Hicks & Warren LLC v. Liberty Mutual Insurance Co. 2011 WL 2436703 ( SDNY, June 16, 2011) In this case, Hicks & Warren (“HW”) contracted with a joint venture (“Stegla”) for construction of a residential complex in Brooklyn. The contract required performance and payment bonds on behalf of Stegla which were issued by Liberty Mutual (“Liberty”) . HW terminated Stegla for default and filed a claim with Liberty that it honor its obligations under its performance bond. Liberty denied the claim. HW and Stegla’s dispute was referred to arbitration as required by their contract, and HW was awarded completion costs of $2.8 million. H&W was also awarded attorneys fees and costs of $4.2 million per the Para. 29 in the contract which stated: “In any arbitration brought under this Article, the prevailing party shall be entitled to an award of its costs and reasonable attorney’s fees.” The award was confirmed in state court which, after including statutory interest, rendered judgment in favor of HW for $8.2 million. Liberty denied liability for the arbitration award, and HW commenced this action against Liberty in federal court. Liberty moved for summary judgment for a declaration that it was not liable for HW’s attorney’s fees, which motion was denied. Fee-Shifting Provisions Parties always want to know if they will be able to recover their attorneys fees if they win in a dispute – and it falls to their attorneys to inform them that they will ordinarily not under the “American Rule.” ‘The court stated this rule as follows: …. attorneys’ fees are ‘incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule.’ ‘Notably, when interpreting fee-shifting provisions, New York courts are ‘distinctly inhospitable.’ Under the exacting ‘unmistakable intention’ standard established by the NY Court of Appeals, the court should award attorneys’ fees to the prevailing party under a contractual fee-shifting provision only where the intention to do so is ‘unmistakably clear from the language of the promise.’ Arbitration by Surety Another question that frequently comes up is whether a surety is obligated to participate in the arbitration that was agreed in the bonded contract; and if not, what is the effect of the arbitration on the surety. The court dealt with this issue stating: ‘ …arbitration provisions binding obligee and principal to arbitrate disputes arising on the underlying contract do not generally bind the surety to arbitrate on the performance bond, …. Nonetheless, …… for purposes of later determining its liability under its performance bond, [the surety] would accept and be bound by the resolution reached in the arbitration forum of any dispute between the [obligee] and [principal].’ Paragraph 1 of the Performance Bond Per Para. 1 of the bond, Stegla and Liberty were jointly and severally bound to HW for the “performance of the Construction Contract,” which is “incorporated [t]herein by reference; and per the contract, arbitration was required for disputes arising from the Contract between HW and Stegla. As a result the court held that bond unambiguously incorporated the contract by reference, and that the contract “unmistakably” provided costs and reasonable attorney’s fees to the prevailing party in the arbitration. Thus, Liberty’s liability was coextensive with Stegla’s under the contract, including liability for the attorneys fees awarded to HW. Paragraph 6 of the Performance Bond Per Para 6 of the bond, Liberty was “obligated ‘without duplication’ for ‘[6.1] completion of the Construction Contract’ and ‘[6.2] additional legal ….costs’.” Liberty, as sureties often do, contended that “completion’ of the contract ‘only involves completion of the actual construction project covered by the Contract, and not other obligations arising under the contract such as’ the fee-shifting provision. To this the Court stated: “However, on its face, the Bond does not limit, and, in fact, expressly extends Liberty’s liability to include the terms of “all Contract Documents.” “Because Stegla’s completion of the Contract includes indemnifying HW for attorneys’ fees and costs arising from the arbitration, Liberty, as Stegna’s surety, appears to be responsible for that liability. I therefore cannot conclude that Liberty’s liability for ‘completion’ of the Contract is limited to completion of the construction project, a narrow reading that would relieve Liberty of liability for HW’s attorneys fees ….” Note: The result in this decision is consistent with prior cases on the subject of a surety’s liability for damages other than the direct cost of completion of the underlying construction project. Also, from my reading of the 2010 revision of the AIA A312 performance bond, it appears that the outcome in this case would be the same under the new bond form.