DENISE COTE, District Judge:
TABLE OF CONTENTS
BACKGROUND......................................................51
I. The DASNY-Trataros Contracts................................51
II. Delays on the Project.......................................53
PROCEDURAL HISTORY..............................................54
DISCUSSION......................................................55
I. Travelers' Claims Against DASNY.............................57
A. Trataros' Impact Claim...................................57
1. No-Damages-for-Delay Clauses Under New York Law.......57
2. The Applicability of Corinno Exceptions...............59
3. Waiver of No-Damages-for-Delay Clause.................66
B. Subcontractors' Pass-Through Claims......................69
1. Crocetti's Impact Claims..............................71
2. Jordan Panel's Extra Work Claim.......................73
3. Remaining Subcontractors' Impact Claims...............76
C. Travelers' Bond Losses Claim.............................79
II. DASNY's Counterclaims Against Travelers.....................80
A. DASNY's Breach-of-Contract Counterclaim..................80
B. DASNY's Performance Bond Counterclaim....................83
C. DASNY's Payment Bond Counterclaim........................85
1. Payment Bonds Under New York Law......................85
2. General Principles of Obligee Standing................87
3. Obligee Standing Under New York Law...................87
4. Application...........................................88
CONCLUSION......................................................91
On February 19, 2010, both parties filed motions for summary judgment. For the following reasons, Travelers' motion is granted in part, and DASNY's motion is granted in its entirety.
The instant litigation has already been the subject of numerous Opinions by this Court.
As Owner of the Project, DASNY entered into some thirteen prime contracts for carrying out the substance of the Project's construction work.
Trataros submitted its bid for Contract 15 on or about March 19, 1998. Trataros' bid of $50,222,000 was accepted on April 22 of that year, and Contract 15 was executed between DASNY and Trataros on or about April 27. The scope of work under Contract 15 included construction of the Project's windows, exterior curtainwall, exterior metal siding, elevators, rough carpentry, and ceilings.
Contract 16, in turn, included the interior fitout/curtainwall, roofing installation, flooring installation and finishing, swimming pool, acoustical spray, and miscellaneous metal work. Trataros' bid of $24,140,000 was accepted on August 27, 1998, and Contract 16 was executed between DASNY and Trataros on or about September 1.
Both Contracts incorporated by reference certain "General Conditions" governing the Project as a whole. Among many other things, the General Conditions contain: required representations, warranties, and guarantees by contractors; a "time-is-of-the-essence" provision; a clause reserving DASNY's right to suspend the performance of work; a definition of "Extra Work," and an exclusive process for determining additional compensation therefor; a dispute-resolution article; and several risk-allocation provisions, including a clause stipulating that contractors cannot seek "increased costs, charges, expenses or damages of any kind" against DASNY as a result of "any delays or hindrances from any cause whatsoever" relating to the Project (the "no-damages-for-delay clause").
As a condition of being awarded Contracts 15 and 16, Trataros was required to obtain certain surety bonds, including both labor and materials payment bonds (the "Payment Bonds") and performance bonds (the "Performance Bonds").
The issuing surety for both sets of bonds was Reliance Insurance Company ("Reliance"), and both sets of bonds named Trataros as principal and DASNY as obligee. Travelers and Reliance subsequently entered into an agreement, however, granting Travelers a power of attorney to act as administrator for the Project bonds, such that Travelers then became Trataros' surety under both the Performance and Payment Bonds.
The Project, which was designed and built on a "fast-track" basis, did not proceed on schedule. Contract 15 was originally to be completed by September 1, 2000, while Contract 16 was originally to be completed by November 1, 2000. On or about August 15, 1999, the Project's construction manager, TDX, provided Trataros with a new construction schedule including a "late finish" date of September 1, 2001 for Trataros' work under both Contracts. Trataros agreed to complete its work within this new time frame, provided that it did not "encounter future circumstances causing delays" or "some unforeseen calamity."
On or about April 6, 2001, DASNY executed Change Order No. GC2-064 ("Change Order GC2-64") to formalize an extension of time for Trataros' performance of the Contracts until the aforementioned "late finish" date.
In about July 2001, DASNY received a temporary certificate of occupancy ("TCO") for the above-ground floors of the
On or about June 19, 2002, Travelers, Trataros, and several Trataros-affiliated individuals entered into a financing agreement (the "Financing Agreement"). Pursuant to the Financing Agreement, Trataros agreed to deposit all payments it received from any project, whether bonded by Travelers or not, into a joint checking account opened and owned by Travelers in Trataros' name (the "Joint Account"). In turn, to the extent Trataros required additional funding in order to complete its bonded projects or to pay its subcontractors or suppliers, Travelers deposited funds into the Joint Account for Trataros' use. Nonetheless, at some point between mid-2002 and early 2003, Trataros largely or entirely ceased its business operations.
