By: Richard E. Guttentag, Esq. and Alexander S. Beck, Esq., Stearns, Roberts & Guttentag, LLC

Prior to issuing payment or performance bonds, it is common for sureties to require contractors or subcontractors seeking bonding to execute a general indemnity agreement (“indemnity agreement”). In addition to the contractor entity executing the indemnity agreement, sureties generally require the contractor’s individual owners, and even their spouses to execute the agreement. The purpose of the indemnity agreement is, in part, to indemnify and hold the surety harmless, to minimize the surety’s losses, and to increase the surety’s rights to recover payments made under the bond. The indemnity agreement also provides the surety with a variety of rights prior to making payments under the bond. One such right is to require the contractor to deposit collateral security in an amount sufficient to discharge a loss or anticipated loss. The case of Developers Surety and Indemnity Co. v. Hansel Innovations, Inc., 2014 WL 2968138 (Fla. M.D. 2014) dealt with a subcontractor’s obligations, including the obligation to post collateral, under an indemnity agreement.

In Developers Surety and Indemnity Co., the Subcontractor entered into a subcontract with the contractor to design, furnish, and install a fire suppression system for a project in Tampa, Florida (the “Project”). As a prerequisite to issuing a performance bond to the Subcontractor, the Subcontractor and its officers (collectively “Subcontractor”) were required to execute an indemnity agreement in favor of the Surety.

The Subcontractor experienced financial difficulties on the Project, resulting in the contractor making a demand on the Performance Bond. The Surety agreed to provide financial assistance to the Subcontractor, conditioned on the Subcontractor executing a Financing and Collateral Agreement (the Financing Agreement). In reliance on the Indemnity Agreement and Financing Agreement, the Surety paid the Subcontractor and its vendors $128,718.10 for the completion of the Subcontractor’s work. Despite the financial assistance, issues persisted. The Surety incurred additional expenses to retain another contractor to complete the Subcontractor’s work on the Project, but work still remained that could only be completed by the Subcontractor (without the Surety having to incur significant costs).

The Surety demanded, under the indemnity agreement, that the Subcontractor deposit with the Surety $200,000.00 collateral security to be held in reserve to cover the Surety’s liability and losses incurred and to be incurred under the performance bond. The Subcontractor did not comply with the Surety’s demand. Consequently, the Surety sued the Subcontractor for breach of the Indemnity Agreement, among other claims, and sought a preliminary injunction compelling the Subcontractor to post collateral security and prohibit all transfers and encumbrances of their assets until they did so.

In order to seek entry of a preliminary injunction, the Surety must first establish that there was a substantial likelihood that it would succeed on its claim for breach of the Indemnity Agreement. The court held that it was substantially likely that the Surety would succeed on this claim because the Indemnity Agreement clearly provided that the Subcontractor was obligated to indemnify and hold the surety harmless from and against all liability, claims and damages. The Indemnity Agreement also provided that if the Surety established a reserve account to cover any liability asserted under any bond, the Subcontractor shall upon demand deposit with the Surety a sum of money equal to such reserve, and if the Subcontractor failed to do so, the Surety may seek a mandatory injunction compelling the deposit of such collateral. In this case, it was undisputed that the Surety demanded the collateral security from Subcontractor, and the Subcontractor failed to do so. Thus, the Court held that the Surety was substantially likely to succeed on its claim for breach of the Indemnity Agreement.

Second, the Surety must establish that there was a substantial threat that it would incur an irreparable injury if the injunction was not granted. The court explained that the injury in collateral security provision cases is the lack of collateralization while claims are pending, which cannot be adequately remedied by a later monetary award. Here, the Surety bargained for the right to demand the Subcontractor to deposit collateral security to provide security against losses covered by the bond. The Subcontractor failed to honor that demand. Therefore, the court held that the Surety would suffer irreparable harm if the Subcontractor was not compelled to deposit the security.

Third, the court held that the threatened harm to the Surety outweighed any damage the proposed injunction may cause the Subcontractor, given that such injunction would only require the Subcontractor to satisfy their contractual obligation of posting monies which would be held in a reserve pending final resolution of the disputes.

Finally, the Surety must show that the preliminary injunction would not be adverse to the public interest. The Court held that the injunction would not be adverse to the public, as the public has an interest in the continued solvency of sureties and in seeing that contractual agreements are upheld.

Accordingly, the Court granted the Surety’s motion for a preliminary injunction compelling the Subcontractor to post collateral security with the Surety, and prohibiting any transfers and encumbrances on the Subcontractor’s assets until such collateral was posted.

This case demonstrates how sureties enforce indemnity agreements signed by contractors, their officers and other individuals, and the rights sureties have under the indemnity agreements in order to minimize their losses, and increase their rights to recover payments made and/or to be made under the bonds. It is important for contractors to carefully review the indemnity agreements prior to signing them to ensure that the financial obligations and potential liabilities therein are understood.

About the Authors: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].

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