Court Opinion

ID: 6349
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:15:56+00
Date Added: 2024-06-11T16:46:09.158938
License: Public Domain

United States Court of Appeals,

                                 Fifth Circuit.

                                  No. 93-7171.

L & A CONTRACTING COMPANY, Plaintiff-Counter Defendant-Appellee,

                                        v.

  SOUTHERN CONCRETE SERVICES, INC., Defendant-Counter Claimant-
Appellant,

                                        and

     Fidelity & Deposit Company of Maryland, Defendant-Appellant.

                                 March 25, 1994.

Appeal from the United States District Court for the Southern
District of Mississippi.

Before WISDOM, HIGGINBOTHAM, and JONES, Circuit Judges.

       WISDOM, Circuit Judge:

       This case turns on the legal distinction between "breach" and

"default".

       A primary contractor sued its bonded subcontractor and the

bonding agent for damages arising from the subcontractor's breach

of the subcontract.      The district court held the subcontractor and

surety liable to the contractor. On this appeal, the subcontractor

and surety challenge the district court's judgment.            We AFFIRM the

district court's judgment against the subcontractor. We VACATE the

judgment against the surety and RENDER judgment in the surety's

favor.

                                  I. BACKGROUND

       L & A Construction Company ("L & A"), the general contractor

on    a   project   to   build     a   bridge   in   Apalachicola,   Florida,

                                         1
subcontracted   with   Southern   Concrete   Services   ("Southern")   to

provide concrete for the project.         Southern, as required by the

subcontract, obtained a performance bond from Fidelity & Deposit

Company of Maryland ("F & D").     Southern began supplying concrete

to L & A in early 1987.

     We need not chronicle the ensuing deterioration in business

relations between L & A and Southern.      It suffices for this opinion

to say that Southern failed to provide sufficient concrete to L &

A in a timely manner and breached the subcontract in numerous other

particulars.    L & A repeatedly complained to Southern about its

slow delivery rates and the poor quality of the concrete Southern

supplied.   On May 29, 1987, L & A sent Southern a letter stating

that Southern had breached the contract and giving Southern five

days to cure the deficiencies in its performance.         L & A sent a

copy of the letter to F & D.       Southern's performance apparently

improved after the May 29 letter.       In response to a routine inquiry

from F & D on August 3, 1987, L & A stated that Southern was

performing satisfactorily.

     Southern's improved performance did not last long, and L & A

soon resumed its periodic complaints.        On January 12, 1988, L & A

sent another letter to Southern and F & D in which it requested

"that the Bonding Company take the necessary steps to fulfill this

contract to prevent any further delays and costs to L & A".        F & D

did not respond to the letter and took no action.              Southern

completed its obligations under the subcontract on May 27, 1988.

At no time did L & A refuse to accept Southern's performance.

                                    2
     L & A sued Southern and F & D for breach of contract in

Mississippi     state    court   on     August   19,   1988.    The   defendants

promptly removed the case to the United States District Court for

the Southern District of Mississippi on the basis of diversity of

citizenship.1      Southern counterclaimed against L & A alleging

various breaches of the subcontract.

     The district court conducted a six-day bench trial beginning

on August 17, 1992.          On September 22, 1992, the district court,

applying Florida law,2 held that both Southern and L & A had

breached the subcontract. The district court, after offsetting the

award from Southern's counterclaim, held that L & A was entitled to

recover   damages       of   $642,269    plus    postjudgment   interest   from

Southern and F & D.3          After the district court overruled their

     1
      Southern averred in its petition for removal that it was a
Michigan corporation having its principal place of business in
Michigan, F & D was a Maryland corporation, and L & A was a
Mississippi corporation. The amount in controversy indisputably
exceeded the statutory minimum of 28 U.S.C. § 1332(a).
     2
      The parties agree on appeal that the district court
correctly chose to apply Florida law. See Restatement (Second)
of Conflict of Laws §§ 188, 194 (1971); Boardman v. United
Servs. Auto. Ass'n, 470 So.2d 1024, 1032-34 (Miss.1985).
     3
      The district court appears to have miscalculated the damage
award. In its judgment of September 22, 1992, the district court
itemizes its damage award:

           Base damages                       $349,152
           Prejudgment interest                178,269
           Attorneys' fees                     115,048

     The sum of those figures is $642,469, or $200 more than the
$642,269 the district court awarded. Because neither party
called the discrepancy to our attention, however, we consider any
argument over that $200 difference waived.