As a result of various delays, obstacles, and deficiencies—the responsibility for which is disputed among the parties— DASNY issued dozens of Change Orders to extend the time for work and provide extra compensation to various contractors and subcontractors. Nevertheless, in many respects, the Project participants could not reach agreement regarding who should bear the loss for certain additional costs that were incurred. Numerous subcontractors and suppliers made demands under Trataros' Payment Bonds,
On August 1, 2007, Travelers commenced this action by filing a complaint (the "Complaint") asserting, inter alia, four separately enumerated claims against DASNY.
On September 28, 2007, DASNY answered Travelers' four claims and interposed three counterclaims (the "Counterclaims") against Travelers in turn.
On or about February 19, 2010, Travelers and DASNY each filed motions for summary judgment. DASNY seeks dismissal of the second, third, and fourth claims asserted by Travelers, while Travelers seeks dismissal of all three Counterclaims. Travelers' motion became fully submitted on April 2, and DASNY's motion became fully submitted on April 9.
Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of demonstrating "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In making this determination, the court must "construe all evidence in the light most favorable to the nonmoving party, drawing all inferences and resolving all ambiguities in its favor." Dickerson v. Napolitano, 604 F.3d 732, 740 (2d Cir. 2010).
Once the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must "set out specific facts showing a genuine issue for trial," and cannot "rely merely on allegations or denials" contained in the pleadings. Fed.R.Civ.P. 56(e); see also Wright v. Goord, 554 F.3d 255, 266
Almost all of the claims and Counterclaims challenged in these two motions are essentially breach-of-contract claims whose adjudication depends, in part, on contract interpretation.
"[A] motion for summary judgment may be granted in a contract dispute only when the contractual language on which the moving party's case rests is found to be wholly unambiguous and to convey a definite meaning." Topps Co., Inc. v. Cadbury Stani S.A.I.C., 526 F.3d 63, 68 (2d Cir.2008). Thus, "[t]he initial question for the court on a motion for summary judgment with respect to a contract claim is whether the contract is unambiguous with respect to the question disputed by the parties." Cont'l Ins. Co. v. Atl. Cas. Ins. Co., 603 F.3d 169, 180 (2d Cir.2010) (citation omitted). "Whether the contract is unambiguous is a question of law for the court." Id. (citation omitted).
"In interpreting a contract under New York law, words and phrases should be given their plain meaning, and the contract should be construed so as to give full meaning and effect to all of its provisions." LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d 195, 206 (2d Cir.2005) (citation omitted). "[A] court should not adopt an interpretation which will operate to leave a provision of a contract without force and effect." Amaranth LLC v. J.P. Morgan Chase & Co., 71 A.D.3d 40, 888 N.Y.S.2d 489, 493 (1st Dep't 2009) (citation omitted). "Courts may not by construction add or excise terms, nor distort the meaning of those used and
The foregoing principles reflect the "general rule [that] `parties should be free to chart their own contractual course' unless public policy is offended." FCI Grp., Inc. v. City of N.Y., 54 A.D.3d 171, 862 N.Y.S.2d 352, 356 (1st Dep't 2008) (quoting Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629, 825 N.Y.S.2d 692, 859 N.E.2d 498 (2006)). "If the agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract to reflect its personal notions of fairness and equity." Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 468 (2d Cir.2010) (citation omitted).
Travelers' second claim, the Impact Claim, is "a claim against DASNY for impact damages on behalf of Travelers' bonded principal, Trataros." The Impact Claim seeks payment for "additional costs incurred by Trataros" while completing Contracts 15 and 16 and resulting from "delays, lost productivity, inefficiencies, acceleration, cost escalation, and additional work." These "additional costs" are alleged in the Complaint to have been caused by, inter alia, "numerous differing site conditions"; "factors beyond the control of Trataros"; "DASNY's failure to take appropriate action to prevent unreasonable impacts to the Project"; "DASNY's failure to provide adequate coordination of the Project"; "DASNY's failure to provide non-defective plans, drawings and specifications"; "DASNY's breach of the implied covenant of good faith and fair dealing implicit in [the] Contracts"; "DASNY's gross negligence in administering the Project"; and DASNY's "active interference with" and/or "obstruction of Trataros' ability to perform [the] Contracts." Travelers alleges that the foregoing impacts "were uncontemplated by Trataros at the time it bid on the Project" and "led to unreasonable and unforeseeable delays."
DASNY asserts that the Impact Claim is barred by the no-damages-for-delay clause included in the General Conditions, which in turn were incorporated by reference into Contracts 15 and 16.
(Emphasis added).
