Owners need to understand the benefit of a performance bond before deciding they do not want to reimburse the contractor for the premium associated with the bond. The performance bond is designed to guarantee the contractor’s faithful performance of the contract. There are numerous ways the bond can come into play. If the contractor goes bankrupt during construction, the owner can assert a claim against the bond. If the contractor gets terminated for default, the owner can assert a claim against the bond. And, if there are construction defects, particularly latent defects, the owner can assert a claim against the bond. Naturally, a benefit of the performance bond is that the contract is presumably guaranteed by a solvent surety (insurance company), which is important based on the value of the contract and/or perceived solvency of the hired contractor.
Importantly, performance bonds have a five year statute of limitations irrespective of the ten year statute of repose period in Florida. See Federal Ins. Co. v. Southwest Retirement Center, Inc., 707 So.2d 1119 (Fla. 1998). The Florida Supreme Court in Southwest Retirement Center held that the statute of limitations on a performance bond in a case involving latent defects accrues (begins to run) “on the date of acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” Id. at 1121. Thus, the statute of limitations begins to run on this date and expires five years thereafter—no matter when the defect was discovered.
A factual issue can arise based on parties’ differing interpretations as to the meaning of “acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” The opinion in GBMC, LLC v. Proset Systems, Inc., 2013 WL 1629162 (N.D.Fla. 2013), illustrates this factual issue. In this case, the performance bond surety moved for summary judgment arguing that the statute of limitations began to accrue on the date of substantial completion. To support this position, the surety pointed to the construction contract that maintained that the statute of limitations accrues no later than the date of substantial completion. (Notably, this is common language in construction contracts, particularly the AIA Document A201 which appears to be the general conditions of the contract executed by the parties.) The Northern District of Florida, however, did not buy this argument because it is illegal under Florida law for parties to contractually shorten the statute of limitations. See Fla. Stat. s. 95.03. In other words, if substantial completion occurred before the “acceptance of the project has having been completed according to the terms and conditions set out in the contract,” then the parties were illegally agreeing to shorten the limitations period. Because there were material facts in dispute as to when the contract was accepted as completed, the surety’s motion for summary judgment was denied.
Owners that plan on asserting a claim against a performance bond for latent defects need to understand when the statute of limitations accrues for purposes of their claim. Based on the project’s completion, the owner will want to create a factual issue as to when it accepted as completed the contract since this date is arguably later than the substantial completion date and, thus, the certificate of occupancy date. This language is a benefit to the owner asserting a latent defect claim on the cusp of five years from the date it started using the project for its intended purpose, particularly if the owner did not release retainage until well after occupancy. Contractors (indemnifying their surety) and sureties need to recognize this so they can start framing a statute of limitations defense based on facts supporting when the contract was accepted as completed by the owner. The contractor should do this by tracking the temporary and/or final certificate of occupancy dates and when final payment was made to argue that the owner accepted the project when it started occupying the project for its intended purpose. A contractor or surety will need to persuasively make this argument if the certificate of occupancy was issued more than five years from the lawsuit but the owner’s final payment to the contractor for retainage was within five years from the lawsuit. The reason being is that language “accepted as completed” allows the owner to argue that they never accepted the project as completed by virtue of not issuing the final payment until an extended period after the certificate of occupancy.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.