Internat’l Fidelity Insurance Co., et al., v. Americaribe-Moriarity JV

Black’s Law Dictionary (online, 2d ed.) defines “indemnity” as “a collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person.” Commonly, drafters of indemnity provisions assume the proposed indemnity applies only to third party claims; i.e., the indemnitor agrees to effectively insure the indemnitee for a third party’s claims of damage, loss, or personal injury (and the fees and costs defending against same), arising from or caused by the acts or omissions of the indemnitor. This “third party” assumption is often reflected by the appearance of separate prevailing party attorneys’ fees provisions that purport to award attorneys’ fees as between the parties when a dispute concerning enforcement of the underlying contract arises. But in Florida, such assumptions could lead to subsequent malpractice claims.

In International Fidelity Insurance Co., et al. v. Americaribe-Moriarity JV, 2017 WL 668898 (U.S.D.C. S.D. Fla. Feb. 14, 2017), the U.S. District Court for the Southern District of Florida held that a subcontractor’s surety (International Fidelity Insurance Co. or “Fidelity”) was permitted to seek its legal fees and costs in the successful prosecution of a declaratory relief action against general contractor Americaribe-Moriarity JV (“Americaribe”). In the underlying action, Fidelity alleged that Americaribe both failed to satisfy conditions precedent to assert claims against Fidelity’s performance bond and also materially breached the bond by contracting with a second subcontractor to complete work commenced by Fidelity’s principal, Certified Pool Mechanics 1, Inc. (“CPM1”). After a magistrate court denied Americaribe’s motion for summary judgment and ruled in favor of Fidelity, the latter moved to tax costs and fees based on the indemnity provision of the subcontract between Americaribe and CPM1, as well as a reimbursement provision within the bond, itself. Internat’l Fidelity, 2017 WL 668898, at 4-5.

Because both the indemnity and reimbursement provisions were written to benefit Americaribe and the development’s owner, respectively, Fidelity was forced to argue that its surety relationship with CPM1 allowed it to claim the benefits of CPM1’s subcontract with Americaribe and that Florida Statutes section 57.105(7) made bilateral any unilateral contractual fee provision. Specifically, section 57.105(7) states the following:
 
“If a contract contains a provision allowing attorney’s fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney’s fees to the other party when that party prevails in any action, whether as plaintiff or defendant, with respect to the contract.” Id. at 4 (Court’s emphasis).
 
Fidelity eventually prevailed with these arguments, but not before Americaribe made three main arguments that the magistrate and district courts ultimately rejected.

First, Americaribe argued that Fidelity was not a party to the subcontract and could not rely on (i) the subcontract’s indemnity provision for attorneys’ fees or (ii) section 57.105(7) of the Florida Statutes to make the indemnity bilateral. Id. at 5. The magistrate court quickly distinguished Americaribe’s legal authorities (Snedeker v. Lighthouse Realty Grp., Inc., 773 So.2d 109, 110 (Fla. 5th DCA 2000); Florida Cmty. Bank, N.A. v. Red Rd. Residential, LLC, 197 So.3d 1112, 1115 (Fla. 3rd DCA 2016)) by noting that while these cases may have dealt with a non-contracting party’s ineligibility to claim contractual attorneys’ fees or the benefit of Section 57.105(7), they did not address the fact that a surety “steps into the shoes of the obligee to the extent of performance or payment.” Id. at 5 (citing Am. Home Assur. Co. v. Larkin Gen. Hosp., Ltd., 593 So.2d 195, 198 (Fla. 1992); Transamerica Ins. Co. v. Barnett Bank of Marion Cty., N.A., 540 So.2d 113, 116 (Fla. 1989); Gencor Indus., Inc. v. Fireman’s Fund Ins. Co., 988 So.2d 1206, 1210 (Fla. 5th DCA 2008)). In other words, Fidelity was permitted to claim both the benefits of its principal’s subcontract agreement with Americaribe and the benefits of Section 57.105(7), thereby making the indemnity clause bilateral in favor of Fidelity.

