L & A Contracting Co. v. Southern Concrete Services, Inc.

• Decision Date: 25 March 1994
• Docket Number: No. 93-7171,93-7171
• Citation: 17 F.3d 106
• Parties: 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.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 106

17 F.3d 106

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.

No. 93-7171.

United States Court of Appeals Fifth Circuit.

March 25, 1994.

Rehearing and Suggestion for Rehearing En Banc

Denied May 2, 1994.

James F. Crowder, Jr., Edward Etcheverry, Kimbrell & Hamann, Miami, FL, John L. Low, IV, Watkins & Eager, Jackson, MS, for Fidelity & Deposit Co.

Thomas W. Prewitt, Jackson, MS, for Southern Concrete Services, Inc.

Luther S. Ott, James Ulam, Ott, Purdy & Scott, Jackson, MS, for appellee.

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.

L & A Construction Company ("L & A"), the general contractor on a project to build a bridge in Apalachicola, Florida, 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.

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 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 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 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 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 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 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 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 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 for damages is limited by the...