The no-damages-for-delay clause is a type of "exculpatory clause," and as such, it is "strictly construed against the party" that relies on it. Wolff & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d 1003, 1008 (2d Cir. 1991). Nonetheless, such a clause "is valid and enforceable and is not contrary to public policy if the clause and the contract of which it is a part satisfy the requirements for the validity of contracts generally.'" McNamee Constr. Corp. v. City of New Rochelle, 60 A.D.3d 918, 875 N.Y.S.2d 265, 266 (2d Dep't 2009) ("McNamee") (quoting Corinno Civetta Constr. Corp. v. City of N.Y., 67 N.Y.2d 297, 309, 502 N.Y.S.2d 681, 493 N.E.2d 905 (1986) ("Corinno")); accord U.S. ex rel. Evergreen Pipeline Constr. Co., Inc. v. Merritt Meridian Constr. Corp., 95 F.3d 153, 167 (2d Cir.1996) ("Evergreen"). The parties' inclusion of a no-damages-for-delay clause, which is "not uncommon in construction contracts," evidences the contracting parties' "`unmistakable intent' that, as between th[o]se parties, the contractor rather than the contractee is to absorb damages occasioned by contractee-caused delay." Kalisch-Jarcho, Inc. v. City of N.Y., 58 N.Y.2d 377, 384, 461 N.Y.S.2d 746, 448 N.E.2d 413 (1983) ("Kalisch-Jarcho").
The rule that no-damages-for-delay clauses are enforceable is "not without its exceptions, however, and even exculpatory language which purports to preclude damages for all delays resulting from any cause whatsoever are not read literally." Corinno, 67 N.Y.2d at 309, 502 N.Y.S.2d 681, 493 N.E.2d 905; see also Kalisch-Jarcho, 58 N.Y.2d at 384, 461 N.Y.S.2d 746, 448 N.E.2d 413. The New York Court of Appeals has enumerated four exceptions to the general rule that no-damages-for-delay clauses are to be enforced:
Corinno, 67 N.Y.2d at 309, 502 N.Y.S.2d 681, 493 N.E.2d 905; see also Commercial Elec. Contractors, Inc. v. Pavarini Constr. Co., Inc., 856 N.Y.S.2d 46, 47 (1st Dep't 2008) ("Pavarini") (paraphrasing the Corinno standard).
The defendant bears the "prima facie burden of establishing that the damages sought by the plaintiff are barred by the no-damage-for-delay exculpatory clause of the parties' contract." Maric
In proving that one of the Corinno exceptions applies, the plaintiff bears a "heavy burden." Dart Mech. Corp. v. City of N.Y., 68 A.D.3d 664, 891 N.Y.S.2d 76, 77 (1st Dep't 2009) ("Dart"); accord Evergreen, 95 F.3d at 167. For example, a plaintiff may not rely on evidence that a defendant's conduct was merely negligent or unreasonable. The exculpatory clause is "specifically designed to protect the contractee from claims for delay damages resulting from its failure of performance in ordinary, garden variety ways," and thus, "a broad no-damage-for-delay clause would be meaningless unless it encompassed within its scope a range of unreasonable as well as reasonable delays because any other application would permit the exception to swallow up the general rule." Corinno, 67 N.Y.2d at 312-13, 502 N.Y.S.2d 681, 493 N.E.2d 905; see also Evergreen, 95 F.3d at 167.
General Conditions § 11.02 is, like most no-damages-for-delay clauses, a broadly worded provision. It prevents recovery for "damages of any kind ... for any delays or hindrances from any cause whatsoever." Similarly worded clauses have been held to bar many kinds of damages, no matter how labeled or characterized by a plaintiff.
In seeking to avoid the no-damages-for-delay clause, Travelers relies principally upon the "uncontemplated delay" exception. Travelers also contends, in passing, that the "gross negligence" exception applies as well.
The second Corinno exception applies where "`the delays or their causes were not within the contemplation of the parties at the time they entered into the contract.'" McNamee, 875 N.Y.S.2d at 267 (quoting Corinno, 67 N.Y.2d at 309-10, 502 N.Y.S.2d 681, 493 N.E.2d 905). The exception is "based on the concept of mutual assent." Corinno, 67 N.Y.2d at 310, 502 N.Y.S.2d 681, 493 N.E.2d 905. "It can hardly be presumed ... that the contractor bargained away his right to bring a claim for damages resulting from delays which the parties did not contemplate at the time" of entering into the contract. Id. Therefore, "even broadly worded exculpatory clauses ... are generally held to encompass only those delays which are reasonably foreseeable, [which] arise from the contractor's work during performance, or which are mentioned in the contract." Id.; see also Blue Water, 843 N.Y.S.2d at 684 (delays must be "wholly unanticipated" to be actionable (citation omitted)); N. Star Contracting Corp. v. City of N.Y., 203 A.D.2d 214, 611 N.Y.S.2d 11, 12 (1st Dep't 1994) (same).
