East 49th Street Development II, LLC v. Prestige Air & Design, LLC 2011 WL 4599708 (Supreme Court, Kings County NY, Oct 6, 2011) This case is of tremendous importance to claims professionals in surety companies, and their counsel defending performance bond claims in NY. It clearly sets out NY law requiring strict compliance with the conditions in para. 3 of the AIA 312 performance bond in order for an obligee to succeed in its claim. The court began by setting forth the general contract law rules related to the interpretation of rights under bonds: “In NY, a bond is a contract and a court therefore looks to standard principles of contract interpretation to determine the rights and obligations of a surety under a bond. Surety bonds, like all contracts, are to be fairly construed so as to effectuate the intent of the parties as it has been expressed in the terms of the bond. Where the terms are unambiguous, interpretation of the surety bond is a question of law …..Before a surety’s obligations under a bond can mature, the obligee must comply with any conditions precedent……A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises….Express conditions must be literally performed ….Substantial compliance with a condition precedent is insufficient.” Regarding the Performance Bond: “It has been specifically held that the conditions contained in paragraph 3 of the AIA 312 performance bond at issue in this action constitute conditions precedent that require strict compliance, and that the failure to strictly comply with these conditions precedent are fatal to an obligee’s claim under a performance bond ….. Thus where an owner has failed to comply with such conditions precedent, it may not maintain a claim under a performance bond.” To summarize the conditions in para 3 of the bond, which are well known to defenders of surety claims: In the event the principal defaults, a surety’s obligations under its performance bond will arise after: 3.1 – the owner has notified the contractor and surety that the owner is considering declaring a Contractor Default (as defined in the bond) and has requested and attempted to arrange a conference to discuss methods of performing the contract; 3.2 – the owner has declared a Contractor Default and formally terminated the contractor’s right to complete the contract; and 3.3 – the owner has agreed to pay the Balance of he Contract Price to the Surety. Suffice it to say that the facts could hardly have been better for the surety in this case, First Sealord Surety. Regarding 3.1, the owner sent a notice of termination to the contractor declaring a default without first giving First Sealord notice or the opportunity to explore alternate methods of completion. Also the owner terminated the contractor and did not give notice to First Sealord until after it had incurred its alleged costs. Regarding 3.2, the owner’s letter, which might be deemed to be notice of default, was not sent to the contractor more than 20 days after required notice of a meeting. Rather the owner declared a default and terminated the contractor without prior notice to the surety. Regarding 3.3, the owner admitted that it did not offer to pay the contract balance to First Sealord. The owner argued that there was no contract balance because of claims by subcontractors and damage to its building. The court held however that under the terms of the bond, the claims could not be deducted from the contract balance. The court also found that due to the manner in which First Sealord had handled the claim, that it was not estopped to assert the bond conditions, and that it had not waived any of its rights or defenses. Lastly, the court denied First Sealord’s motion to dismiss the owner’s claim on the payment bond on the grounds that the owner might be able to assert the rights of subcontractors it had paid through equitable subrogation.
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