     Although the district court's judgment does not so state, it

                                          3
posttrial motions, the defendants appealed to this Court.                         L & A

cross-appealed      from      the     district       court's    judgment   but    later

dismissed its cross-appeal.                Only the defendants' appeals remain

for us to decide.

           This case turns on the language of the subcontract and

Southern's performance and payment bond.                      "A bond is a contract,

and,       therefore,    a   bond     is     subject     to    the   general   law    of

contracts".4            We   review     de        novo   questions    involving      the

construction or interpretation of contracts.5

                                             II.

A. F & D's Liability Under its Bond

       We turn first to F & D's appeal.                       As a surety, F & D's

liability is governed by the terms of its bond with L & A.                        While

Southern is, of course, directly liable for its own breach of

contract, the bond in this case imposes liability on F & D for

Southern's breach only if two conditions exist.                      First, Southern

must have been in default of its performance obligations under the

subcontract.       Second, L & A must have declared Southern to be in

default.6       The main focus of our inquiry is on the declaration

appears from the record that Southern and F & D's liability to L
& A was intended to be joint and several.
       4
      American Home Assurance Co. v. Larkin Gen. Hosp., Ltd., 593
So.2d 195, 197 (Fla.1992).
       5
      Gladney v. Paul Revere Life Ins. Co., 895 F.2d 238, 241
(5th Cir.1990).
       6
      F & D's Subcontract Performance Bond provided that F & D
would become liable to take certain actions to remedy Southern's
breach "[w]henever Principal shall be, and shall be declared by
Obligee to be in default under the subcontract, the Obligee

                                              4
requirement, although we shall also briefly address the type of

default that is required.

         We first must consider whether the bond term "declared ... to

be   in    default"   is       ambiguous.7      While   the    construction     of

unambiguous contracts is a matter of law, resolving ambiguous

contracts     requires     a    fact-specific    inquiry      to   ascertain   the

parties' intent.      That inquiry is best performed by the district

court, and its factual determinations of the parties' intent will

be reversed on appeal only if clearly erroneous.8

         A contractual term is ambiguous if it is reasonably subject

to more than one meaning.9          Although the bond does not define the

terms "declare" or "default", we consider the term "declared in

default" unambiguous; the definition L & A offers is unreasonable.

The only authority L & A offers for its view is Webster's Ninth New

Collegiate Dictionary.           Webster's defines "declare" as "to make

clear;    to make known formally or explicitly;            to make evident;    to

having performed Obligee's obligations thereunder". Pl.'s Ex.
189; Appellant's Record Excerpts tab J. In this tripartite
suretyship arrangement, F & D was the "surety", Southern the
principal obligor or simply the "principal", and L & A the
"obligee". See In re Eli Witt Co., 2 B.R. 487, 491
(Bankr.M.D.Fla.1979); Restatement (Third) of Suretyship § 1
(Tent.Draft No. 1, 1992).
     7
      Whether a contract term is ambiguous is a question of law
which we are free to decide de novo. See Carrigan v. Exxon Co.
U.S.A., 877 F.2d 1237, 1240 (5th Cir.1989).
     8
      Godechaux v. Conveying Techniques, Inc., 846 F.2d 306, 314-
15 (5th Cir.1988).
     9
      See Friedman v. Virginia Metal Prods. Corp., 56 So.2d 515,
517 (Fla.1952); Fireman's Fund Ins. Co. v. Murchison, 937 F.2d
204, 207 (5th Cir.1991).

                                         5
state     emphatically"   and   "default"   as   "to   fail   to   fulfill   a

contract, agreement, or duty".        Therefore, L & A concludes, any

communication that "[made] it clear that [Southern] failed to

fulfill a contract or duty" constituted a legal declaration of

default.

        Three factors counsel rejection of L & A's popular dictionary

authority.     First, L & A's proffered definition misapprehends the

legal nature of the "default" that is required before the obligee's

claim against the surety matures.        Although the terms "breach" and

"default" are sometimes used interchangeably,10 their meanings are

distinct in construction suretyship law.           Not every breach of a

construction contract constitutes a default sufficient to require

the surety to step in and remedy it.              To constitute a legal

default, there must be a (1) material breach or series of material

breaches (2) of such magnitude that the obligee is justified in

terminating the contract.11        Usually the principal is unable to

     10
      See, e.g., Black's Law Dictionary 417 (6th ed. 1990),
including "the omission or failure to perform a legal or
contractual duty" among the definitions of "default".
     11
          We draw this meaning from the words of a commentator:

             Not every breach of a construction contract, not even
             every material breach, constitutes a default under the
             contract as to justify termination and the involvement
             of a surety, if there is one. A default which would
             involve the surety is believed to require a material
             breach or series of breaches which are sufficient to
             justify termination of the contract by the
             owner/obligee.

