Can a Principal Sue its Own Surety?

Does Florida law allow a payment and performance bond principal to maintain a cause of action against its surety?

The scenario where this typically comes up is in an indemnity action (where, at least in Florida, “it is well settled that the only defense to indemnity is bad faith on the part of the surety.” Great American Ins. Co. v. General Contractors & Const. Mgmt., Inc., 2008 WL 2245986 (S.D. Fla. 2008)).

The form of most claims by the principal against the surety are counterclaims. The typical counterclaims are:

  • Tortious Interference with Contract
  • Breach of Indemnity Agreement
  • Breach of Performance Bond
  • Breach of Duty of Good Faith
  • Bad Faith
  • Declaratory Judgment

These claims are generally an attempt to conflate suretyship with insurance. As we’ve covered in our previous discussion, a Florida surety is not an insurer. Indeed, the United States Supreme Court recognized over 50 years ago that “the usual view, grounded in commercial practice, [is] that suretyship is not insurance.” Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n. 19 (1962).

The fact that sureties are not insurers knocks out most of these claims. “Bad faith” and “breach of duty of good faith” arise in the context of the defendant having a “special relationship” or “fiduciary duty” to the plaintiff. Sureties have no such duty — especially to their principal. Indeed, the surety’s obligations run only to the obligee, not to the principal. Florida courts have recognized the bond is issued for the benefit of the obligee, not the principal. Shannon R. Ginn Construction Co. v. Reliance Insurance Co., 51 F. Supp. 2d 1347 (S.D. Fla. 1999). Unlike insurance, which is enforceable by the insured, “the surety bond runs solely to the benefit of the obligee.” Chicago Dist. Council of Carpenters Health & Welfare Fund v. Alan Scott Co., 597 F.2d 1103, 1104 (7th Cir. 1979) (citing 74 Am.Jur.2d Suretyship, s 205).

Indemnity agreements similarly do not contain any promises flowing from the surety to the indemnitors. Instead, by their very nature, indemnity contract promises flow one way: From the indemnitors to the surety. Because of this one way street, indemnitors do not have any valid claim for “breach of indemnity agreement” against the surety. Since the surety does not make any promises to the indemnitors (or the principal), then no action for breach of contract arises. As the legendary contract law scholar Arthur Corbin recognized: “Breach of contract is always the non-performance of some duty created by a promise.” Corbin on Contracts § 30.13. Without any duty flowing from the surety to the principal, no right of action for breach of any contract (indemnity agreement, performance or payment bond) arises for the principal against its own surety.

As for the other claims (tortious interference with contract and declaratory judgment), a party cannot tortiously interfere with its own contract. And an action for declaratory judgment does not serve a useful purpose, and is therefore subject to dismissal, when resolution of the surety’s claim, along with the defenses asserted by the indemnitors, would resolve all questions raised by the counterclaim.

Conclusion: A Principal Does Not Have Any Valid Claims Against its Surety.

Although a principal (and the indemnitors) do not have any viable claims against the surety, such counterclaims will undoubtedly continue to be raised, especially by counsel unfamiliar with the nuances of construction law. The surety’s best strategy is to move early on to dismiss such counterclaims. Such motions should consider educating the Court about the difference between suretyship and insurance.

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