New York courts apply several general principles in determining whether a delay was "uncontemplated." These principles were summarized recently in Premier-New York, Inc. v. Travelers Prop. Cas. Co., a delay-damages case also arising out of this Project. Index No. 603043-2003, 20 Misc.3d 1115(A), 2008 WL 2676800 (Sup.Ct. N.Y. County July 8, 2008) ("Premier"). In Premier, Justice Fried explained, first, that "[i]t is not necessary that the contract specifically contemplate the exact occurrences giving rise to the delay; all that is required is that the class of occurrence have been contemplated." Id. at *13; see also Blau Mech. Corp. v. City of N.Y., 158 A.D.2d 373, 551 N.Y.S.2d 228, 230 (1st Dep't 1990) ("Blau"); Buckley & Co. v. City of N.Y., 121 A.D.2d 933, 505 N.Y.S.2d 140, 142 (1st Dep't 1986) ("Buckley"). Second, where a contract "discusses a potential cause (or class of causes) of delay, subsequent delays arising from that cause are considered to have been contemplated by the parties." Premier, 2008 WL 2676800, at *13; see Blau, 551 N.Y.S.2d at 229-30; Visconti Corp. v. LaBarge Bros. Co., Inc., 272 A.D.2d 948, 707 N.Y.S.2d 566, 567 (4th Dep't 2000) ("Visconti"). Third, "ordinary, garden variety" poor performance by the contractee is within the contemplation of the parties, Corinno, 67 N.Y.2d at 313, 502 N.Y.S.2d 681, 493 N.E.2d 905, and therefore conduct by a contractee "amount[ing] to nothing more than inept administration or poor planning" does not fall within the Corinno exceptions. Pavarini, 856 N.Y.S.2d at 47.
DASNY has shown that the damages Travelers seeks in the Impact Claim are barred by the no-damages-for-delay clause in the General Conditions, and that none of the Corinno exceptions applies. In attempting to create a triable issue of fact, Travelers relies on the following evidence and arguments. First, Travelers observes—relying on the parties' expert consensus that Trataros' work under the Contracts was substantially completed by about February 1, 2002, when a TCO was issued for the Project's three basement levels—that "Contract[s] 15 and 16 were respectively extended 17 months and 15 months longer than anticipated."
Travelers has failed to demonstrate a triable issue of fact. Several considerations compel this result. First, Travelers has failed, with perhaps a single exception discussed below,
(Emphasis added). In turn, if a contractor wishes to make an extra-work claim, the contractor must follow the process specified in General Conditions § 11.01(A). That Subsection provides that within "fifteen (15) working days after being ordered to perform the Work claimed by the Contractor to be Extra Work," the contractor must give written notice, including a cost estimate and a formal request for a determination by the Owner as to whether the claim involves extra work. Section 11.01(A) further mandates that "[t]he Contractor's failure to comply with any or all parts of [Article 11] shall be deemed to be: (1) a conclusive and binding determination... that said order, Work, action or omission does not involve Extra Work" and "(2) a waiver by the Contractor of all claims for additional compensation or damages as a result of said order, Work, action or omission."
Second, even where the Contracts did not explicitly discuss the delay-causing "factors" upon which Travelers may be relying, the sources of delay alluded to by Travelers in its briefing were nevertheless clearly within the contemplation of the parties at the time of contracting. Claims for damages based on "ordinary, garden variety" delays arising from an owner's negligent supervision, a fellow contractor's defective or delayed performance, an architect's slow review of shop drawings, and the like, are all routinely barred by a no-damages-for-delay clause.
Third, any consideration of what was reasonably within the contemplation of the parties at the time of contracting must take into account the commercial context. Trataros was the last of around a dozen prime contractors to join a complex construction project in the heart of a busy commercial neighborhood in this City, and it did so with full knowledge of the number of other participants involved. Having been supplied before bidding with all of the Contract Documents—documents which Trataros was required to review—Trataros was also well aware that the Project was architecturally "ambitious" (as Travelers alleged in the Complaint). The fact that design modifications, delays, or other difficulties could arise on such a project would not surprise a prudent bidder. Cf., e.g., McNamee, 875 N.Y.S.2d at 267 ("experienced excavator[] must have reasonably foreseen the possibility that a utility company would be unable or unwilling to move its underground lines"). By nonetheless submitting bids on those Contracts,
Indeed, New York courts treat with skepticism claims by sophisticated commercial actors that the terms for which they bargained should not be enforced, finding that such an outcome would undermine freedom of contract.
Century-Maxim Constr. Corp. v. One Bryant Park, LLC, Index No. 24683-2008, 23 Misc.3d 1120(A), 2009 WL 1218895, at *21 (Sup.Ct. Westchester County Apr. 7, 2009).
Finally, Travelers cannot achieve a triable claim based solely on its experts' conclusions that the delays were "unreasonable" or could not have been contemplated by Trataros at the time of contracting. "An expert's report is not a talisman against summary judgment." In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 512 (2d Cir.2010) (citation omitted). "Although the [expert] reports must be construed in the non-moving party's favor, if the admissible evidence is insufficient to permit a rational juror to find in favor of the plaintiff, the court remains free to ... grant summary judgment for defendant." Id. Having failed to tender other admissible evidence to raise a question of fact that the delays were uncontemplated by the parties, the opinions expressed in the CSF and Buric expert reports that the "[t]he numerous delays experienced by Trataros could not have been foreseen when Trataros entered into its Contract(s)" and that "the impacts were of a nature and duration that no contractor could have reasonably foreseen or discovered at the time the contracts were signed" are insufficient to raise any question of fact. Accordingly, Travelers has failed to present evidence to create a triable issue of fact as to the "uncontemplated delay" exception.
