Federal Insurance Co. v. Turner Construction Co. 2011 WL 1214582 (SDNY March 29, 2011) Federal Insurance issued a performance bond on behalf of Pile Foundation Construction Co., a subcontractor to Turner on a project for the NYC Economic Development Corp. (EDC – a non-profit corporation that acts as a development consultant for NYC). Pile and Turner were in the midst of disputes when it came to the EDC’s attention that there were bureaucratic problems with getting Pile paid with City funds. As a result, the parties, without Federal’s knowledge or consent, entered into a Memorandum of Understanding (MOU) in which Pile agreed that it would keep on working even though it would not get paid until the bureaucratic problem was resolved. Pile did not keep on working and was defaulted by Turner. Turner then demanded that Federal complete the project. Federal filed suit for a declaration that it had no obligation to Turner under its performance bond. Federal argued that the MOU materially changed the bonded contract such that it is released from liability under the Performance Bond. The applicable law in  NY stated in the decision, which held in favor of Federal, was as follows: “The surety bond is construed in conjunction with the underlying contract, which, in this case, was incorporated by reference into the bond. ‘The interpretation of a contract of suretyship is governed by the standards which govern the interpretation of contracts in general. [C]ontracts of sureties are to be construed like other contracts so as to give effect to the intention of the parties. In ascertaining the intention, we are to read the language used by the parties in light of the circumstances surrounding the execution of the instrument.” In interpreting the surety contract, the court must bear in mind that a “compensated, corporate surety… is not a favorite of the law and its contract of suretyship will be construed in a manner most favorable to [the] claimant. Nevertheless, after “the meaning of the language used has been thus ascertained, the responsibility of the surety is not to be extended or enlarged by implication or construction and is strictissimi juris.” “Under general contract rules, an obligation may not be altered without the consent of the party who assumed the obligation. Suretyship is a contractual relation and thus the rule is stated that the creditor and the principal debtor may not alter the surety’s undertaking to cover a different obligation with the surety’s undertaking to cover a different obligation without the surety’s consent. If they do so the surety is discharged because the parties have substituted a new contract, to which it never agreed, for the original.” “Under construction contracts specifically making allowances for alteration during the progress of the work, changes not fairly within the contemplation of the parties at the time the original contract was made, constituting a material departure from the original undertaking, will therefore release a non-consenting surety from obligations under its bond.” “If a principal and an obligee modify a bonded contract, and the surety consents thereto, the law has no objection to any such modification, and the surety will not be discharged from its obligations under the bond.”  However, “[a] surety cannot rest supinely, close his eyes, and fail to seek important information, and then seek to avoid liability under the guaranty by claiming he was not supplied with such information.” “If a principal and an obligee modify a bonded contract, and the surety consents thereto, the law has no objection to any such modification, and the surety will not be discharged from its obligations under the bond.”  However, “[a] surety cannot rest supinely, close his eyes, and fail to seek important information, and then seek to avoid liability under the guaranty by claiming he was not supplied with such information.” Under the facts of this case, the court found that Federal was not liable under its bond due to the material modifications of the subcontract as affected by the MOU. The found further that Federal did not become aware of the MOU until after it had been eneterd into by Pile, therefore Federal as a matter of law had not consented to the modification. One last thought: Performance bonds usually contain a provision in which the surety waives its right to object to any changes to the bonded contract. And such provisions are commonly held not to waive material alterations as in this case. Such a provision was not mentioned in this decision. Had it been, it would have been interesting to see if the court’s decision would have been the same.