     James A. Knox, Representing the Private Owner, in
     Construction Defaults: Rights, Duties, and Liabilities §
     9.3, at 201 (Robert F. Cushman & Charles A. Meeker eds.,
     1989). Accord Robert J. Hoffman & David L. Simmons, Suing

                                     6
complete the project, leaving termination of the contract the

obligee's only option.12      The definition of "default" implicit in

L   &   A's   dictionary   analogy   impermissibly   blurs   the   distinct

concepts of "breach" and "default".13

         Second, L & A's definition is impractical.      A definition of

a contract term that leads to impractical or commercially absurd

        the Subcontractor and Material Supplier, in Construction
        Litigation: Representing the Contractor § 8.9 (Robert F.
        Cushman, John D. Carter & Alan Silverman eds., 1986). Mr.
        Knox has pointed out that a clear definition of "default" is
        most necessary in several common construction problems,
        including one that precisely matches the circumstances of
        this case. His list of circumstances in which a clear
        meaning of "default" is most necessary includes:

              4. When the all-too-common confused situation develops
              where the obligee is claiming the principal has
              defaulted and the principal is claiming that the owner
              is in default.

              5. A variation of the preceding situation, when the
              situation is confused, the obligee claims default but
              does not terminate and yet demands action by the
              surety.

        James A. Knox, What Constitutes a Default Sufficient to
        Justify Termination of the Contract: The Surety's
        Perspective, Constr.Law., Summer 1981, at 1.
        12
      See, e.g., Cotton States Mut. Ins. Co. v. Citizens and S.
Nat'l Bank, 308 S.E.2d 199, 203 (Ga.Ct.App.1983), explaining that
"default in the relevant sense occurs only when the principal
finds itself unable to pay and calls upon the surety to pay in
accordance with the terms of the bond" (emphasis added).
        13
      Our holding that a material breach of the subcontract is
required before L & A may seek relief from F & D does not deprive
L & A of a remedy for partial breaches of the subcontract. The
subcontract itself prudently provides that L & A may withhold
payments from Southern to compensate for partial breaches. See
Pl.'s Ex. P-22, Appellants' Record Excerpts, tab I, sec. 3. L &
A urges that the bond makes F & D an insurer even for those
partial breaches, but we are unable to square that contention
with the bond's requirement of a default.

                                      7
results is unreasonable.14        Serious legal consequences attend a

"declaration of default", particularly in cases such as this case

involving multi-million-dollar construction projects.               Before a

declaration of default, sureties face possible tort liability for

meddling in the affairs of their principals.15          After a declaration

of default, the relationship changes dramatically, and the surety

owes immediate duties to the obligee.16 Given the consequences that

follow a declaration of default, it is vital that the declaration

be made in terms sufficiently clear, direct, and unequivocal to

inform    the   surety   that   the   principal   has   defaulted    on   its

obligations and the surety must immediately commence performing

under the terms of its bond.      Sureties deprived of a clear rule for

notices of default would be reluctant to enter into otherwise

profitable contracts.       Nothing in the record suggests that the

parties intended such an impractical result.

     Finally, L & A's definition does not promote the purpose for

which the parties probably included a notice of default provision

     14
      See Lakeland Tool & Eng'g, Inc. v. Thermo-Serv, Inc., 916
F.2d 476, 481 (8th Cir.1990); G.M. Shupe, Inc. v. United States,
5 Cl.Ct. 662, 704 (Cl.Ct.1984).
     15
      See, e.g., Gerstner Elec., Inc. v. American Ins. Co., 520
F.2d 790 (8th Cir.1975); Cox v. Process Eng'g, Inc., 472 S.W.2d
585, 587 (Tex.Civ.App.—Amarillo 1971, no writ); Restatement
(Second) of Torts §§ 766, 766A (1979). "Prior to default, a
surety does not have a unilateral right to intervene in a
contract dispute between an owner and a principal unless the
indemnity agreement between the surety and principal provides
otherwise". Robert F. Cushman, et al., Representing the
Performance Bond Surety, in Construction Defaults, supra note 11,
§ 5.2, at 106.
     16
      Zoby v. United States, 364 F.2d 216, 219 (4th Cir.1966);
In re Wilson, 9 B.R. 723, 725 (Bankr.E.D.N.Y.1981).

