (Fla.1998). However, in American Home Assurance Co. v. Larkin General Hospital, Ltd., 593 So.2d 195 (Fla. 1992), the Supreme Court of Florida held that a surety cannot be held liable for delay damages due to the contractor's default unless the bond specifically provides coverage for delay damages. Id. 593 So.2d at 196 (footnote omitted). In Larkin General Hospital, the contractor had not substantially completed the project by the target date, but the owner did not declare the contractor in default. Nearly eighteen months later, after a dispute arose between the owner and contractor, the owner declared the contractor in default and notified the surety. The surety elected not to complete performance and the owner used another contractor to complete the job. In the owner's action against the surety for breach of the performance bond, the trial court included in its damage award the owner's consequential delay damages for the contractor's tardy performance. Importantly for purposes of our analysis, there was no liquidated or other type of damages provision in the underlying contract. The Larkin General Hospital court noted: 48 [t]he purpose of a performance bond is to guarantee the completion of the contract upon default by the contractor. Ordinarily a performance bond only ensures the completion of the contract. The surety agrees to complete the construction or to pay the obligee the reasonable costs of completion if the contractor defaults. 49 Id. at 198 (citations omitted). Although a surety's liability is coextensive with that of the principal, the surety's liability for damages is limited by the terms of the bond. Id. Therefore, the Supreme Court of Florida found that [t]he language in the performance bond, construed together with the purpose of the bond, clearly explains that the performance bond merely guaranteed the completion of the construction contract and nothing more. Id. (emphasis added); see also Mycon Constr. Corp. v. Board of Regents, 755 So.2d 154, 155 (4th DCA 2000) (Because the performance bond contains no provision for damages for delay, the surety cannot be held liable for such damages.). However, unlike the performance bond in Larkin General Hospital, the bonds at issue in this case expressly incorporated the subcontracts, which, in turn, do expressly provide for liquidated delay damages. 50 Larkin General Hospital could possibly be interpreted to mean that a performance bond surety cannot be held liable for, or denied subrogation for, delay damages, whether liquidated or unliquidated, unless the responsibility for delay damages is specified on the face of the performance bond. However, we do not read the decision that broadly. 18 The purpose of the bond must be considered, which requires reference to the contract secured by the bond. Where a provision for liquidated delay damages is clearly delineated in the underlying contract and incorporated by reference into the bond, the surety is on notice of the time element of performance and the contractual consequences of failure to timely perform in accordance with the contract. Once the liquidated damages accrue, the contractor-principal owes a debt to the obligee which is, in effect, a reduction of (or contractual off-set to) the contract price. In such event, the obligee becomes the creditor of the principal and the performance bond surety should not have superior rights to the obligee in the remaining contract balances where liquidated damages have been suffered. This is especially true where, as here, the surety does not remedy the principal's delay by performing the surety's obligations under the performance bond. 51 While it is true that the terms of the bonds in this case do not expressly require the surety to assume responsibility for delay, [i]t is the general rule of contract law that where a writing expressly refers to and sufficiently describes another document, the other document is to be interpreted as part of the writing. Lord & Son Constr., Inc. v. Roberts Electrical Contractors, Inc., 624 So.2d 376, 377 n. 2 (Fla. 1st DCA 1993). Even after Larkin General Hospital, Florida courts have continued to utilize the well-established doctrine of incorporation by reference to impose liability on a performance bond surety. See DCC Constructors, Inc. v. Randall Mech. Inc., 791 So.2d 575, 576-77 (Fla. 5th DCA 2001); Southwest Fla. Retirement Ctr. v. Fed Ins. Co., 682 So.2d 1130, 1132-33 (Fla. 2d DCA 1996), aff'd, 707 So.2d 1119 (Fla.1998). The purpose of the performance bonds was to insure performance in accordance with the terms of the respective subcontracts, and those terms plainly include adverse direct consequences for delay. Therefore, under the particular facts of this case, the unequivocal delay damages provisions of the subcontracts are properly considered part of the bonds issued by National Fire because of the incorporation by reference. Moreover, the liquidated delay damages are properly considered part of the performance of the subcontracts, and it is undisputed that Fortune completed the projects, with no performance-related costs being incurred or paid by National Fire. Accordingly, Fortune's claim for set-off of the delay damages is entitled to priority over National Fire with respect to any of National Fire's claims related to the performance bonds. 52 However, Fortune's claim for delay damage set-off is not entitled to priority over National Fire's valid payment bond claims. A performing payment bond surety stands in the shoes of the laborers and materialmen who might have had liens on the property. That right is generally superior to the rights of either the principal or the obligee. To the extent of the payment bond claims actually and properly paid, National Fire's right to any unpaid contract balances is superior to Fortune's liquidated delay damages claim. 19 We express no opinion about whether National Fire may be responsible for delay damages related to Fortune's breach of contract claims on the performance bonds.