Travelers also appears to contend that the no-damages-for-delay clause may not be enforced because Trataros' damages were "caused by [DASNY's] bad faith or its willful, malicious, or grossly negligent conduct." Corinno, 67 N.Y.2d at 309, 502 N.Y.S.2d 681, 493 N.E.2d 905. "More pointedly, an exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing." Kalisch-Jarcho, 58 N.Y.2d at 385, 461 N.Y.S.2d 746, 448 N.E.2d 413; see also A.H.A. Gen. Constr., Inc. v. N.Y. City Hous. Auth., 92 N.Y.2d 20, 31, 677 N.Y.S.2d 9, 699 N.E.2d 368 (1998) ("A.H.A."). Conduct that "betokens a reckless indifference to the rights of others" constitutes "gross negligence" for the purposes of this exception. Kalisch-Jarcho, 58 N.Y.2d at 385, 461 N.Y.S.2d 746, 448 N.E.2d 413.
Travelers has failed to adduce evidence raising a triable issue of fact as to whether DASNY was grossly negligent. Travelers has tendered evidence indicative of, at worst, ordinary negligence. Delays arising out of "no more than ordinary negligence at most" are barred by a no-damages-for-delay clause. Obremski v. Image Bank, Inc., 30 A.D.3d 1141, 816 N.Y.S.2d 448, 450 (1st Dep't 2006); see also Teddy Giannopulos Gen. Contractors, Inc. v. N.Y. City Hous. Auth., 260 A.D.2d 253, 688 N.Y.S.2d 536, 537 (1st Dep't 1999).
Travelers asserts that, even if none of the Corinno exceptions applies, DASNY has nonetheless waived its right to enforce the no-damages-for-delay clause. "Contractual rights may be waived if they are knowingly, voluntarily and intentionally abandoned." Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104 (2006) ("Portfolio Advisors"). "[W]aiver of a contractual right `may be established by affirmative conduct or by failure to act so as to evince an intent not to claim a purported advantage ... and must be based on a clear manifestation of intent to relinquish a contractual protection.'" Natale v. Ernst, 63 A.D.3d 1406, 881 N.Y.S.2d 232, 233 (3d Dep't 2009) (quoting Portfolio Advisors, 7 N.Y.3d at 104, 817 N.Y.S.2d 606, 850 N.E.2d 653); accord Capitol Records, Inc. v. Naxos of Am., Inc., 372 F.3d 471, 482 (2d Cir.2004). "A waiver is not created by negligence, oversight, or thoughtlessness, and cannot be inferred from mere silence. Rather, there must be proof that there was a voluntary and intentional relinquishment of a known and otherwise enforceable right." Golfo v. Kycia Assocs., Inc., 45 A.D.3d 531, 845 N.Y.S.2d 122, 124 (2d Dep't 2007) (citation omitted). Moreover, for the parties' conduct to amount to a waiver, "it `must not otherwise be compatible with the agreement as written,'" and "`the conduct of the parties must evidence an indisputable mutual departure from the written agreement.'" Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 783 (2d Cir.2003) (quoting Rose v. Spa Realty Assocs., 42 N.Y.2d 338, 344, 346, 397 N.Y.S.2d 922, 366 N.E.2d 1279 (1977)). "[T]he existence of an intent to waive a contractual right generally presents a question of fact." Natale, 881 N.Y.S.2d at 233; accord Portfolio Advisors, 7 N.Y.3d at 104, 817 N.Y.S.2d 606, 850 N.E.2d 653. Because the effect of waiver is to "relinquish a contractual protection," however, "waiver should not be lightly presumed." Portfolio Advisors, 7 N.Y.3d at 104, 817 N.Y.S.2d 606, 850 N.E.2d 653 (citation omitted).
Travelers' waiver argument depends upon the following assertions. First, Travelers argues that "DASNY's conduct in executing and paying a number of change orders in payment of delay and impact costs served to waive the exculpatory clauses." Travelers contends that DASNY's payments to Trataros included "change orders [constituting] explicit settlements of delay claims asserted by a number of Trataros' subcontractors" as well as "change orders compensating Trataros for extra costs incurred as a result of Project delays." Travelers asserts that DASNY executed and paid at least twelve change orders constituting settlements of delay claims asserted by Trataros' subcontractors.
Travelers' waiver argument cannot succeed. Travelers overlooks that all but one of the twelve change orders upon which it relies include express reservations by DASNY of its contractual rights.
(Emphasis added).
Second, Trataros itself waived whatever rights it has to seek delay damages from DASNY with respect to the disputes for which DASNY has already executed a change order settlement. By signing each change order and accepting payment, Trataros explicitly agreed to "release and forever discharge [DASNY] from any and all actions, causes of action, claims and demands whatsoever ... in any way arising out of this change."