                                      8
in F & D's bond.        That purpose was to avoid the common-law rule

that a secondary obligor such as F & D is not entitled to notice

when the time for its performance is due.17              That purpose is not

served if L & A can fulfill its duty to provide "notice of default"

to F & D by sending letters containing no mention of a default.

     We conclude, therefore, that F & D's is the only reasonable

view.     A declaration of default sufficient to invoke the surety's

obligations under the bond must be made in clear, direct, and

unequivocal language.      The declaration must inform the surety that

the principal has committed a material breach or series of material

breaches     of   the   subcontract,       that   the   obligee   regards   the

subcontract as terminated, and that the surety must immediately

commence performing under the terms of its bond.

     Under this standard, L & A's evidence is insufficient as a

matter of law to establish a declaration of default.              None of the

letters L & A sent to Southern and F & D even contained the word

"default", nor do we find an unequivocal declaration of default in

the other items of correspondence L & A's brief calls to our

attention.18      Accordingly, we must VACATE the district court's

     17
          See Restatement of Security § 136 & cmt. a (1941).
     18
      After inviting us to write Webster's Ninth New Collegiate
Dictionary into Florida law, L & A provides a list of ten letters
it sent to Southern, each of which it characterizes as a
"declaration of default" under its definition even though only
two of the letters were sent to F & D. Appellee's Principal
Brief at 14-15. The sizeable volume of correspondence that fits
L & A's definition of "declaration of default" underscores the
overbreadth of the definition. A declaration of default is an
act of legal significance marking a fundamental change in
relations among the parties to a suretyship contract. The burden
is on the party initiating that fundamental change to express it

                                       9
judgment against F & D for Southern's breach, because L & A has

failed to prove a necessary precondition to F & D's liability under

its bond.19

B. F & D's Liability for Delay Damages

      F & D next challenges the district court's judgment holding

it liable for delay damages.          We need not linger long on this

question because it is directly controlled by the Florida Supreme

Court's opinion in American Home Assurance Co. v. Larkin General

Hospital, Ltd.20 The Larkin Court held that "the surety's liability

plainly and unequivocally. Letters from general contractors
attempting to prod subcontractors into improved performance are
inevitably abundant in large construction projects but are not
generally thought to constitute declarations of default. See
Knox, Representing the Private Owner, supra note 11, § 9.2, at
200. It is not asking too much of obligees to require that when
they wish to give up on a principal and look to the surety for
satisfaction, rather than merely to urge the principal to what
they hope will be better performance, they must say so to the
surety in clear, unequivocal terms. See, e.g., id. § 9.7, at
217-18.
     19
      Part IV.C of the district court's opinion dealt with what
the district court characterized as F & D's breach of its own
surety bond. On this appeal, L & A seizes on that language to
argue that F & D's actions exposed it to liability for its own
breach of contract notwithstanding Southern's conduct. Obviously
L & A intends this argument to bring it within the protection of
some favorable language in footnote 2 of the Florida Supreme
Court's Larkin opinion, which we address below. We reject L &
A's argument. L & A's failure to declare Southern in default
excuses F & D's failure to remedy Southern's breach. F & D did
not breach the terms of its bond and accordingly has no liability
under the bond.

          Because we conclude that L & A failed to declare
     Southern in default, we need not resolve the question
     whether the first requirement of the bond—that Southern
     actually be in default—was met here.
     20
          593 So.2d 195 (Fla.1992).

                                      10
for damages is limited by the terms of the bond".21    The bond here

contained no provision imposing liability on F & D for delay

damages, and the district court may not imply such a provision. 22

Therefore, the district court erred in holding F & D liable for

delay damages.          We are not persuaded by L & A's attempts to

distinguish away the clear command of Larkin.23      Accordingly, we

VACATE the award of delay damages against F & D.

