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Fidelity and Surety Law Alert
July 2014
* This Fidelity and Surety Law Alert should not be construed as legal advice or a ...
* This Fidelity and Surety Law Alert should not be construed as legal advice or a legal opinion on any specific facts or
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New York’s Appellate Division Affirms Trial Court’s Ruling that Failure to Comply with A312 Performance Bond Requirements Precludes Recovery By Obligee – Even Though Alleged Defective Work Was Discovered After Project Completion

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New York’s Appellate Division Affirms Trial Court’s Ruling that Failure to Comply with A312 Performance Bond Requirements Precludes Recovery By Obligee – Even Though Alleged Defective Work Was Discovered After Project Completion

  1. 1. Fidelity and Surety Law Alert July 2014 * This Fidelity and Surety Law Alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your specific situation or any legal questions you may have. www.wolffsamson.com ■ WOLFF & SAMSON PC One Boland Drive West Orange, NJ 07052 (973) 325-1500 140 Broadway, 46th Floor New York, NY 10005 (212) 973-0572 128 West State Street, Suite 3 Trenton, NJ 08608 (609) 396-6645 ATTORNEY ADVERTISING* New York’s Appellate Division Affirms Trial Court’s Ruling that Failure to Comply with A312 Performance Bond Requirements Precludes Recovery By Obligee – Even Though Alleged Defective Work Was Discovered After Project Completion In a previous Alert we reported that the New York Supreme Court in Nassau County had ruled in our surety-client’s favor, rejecting a project owner’s attempt to circumvent the requirements set forth in the most commonly used performance bond – the AIA Document A312. The owner appealed from that decision and, on behalf of the surety, we argued the appeal on December 10, 2013. On July 2, 2014, the Appellate Division, Second Department issued its decision affirming the lower court’s ruling (Archstone v. Tocci Building Corporation of New Jersey, Inc., Liberty Mutual, et al., _N.Y.S.2d_, 2014 WL 2958176 (N.Y.A.D. 2 Dept.)) The action involved a residential housing development on Long Island. More than a year after construction was completed by the bonded general contractor, and all of the residential units were occupied, the owner discovered widespread water intrusion in all 20 buildings. The project owner decided that it was necessary to evacuate all of the tenants and to remove the exterior building materials from each building. It was alleged that the remediation and reconstruction costs alone exceeded $40,000,000 (the penal sum of the bond). All in all, the project owner sought to recover total damages from the general contractor and its surety of more than $60,000,000. Although the owner had complied with none of the conditions precedent set forth in paragraph 3 of the bond, it argued that substantial compliance was sufficient. After all, said the owner, the surety had sent three representatives to an “informational meeting” near the site, had retained an engineering consultant, and had hired legal counsel. The project owner also argued that the conditions precedent in the bond should apply only to projects where the surety is asked to complete the physical construction work, and not to completed projects such as this, where satisfying the bond’s express requirements would be “futile” according to the owner. In our Respondent’s Brief and during oral argument before the Appellate Division, we cited several New York appellate court decisions that make it clear that strict compliance with the bond’s conditions precedent is required, whether or not there is unfinished construction work for the surety to complete. We also argued that the owner’s irrefutable failure to strictly comply with the conditions precedent was a material breach of the owner’s contractual duties to the surety, and that there is no authority for the proposition that the surety must show that it was prejudiced by the project owner’s failure to comply with the terms of the bond. In full agreement with the arguments we made on the surety’s behalf, the Appellate Division wrote: “Contrary to the [owner’s] contention, paragraph 3 of the subject AIA A312 performance bond contains express conditions precedent to the liability of the surety under the bond. Since the [owner] failed to
  2. 2. * This Fidelity and Surety Law Alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your specific situation or any legal questions you may have. www.wolffsamson.com ■ strictly comply with the conditions of the bond, the Supreme Court properly granted [the surety’s] motion for summary judgment dismissing all causes of action in the second amended complaint insofar as asserted against it”. Darryl Weissman of Wolff & Samson argued the appeal in the Appellate Division on behalf of the surety. He was assisted by Marc Lepelstat. For more information, please contact your Wolff & Samson PC attorney or the authors listed below. Armen Shahinian | Chair, Fidelity and Surety Group | ashahinian@wolffsamson.com | (973) 530-2002 Darryl Weissman | Member of the Firm | dweissman@wolffsamson.com | (973) 530-2023 Marc R. Lepelstat | Counsel | mlepelstat@wolffsamson.com | (973) 530-2087

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