The worksheets prepared by DASNY also do not raise a triable question of waiver. Travelers relies on a certain line entry in each worksheet which reads, "DASNY assumed responsibility," followed by a particular percentage value. For example, on Change Order GC2-201, which settled a claim made by DAG Floors, Inc., the worksheet indicates that "DASNY [a]ssumed [r]esponsibility" for 66% of the delay. Nonetheless, DASNY's recognition, as a factual matter, that it played a role in causing delay is not equivalent to an admission of a legal obligation to compensate Trataros for those delays. Indeed, the very purpose of a no-damages-for-delay clause is to bar damages even where the factual cause of delay is, undisputedly, the owner. See, e.g., Evergreen, 95 F.3d at 167 ("Lest the exceptions swallow the rule, delay clauses proscribe damages for a broad range of both reasonable and unreasonable delays."). DASNY's internal worksheets simply do not indicate an intent on the part of Travelers to forgo its contractual rights, and the language of the change orders themselves shows the opposite.
The cases upon which Travelers relies do not compel a different result. Travelers relies heavily on Plato General Construction Corp./EMCO Tech Construction Corp., JV. LLC v. Dormitory Authority of the State of New York ("Plato"), a recent case in which the Brooklyn Supreme Court found that a triable question of fact existed regarding whether DASNY waived a no-damages-for-delay clause identical in its terms to the one at issue in this litigation.
Travelers' claim is also not salvaged by its reliance on Eldor Contracting Corp. v. County of Nassau, 6 A.D.3d 654, 775 N.Y.S.2d 556 (2d Dep't 2004) ("Eldor").
DASNY also seeks dismissal of the third count of the Complaint, the Pass-Through Claims, which Travelers characterizes as claims for "impact damages against DASNY on behalf of Trataros' subcontractors." Travelers identifies these subcontractors as LBL, Jordan Panel, Crocetti, and Brooklyn Welding. Travelers asserts that it has admitted contingent liability to the Subcontractors by concluding separate liquidating agreements with LBL, Jordan Panel, and Brooklyn Welding
The general rule under New York law is that even where an owner causes delay that injures a subcontractor, "[s]ubcontractors, lacking privity of contract, are precluded from bringing suit against the owners directly." Bovis Lend Lease LMB Inc. v. GCT Venture, Inc., 285 A.D.2d 68, 728 N.Y.S.2d 25, 27 (1st Dep't 2001) ("Bovis"). Furthermore, "absent a contractual commitment to the contrary, a prime contractor is not responsible for delays that its subcontractors may incur unless those delays are caused by some agency or circumstance under the prime contractor's direction or control." Triangle Sheet Metal Works, Inc. v. James H. Merritt & Co., 79 N.Y.2d 801, 802, 580 N.Y.S.2d 171, 588 N.E.2d 69 (1991) ("Triangle"); accord Thalle Constr. Co., Inc. v. Whiting-Turner Contracting Co., Inc., 39 F.3d 412, 418 (2d Cir.1994). Not only may the subcontractor not sue the general contractor directly, but the general contractor typically may not sue the owner on the subcontractor's behalf, because "[g]eneral contractors on a construction project which have sustained no injury may not bring suit on behalf of a subcontractor for additional costs caused by the owner's delays." Bovis, 728 N.Y.S.2d at 27; see also Barry, Bette & Led Duke Inc. v. State, 240 A.D.2d 54, 669 N.Y.S.2d 741, 743 (3d Dep't 1998) ("Barry"). Taken together, these principles would seem to leave a subcontractor who sustains damage from purely
New York law has, however, created a safety valve in the form of a "liquidating agreement," which is a contractual device specifically designed to overcome the aforementioned "legal impediments" to an injured party's recovery. Bovis, 728 N.Y.S.2d at 27. Liquidating agreements are written agreements by which an intermediary (for example, a general contractor) admits liability to an injured contractual counterparty (for example, a subcontractor) and then agrees to pursue a claim for damages on behalf of that injured counterparty against a different, responsible party with whom the intermediary is also in privity (for example, an owner).