C. F & D's Liability for Attorney Fees

      Because F & D is not liable under the terms of its bond, it

is not liable for consequential damages, such as attorney fees,

flowing from Southern's breach of its contract.      Accordingly, to

     21
          Id. at 198.
     22
      "[T]he liability of a surety should not be extended by
implication beyond the terms of the contract, i.e., the
performance bond". Id.
     23
      L & A first contends that the bond in Larkin contained
different language from F & D's bond. Even if that is true—and F
& D contends that it is not—it is irrelevant. Larkin did not
turn on the language of the particular bond before the Court in
that case, but rather stated what was obviously intended to be a
general proposition of law. Second, L & A contends that F & D's
bond was ambiguous. We conclude that the bond was not ambiguous,
but even if it were, that is irrelevant to this issue. Larkin
plainly states that the express terms of the bond provide the
sole measure of F & D's obligation. If F & D's liability for
delay damages is not "expressed in the bond ", id. at 198
(emphasis added, internal quotation omitted), F & D has no such
liability. Finally, L & A relies on footnote 2 of Larkin for the
proposition that Larkin does not apply to cases involving a
surety's liability for its own breach of its bond. That is what
Larkin says, but this is not that case. L & A plainly seeks
recovery from F & D for Southern's breach of the subcontract.
That is precisely the circumstance Larkin covers.

          The district court similarly distinguished Larkin on
     grounds irrelevant to the holding of that case, but our
     discussion of L & A's objections to Larkin should dispose of
     the district court's reasoning as well.

                                    11
the extent the district court held F & D liable for attorney fees,

we VACATE the award.

                               III.

A. Southern's Liability for Delay Damages

      We turn now to Southern's appeal.     Southern challenges its

liability for delay damages, arguing that L & A failed to prove

that Southern's delay resulted in the project as a whole becoming

overdue.     Southern   contends    that,   under   Florida   law,   a

subcontractor may not be held liable for delay damages unless the

general contractor was late in completing the construction project.

The cases Southern cites do not support that proposition, however.24

     24
      Fred Howland, Inc. v. Gore, 152 Fla. 781, 13 So.2d 303
(Fla.1942), held simply that an owner cannot be awarded
liquidated damages under a clause providing for damages in the
event of a 30-day delay in completion of the project unless the
owner proves that the condition precedent occurred; in other
words, proves that the project was delayed for thirty days.
Southern cites no similar clause in its contract with L & A.

          Lynch v. Florida Mining & Materials Corp., 384 So.2d
     325 (Fla.App.1980), primarily involved damages for
     defective, not delayed, performance. Lynch did not hold
     that a general contractor's timely completion of the project
     absolves the subcontractor from liability for delay damages.

          In Tuttle/White Constr., Inc. v. Montgomery Elevator
     Co., 385 So.2d 98 (Fla.App.1980), the subcontractor sued the
     general contractor for payment under the subcontract, and
     the general contractor counterclaimed for late performance.
     The court held that the general contractor could offset
     against its liability the damages the subcontractor caused
     it by not timely performing. The court did not hold,
     however, that a delay in the completion of the overall
     project was a condition precedent to the subcontractor's
     liability for delayed performance.

          Finally, Haney v. United States, 676 F.2d 584
     (Ct.Cl.1982) involved a dispute between the owner and the
     general contractor. Obviously, a general contractor is not
     liable to the owner for delay damages unless it has untimely

                                   12
In this case, Southern was held liable for its own delay in

completing     its       obligation   to     L    &   A.      Southern's    untimely

performance imposed unanticipated costs on L & A, and L & A is

entitled to recover those costs regardless of whether it timely

completed     its    own     obligation      to    the     Florida   Department     of

Transportation.25

B. Southern's Liability for Attorney Fees

      Southern challenges the district court's attorney fee award

of $115,048, or half the $230,095 L & A requested.                    We review an

award of attorney fees for abuse of discretion.26                    Southern cites

no authority in its one-page argument on the attorney fee question,

however,     and    we    consider    the    challenge       abandoned     for   being

inadequately briefed.27

                                          IV.

     In conclusion, we VACATE the district court's judgment and

award of damages against F & D in its entirety and RENDER judgment

for F & D.    We AFFIRM the award against Southern for $642,269 plus

postjudgment interest as the district court calculated.

     performed its obligation to the owner. Haney does not
     imply, however, that timely performance by the general
     contractor absolves the subcontractor from liability for
     untimely performing its own obligations.
     25
      See District Concrete Co. v. Bernstein Concrete Corp., 418
A.2d 1030, 1038 (D.C.1980).
     26
      Palmco Corp. v. American Airlines, Inc., 983 F.2d 681, 688
(5th Cir.1993).
     27
      See Dardar v. Lafourche Realty Co., Inc., 985 F.2d 824,
831 (5th Cir.1993); Fed.R.App.P. 28(a)(5).

                                            13