Imagine a situation where the property owner finds significant problems with its contractor’s work and decides to fire the contractor.  The property owner promptly informs the surety seeking a replacement contractor to finish the project.  The surety investigates the situation and decides to hire the terminated contractor to finish the project.  Sounds a bit odd, and certainly disappointing to the owner, but this can happen and did happen in a recent case out of Florida.

In Seawatch at Marthon v. GCNA, the property owner hired Complete Aluminum General Contractors to renovate some condominiums.  Seawatch was not satisfied with the quality of the work Complete Aluminum was performing and terminated the contractor.  The surety and Seawatch then began negotiating a replacement contractor. The parties could not agree on a contractor, and the Surety exercised its rights under the bond to complete the project itself, through agents or independent contractors.  Surprising to Seawatch, the surety hired Aluminum General to complete the work.

Seawatch sued the surety, claiming that Seawatch did not agree to the replacement contractor and the surety breached its contract.  The court ruled in favor of the surety, finding that the surety had complete authority to identify a replacement contractor and did not need the owner’s consent to do so.

The court relied on the language in the bond, which provided that the Surety was required to promptly, at its own expense, exercise one of the following options:

4.1 Arrange for the Contractor, with consent of the Owner, to perform and complete the Contract; or

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner . . .

The surety successfully argued that it exercised its authority under section 4.2 and did not need Seawatch’s consent to complete the work.

Take Away: Do you know what your bonds allow the surety to do if you terminate the contractor? Could the surety hire the terminated contractor on your project?  Perhaps you should review your bonds.  As always, we recommend that you hire experienced construction attorneys to review your construction documents, including any bonds, before the project begins.