Americaribe’s second argument – and one plied across much of this country – was that indemnity provisions are written for purposes of third party claims only. Id. at 6. The magistrate court, however, begged to differ. Citing two state appellate court rulings (Merchants Bonding Co. (Mut.) v. City of Melbourne, 832 So.2d 184, 185 (Fla. 5th DCA 2002); Ajax Paving Indus., Inc. v. Hardaway Co., 824 So.2d 1026, 1029 (Fla. 2nd DCA 2002)) and another from the U.S. District Court for the Middle District of Florida (ADF Int’l, Inc. v. Baker Mellon Stuart Const., Inc., 2001 WL 34402607, at 1 (M.D. Fla. Apr. 6, 2001)), the court noted that the assumed third party limitation on basic indemnity provisions was a fiction. Id. at 6. Highlighting this fact was Americaribe’s own legal authorities, which the court distinguished on the basis that the indemnity provisions at issue expressly limited liability for injuries to persons or property; i.e., the usual claims of third parties. Id. Nowhere in Americaribe’s indemnity provision was there a limitation to personal or property injury, nor was there a limitation that indemnity (and the accompanying attorneys’ fees) extended only to third party claims. Thus, the lesson is presented – if a party wants to limit the scope of an indemnity provision, it must do so in the contract’s text.

Finally, Americaribe presented what it believed to be dispositive legal authority that expressly established that “a surety is not entitled to the benefit of a contractual fee provision between a principal and obligee.” Id. (citing McCarthy Bros. Co. v. Tilbury Const., Inc., 849 So.2d 7 (Fla. 1st DCA 2003)). And, in fact, the First DCA in McCarthy Bros. did so hold and also held that parties not in privity could not benefit from Section 57-105 of the Florida Statutes. See McCarthy Bros., supra, at 10-11. The magistrate court, however, distinguished McCarthy Bros. by noting that the First DCA relied principally upon sections 627.428 and 627.756 of the Florida Statutes as a reason why its surety was not entitled to contractual attorneys’ fees. Internat’l Fidelity, 2017 WL 668898, at 6.

The logic the First DCA employed in McCarthy Bros. amounted to the following: “why would a general contractor include a surety within an attorneys’ fees provision between general contractor and subcontractor, when Sections 627.428 and 627.756 of the Florida Statutes establish a unilateral basis by which the general contractor may seek attorneys’ fees in an action to enforce the surety’s bond?” See McCarthy Bros., supra, at 11. The magistrate court ignored this logic and instead stated in omnibus fashion that the First DCA had failed to analyze the legalities of the surety relationship. Internat’l Fidelity, 2017 WL 668898, at 6. As such, according to the magistrate court, Americaribe had relied on dicta and an unpersuasive, one line legal conclusion that parties not in privity could not benefit from Section 57-105’s reciprocity for attorneys’ fees. Id.

To support its ruling, the magistrate court cited to Federal Ins. Co. v. Exel of Orlando, Inc., 685 So.2d 896, 898 (Fla. 5th DCA 1996) and Gibbs Const. Co. v. S.L. Page Corp., 755 So.2d 787, 790 (Fla. 2nd DCA 2000) for the proposition that sureties were entitled to the recovery of attorneys’ fees when their principals’ contracts included a prevailing party attorneys’ fees provision. Id. at 7. Yet, these cases present some troubling issues as well. Exel of Orlando used exactly two sentences and no legal citations to hold that a surety was entitled to attorneys’ fees via the construction contract of its principal. Exel of Orlando, supra, at 898. Further undermining the court’s reliance on Exel of Orlando, the right to attorneys’ fees was not at issue, and a concurring opinion openly questioned on what basis the surety was entitled to attorneys’ fees. Id. In Gibbs Const., it is expressly noted that the appellant school board chose not to contest its obligation to pay attorneys’ fees to a general contractor and its surety, related to the Board’s unsuccessful prosecution of a lawsuit against both parties; thus, the issue was never really analyzed by the Second DCA. Gibbs Const. Co., supra, at 790.

The magistrate court cited to other questionable legal authorities as well. Those include Ajax Paving Indus., Inc., and Merchants Bonding Co., which the court used to justify the extension of indemnity to first party claims. Internat’l Fidelity, 2017 WL 668898, at 6. In fact, the former case involved a third party claim and the indemnitor’s obligation to indemnify the indemnitee (Merchants Bonding Co., 832 So.2d at 1027), and in the latter case, the appellee abandoned the issue of the surety/principal relationship for purposes of contesting an award of attorneys’ fees to the surety (Merchants Bonding Co., 832 So.2d at 185-86).

On the other hand, the magistrate court is on firmer ground with its citation to ADF Int’l, Inc. v. Baker Mellon Stuart Const., Inc., which was decided in the Middle District. Thus, one must question whether Internat’l Fidelity will withstand further scrutiny in Florida’s state courts. Additionally, sureties must recognize that courts do not favor a legal result that results in a shield/sword scenario. The surety’s victory in Internat’l Fidelity could prove pyrrhic, as opposing contractors are sure to assert their right to fees from sureties pursuant to not only sections 627.428 and 627.756 of the Florida Statutes, but also from the very construction contracts attributable to each surety’s principal.