Interpreting Surety Bonds

In East 49th St. Dev. LLC v. Prestige Air and Design, the Kings County Supreme Court (Demarest, J.) noted that under New York law, a surety bond is to be interpreted as any other contract and the court should, therefore, look to principles of standard contract interpretation in determining the rights and obligations of the parties under the bond.  The Court also noted that "before a surety's obligations under a bond can mature, the obligee must comply with any conditions precedent" and that "express conditions [of the bond] must be literally performed."

In regards to an AIA A312 performance bond, the Court notes that the conditions set forth in paragraph 3 thereof are conditions precedent that require strict compliance and that failure to comply with those conditions is fatal to an obligee's claim under the performance bond.  While the plaintiffs in this case argued that they "substantially complied" with the terms of the performance bond, the Court noted that literal compliance was required and having failed to precisely comply with the terms of the performance bond, the plaintiffs claims were barred.

The Court here also noted that the owner on the project did not have standing to make a claim under the payment bond since the payment bond was intended to cover claims made by those who had contracted with the principal and who had furnished labor or material to the project. Here, the owner attempted to argue that since it made payments directly to subcontractors, it could subrogate those claims and recover under the payment bond.  The court noted that subrogation does not lie where the payments were voluntary as they were here.  The owner had no legal duty to make payments directly to the subcontractors. However, because the subcontractors filed mechanic's liens, that the owner bonded, the Court found that the owner created questions of fact as to whether it was entitled to equitable subrogation against the payment bond due to the bonding of the mechanic's liens.

Vincent T. Pallaci is a partner in the New York construction law firm of Kushnick Pallaci, PLLC.  He can be reached at vtp@kushnicklaw.com or (631) 751-7100.