53 The district court granted National Fire partial summary judgment on Fortune's counterclaim for set-off of the amount of back wages Fortune paid due to violations of the Davis-Bacon Act by one of Arkin's subcontractors on the West Brickell Project. The Davis-Bacon Act requires laborers on federally funded projects to be paid not less than the prevailing wages in the locale. See 40 U.S.C. § 276a(a); Walsh v. Schlecht, 429 U.S. 401, 411, 97 S.Ct. 679, 686, 50 L.Ed.2d 641 (1977). The Act requires that every contract based upon these specifications shall contain a stipulation that the contractor or his subcontractor shall pay all mechanics and laborers the federally mandated wages. 40 U.S.C. § 276a(a) (emphasis added). Federal regulations applicable to contracts and subcontracts under the Davis-Bacon Act provide, The prime contractor shall be responsible for the compliance by any subcontractor or lower tier subcontractor.... 29 C.F.R. § 5.5(a)(6) (1999). 54 We conclude that the Davis-Bacon wages paid by Fortune are part of Fortune's reasonable cost of completion of construction. 20 The Davis-Bacon wage claims paid by Fortune represent wages of laborers on the West Brickell project that should have properly been paid as part of the costs of construction. Because of Arkin's failure to properly supervise Allied's compliance with the Davis-Bacon Act, as Arkin was required to do under the West Brickell Subcontract, federal funds payable to Fortune, as general contractor, for the West Brickell project sufficient to pay Allied's employees could have been withheld. 40 U.S.C. § 276a-2(a). If the remaining federal funds were insufficient to repay the employees, the Davis-Bacon Act gave Allied's employees the right to file a lien on the West Brickell property for the difference. 40 U.S.C. § 276a-2(b); Fla. Stat. § 713.03. We reverse the district court's grant of partial summary judgment to National Fire on this issue and hold that Fortune has a right to set off its $71,126.00 Davis-Bacon Act claim against the remaining contract balances as part of Fortune's reasonable costs of completion. 21
55 Fortune also claims the Fortune-Arkin letter agreement gives Fortune a right to payment from National Fire for the electrical overages Fortune paid on the West Brickell project. However, the West Brickell performance bond cannot be construed to cover an agreement that was not identified in the West Brickell Subcontract. 22 The West Brickell performance bond specifically incorporated the West Brickell Subcontract by reference. The list of Contract Documents identified in the West Brickell Subcontract, which sets forth the documents that are part of the bonded subcontract, does not include the letter agreement. The subcontract made no other reference to the letter agreement, even though the parties made several other handwritten alterations to the subcontract. Merger and integration provisions in both the Contract Documents section and in Article 17 of the subcontract provide that the referenced documents are the entire and complete agreement of the parties. Since the bond was issued on the subcontract without reference to the letter agreement, the letter agreement is not within the scope of contract work that National Fire agreed to insure when it issued the bond. Further, the district court properly rejected Fortune's offer of parol evidence that the letter agreement was part of the subcontract because Fortune produced no evidence that National Fire knew of the letter agreement at the time it issued the bond. Therefore, Fortune has no right to payment for electrical overages from National Fire and the district court properly granted summary judgment in favor of National Fire on this issue.