To be valid, liquidating agreements must meet certain requirements. "Liquidating agreements [under New York law] have three basic elements: (1) the imposition of liability upon the general contractor for the subcontractor's increased costs, thereby providing the general contractor with a basis for legal action against the owner; (2) a liquidation of liability in the amount of the general contractor's recovery against the owner; and, (3) a provision that provides for the `pass-through' of that recovery to the subcontractor." Bovis, 728 N.Y.S.2d at 27; see also N. Moore St., 799 N.Y.S.2d at 489; Barry, 669 N.Y.S.2d at 743. A liquidating agreement must "satisf[y] all three elements," N. Moore St., 799 N.Y.S.2d at 489, and must represent "`an actual contractual commitment'" by the parties, although this commitment "`need not take any particular form.'" Helena Assocs., 2008 WL 2117621, at *9 (quoting Barry, 669 N.Y.S.2d at 743). Liquidating agreements "may be memorialized in the subcontract or in a separate written agreement and may be assembled from several documents executed over a period of years." N. Moore St., 799 N.Y.S.2d at 490 (citation omitted). Nevertheless, "only an express —as opposed to implied—contractual undertaking to pass through a claim recovery gives rise to a liquidating agreement." Id. "Absent a showing of actual contractual liability [running from the prime contractor
Carolina, as assignee of the legal claims of Crocetti,
In arguing that a liquidating agreement exists between Trataros and Crocetti, Travelers and Carolina both rely on three different passages contained in the Trataros-Crocetti Subcontract. None of these provisions constitutes an express admission of liability by Trataros to Crocetti. First, Paragraph 6(d) provides:
(Emphasis added). Second, Paragraph 7(b) provides:
(Emphasis added). Finally, Paragraph 9(a) provides:
(Emphasis added).
Travelers has not demonstrated that it has legal standing to assert claims on Crocetti's behalf. As noted, the critical element missing is an admission of liability by Trataros (or Travelers) to Crocetti. Although Paragraph 6(d) of the Subcontract does suggest a "pass-through" of any damages recovered from DASNY by Trataros to Crocetti, that clause does not "impose[] liability upon the general contractor for the subcontractor's increased costs." Barry, 669 N.Y.S.2d at 743. Instead, Paragraph 6(d) provides only that Crocetti "shall not be entitled to" any damages "unless the Owner is liable and pays Contractor."
Carolina argues, in opposition, that the Trataros-Crocetti "may not be artfully written," but that it nonetheless "provides that the Subcontractor is entitled to such impact damages as the Contractor may receive from the owner for the impact to Crocetti." That may be so, but a contractual entitlement to funds received by a counterparty from a third party is not the same as an acknowledgment of liability.
Carolina also argues that an implicit admission of liability should be sufficient, relying on Cayuga Construction Corp. v. United States, No. 91 Civ. 4883(JFK), 1992 WL 233888, at *3 (S.D.N.Y. Sept. 9, 1992) ("Cayuga"). To the extent Cayuga overlooked the requirement under New York law that an "express—as opposed to implied —contractual undertaking" is required to create a liquidating agreement, see N. Moore St., 799 N.Y.S.2d at 490, that decision is not persuasive authority. In any event, in Cayuga, the court was considering a motion to dismiss based on the statute of limitations. Cayuga, 1992 WL 233888, at *3. It therefore addressed whether an implicit admission of liability was sufficient to toll the statute, not whether a liquidating agreement sufficed to create legal standing in the general contractor.
In sum, Travelers lacks standing to assert impact claims on Crocetti's behalf, and this aspect of the Pass-Through Claims must be dismissed. Accordingly, the court need not consider the parties' other arguments concerning the legal merit of Crocetti's impact claims or of the possible legal defenses thereto.
Jordan Panel, through Travelers, seeks payment for extra work related to "differing site conditions encountered during Jordan Panel's work at the Project's east-facing exterior facade" (the "Extra Work Claim"). Specifically, due to problems
DASNY contends that Jordan Panel failed to comply with a condition precedent present in the General Conditions, which were incorporated into Jordan Panel's subcontract by reference. "[A] condition precedent is `an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises.'" Presstek, 12 N.Y.3d at 645, 884 N.Y.S.2d 211, 912 N.E.2d 43 (quoting Oppenheimer, 86 N.Y.2d at 690, 636 N.Y.S.2d 734, 660 N.E.2d 415). "Whether a condition precedent exists under the terms of a contract is a matter of law for the court to decide." Mullany v. Munchkin Enters., Ltd., 69 A.D.3d 1271, 893 N.Y.S.2d 714, 717 (3d Dep't 2010). "A contractual duty ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition." Id. at 717-18 (citation omitted). A court may "interpret doubtful language as embodying a promise or constructive condition rather than an express condition" in order to reduce "the risk of forfeiture by the obligee," but this option "cannot be employed if the occurrence of the event as a condition is expressed in unmistakable language."
A.H.A., 92 N.Y.2d at 33-34, 677 N.Y.S.2d 9, 699 N.E.2d 368.
The contract term at issue is General Conditions § 11.01, entitled "Claims for Extra Work." Section 11.01 provides:
(Emphasis added).
Section 11.01 constitutes an unambiguous condition precedent to any recovery for extra-work claims and is enforceable as an express condition under New York law. The language of § 11.01(B)(2) clearly mandates that a contractor's failure to follow the process set forth in § 11.01(A) will result in "a waiver by the Contractor of all claims for additional compensation or damages" resulting from the work in question.
