Question: Sureties issued a performance bond to
the Public Owner in connection with Contractor's contract. The Sureties claim
the Public Owner made an improper post-termination payment to Contractor to the
detriment of their rights as potential subrogees. The sureties neither
performed the contract themselves nor financed the project's completion. Is the Sureties claim proper?
Answer: Not at
this time.
The Sureties issued a performance bond in connection with
a public improvement project. The Contractor has alleged the Public Owner is in
material breach of the contract seeks to withdraw from the same. The Public Owner has declared the Contractor
in default and asserts that the Sureties have breached their obligations under
the performance bond. The Contractor contests the Public Owner's claims of
default. The Sureties assert that the Public Owner improperly made a
post-termination payment to Contractor to the detriment of the Sureties' rights
as potential subrogees.
In the Bond, the Sureties agreed,
if requested to do so by the [Public Owner], to
fully perform and complete the Project to be performed under the Contract,
pursuant to the terms, conditions and covenants thereof, if for any cause the
Contractor fails or neglects to so fully perform and complete such Project….
[and] to commence the work of completion within twenty (20) days after written
notice thereof from the [Public Owner] and to complete such Project within such
time as the [Public Owner] may fix.
At the conclusion of the 20-day period, the Sureties
notified the Public Owner that they have been unable to conclude that
Contractor is, in fact, in material breach of the subject Contract such that it
could properly be terminated for default under the terms and conditions of that
Contract. Therefore, the Sureties have been unable to conclude that the
conditions triggering any obligation under the Bond have been met.
The Sureties further contend that the Public Owner made a
post termination payment to the Contractor and in doing so the Public Owner
failed to mitigate its damages, to the ultimate detriment of the Sureties. The Sureties never notified the Public Owner
that it should not make further payments to Contractor or that doing so would
impair their interests.
The Sureties assert that the Public Owner's
post-termination payment to Contractor was improper, notwithstanding that the
payment was approved before Contractor's termination. They argue that any
balance the Public Owner owes Contractor under the Contract serves as the
Sureties' collateral in the event that they are required to pay or otherwise
perform under the Bond. According to the Sureties, if the Public Owner is
correct that Contractor materially breached the Contract, then payment was an
overpayment that impaired their interests in the unpaid balance of the contract
price. The Sureties further contend that, in the event that Contractor is found
liable and they are compelled to fulfill their obligations under the Bond, they
are entitled to a damages offset under the doctrine of equitable subrogation.
Subrogation is the right one party has against a third
party following payment, in whole or in part, of a legal obligation that ought
to have been met by the third party. The doctrine of equitable subrogation
allows insurers to "stand in the shoes" of their insured to seek
indemnification by pursuing any claims that the insured may have had against
third parties legally responsible for the loss. In short, one party known as
the subrogee is substituted for and succeeds to the rights of another party,
known as the subrogor. The doctrine of subrogation, which is based upon
principles of equity, has a dual objective as stated by New York courts: It
seeks, first, to prevent the insured from recovering twice for one harm, as it
might if it could recover from both the insurer and from a third person who
caused the harm, and second, to require the party who has caused the damage to
reimburse the insurer for the payment the insurer has made.
Generally in a public improvement contract, the contractor
is required to find a surety that will secure the performance of his contract.
Upon default by the contractor, the surety, pursuant to a performance bond,
completes the contract, at its own cost and expense. It then becomes equitably
subrogated to the rights of the contractor and certain of the rights of the
owner in the unpaid balance of the contract price.
Here, it is undisputed that the Sureties have neither
undertaken performance of the Contract themselves nor financed the project's
completion. The Sureties' lack of performance to date precludes them from
asserting an equitable subrogation claim at this time for any improper payments
that the Public Owner purportedly made to Contractor.
Thomas S. Tripodianos is a partner at the law firm of Welby, Brady & Greenblatt, LLP. Welby, Brady & Greenblatt, LLP emphasizes the practice of Construction Law, representing general contractors, subcontractors, sureties, developers, owners, suppliers, engineers, homeowners and other entities connected with the construction industry in transactions, litigation, arbitration, mediation, public and private construction contracts, mechanics liens, surety law, labor and employment, real estate, and environmental law. Welby, Brady & Greenblatt, LLP has its principal office in White Plains, New York, and also has offices in Manhattan, New Jersey and Connecticut. Mr. Tripodianos resides in Orange County.
If you would like more information regarding this topic please contact Thomas S. Tripodianos at TTripodianos@wbgllp.com, or call him at 914-607-6440.
Please understand that this column provides general information only, and should not be construed as legal advice to anyone under any circumstances. The author reserves the right to modify any questions submitted so as to broaden their appeal. While we encourage you to contact us, you should not disclose to us any information that you consider confidential unless and until we have formally established an attorney-client relationship, and agreed to represent you in your particular matter. The opinions expressed in this column are of the individual author, and not necessarily those of the Hudson Valley Builders and Remodeler’s Association. Citations to legal authority have been omitted.
Posts