In opposition, Travelers does not dispute that Jordan Panel failed to fully comply with the notice requirement of § 11.01(A)(2). Instead, Travelers argues that "[t]he factual record evidences ample notice provided by Trataros and Jordan Panel" and that such notice is sufficient to satisfy "New York's doctrine of substantial compliance with notice provisions." Travelers cites two cases, Whitmyer Bros., Inc. v. State of N.Y., 63 A.D.2d 103, 406 N.Y.S.2d 617 (3d Dep't 1978) ("Whitmyer"), and Huff Enters., Inc. v. Triborough Bridge & Tunnel Auth., 191 A.D.2d 314, 595 N.Y.S.2d 178 (1st Dep't 1993) ("Huff"), for the proposition that when a public owner has been made aware of the contractor's claim that extra work beyond the scope of the contract was being performed, the State has been precluded from insisting upon strict compliance with the notice provisions."
Actual notice or substantial compliance does not suffice. Under New York law, "[e]xpress conditions precedent, which are those agreed to and imposed by the parties themselves, must be literally performed." Klewin Bldg. Co., Inc. v. Heritage Plumbing & Heating, Inc., 42 A.D.3d 559, 840 N.Y.S.2d 144, 145 (2d Dep't 2007) (citation omitted); see also Mezzacappa Bros., Inc. v. City of N.Y., 29 A.D.3d 494, 815 N.Y.S.2d 549, 550 (1st Dep't 2006) ("Mezzacappa"). Huff states that "New York case law recognizes that prompt, written notice requirements in public works contracts serve salutary purposes, and merit strict enforcement." Huff, 595 N.Y.S.2d at 181 (citation omitted).
Whitmyer also does not save the Extra Work claim.
With respect to the Pass-Through Claims of the remaining Subcontractors— Brooklyn Welding, LBL, and Jordan Panel
First, the Subcontracts each provide that the "Subcontractor shall assume all obligations, risks and responsibilities which Contractor has assumed towards Owner in the Contract Documents" (emphasis added). Those Contract Documents include Contracts 15 and/or 16 as well as the General Conditions, which in
Second, DASNY observes that each Subcontract includes further restrictions on the Subcontractors' ability to seek delay or impact damages from Trataros. Paragraph 6(a) of each Subcontract states:
Paragraph 6(d) further provides:
(Emphasis added). A contract appendix, made a part of each Subcontract, provides:
(Emphasis added). Finally, each Subcontract provides that "[t]he Subcontractor understands that work of this trade may not be continuous and that he may be required to work out of sequence and/or leave a portion of work out due to coordination at the direction of the General Contractor," and that "there shall be no charges for `comeback time' or out of sequence work."
The no-damages-for-delay clause in Contracts 15 and 16, as well as the various other Subcontract conditions outlined above, apply to bar the Subcontractors' damage claims against DASNY. In another lawsuit arising out of this Project, the Appellate Division held that General Conditions § 11.02 applied to subcontractors' delay claims against DASNY. See Universal/MMEC, 856 N.Y.S.2d at 561. Indeed, Travelers, sued in its capacity as surety to Trataros, successfully obtained dismissal of a state-court lawsuit by a roofing subcontractor based on the Paragraph 6(d) no-damages-for-delay provision. See Premier, 2008 WL 2676800, at *4-*5. The reasoning applied in the other two Project lawsuits, Universal/MMEC and Premier, also governs here.
Travelers' evidence is as follows. First, Travelers relies on findings made by a DASNY expert, Warner Construction Consultants ("Warner"), that KPF or its subconsultants were responsible for a 187-day delay to the start of Jordan Panel's and LBL's work on the Project's exterior. Warner found that this delay "was caused by the extended period of time taken to resolve a design conflict between the specified milling, fabrication, and erection tolerances for the tubular structural steel girts and the exterior metal panel and glazing systems" (the "Girt Tolerance Issue"). Warner opined that the Girt Tolerance Issue "made it impossible to build the exterior walls as shown in the plans and specifications." Travelers also relies on evidence from another DASNY expert, Wiss, Janney, Elstner Associates, Inc. ("WJE"), who opined that KPF's and its subconsultants' "fail[ures] to properly co-ordinate the specified tolerances for the profiled metal panel system with the specified tolerances for the supporting structural steel girts" constituted professional negligence. Travelers contends that KPF's "malpractice" with respect to the Girt Tolerance Issue "alone constitute[s] sufficient grounds to deny DASNY's motion." Nevertheless, Travelers also asserts that the Girt Tolerance Issue is "merely the tip of the iceberg with respect to the impacts to Contract 15 and 16."
Travelers' argument that the no-damages-for-delay clause does not apply is without merit. The factual evidence tendered by Travelers simply does not rise to the level of creating a triable issue as to whether the delays suffered by the Subcontractors were "uncontemplated." Corinno, 67 N.Y.2d at 309, 502 N.Y.S.2d 681, 493 N.E.2d 905.
Travelers' second, broader argument opposing summary judgment on the Pass-Through Claims is that the "exculpatory clauses contained in Trataros' subcontracts" can no longer be enforced. Travelers contends that by concluding a liquidating agreement with each of the Subcontractors, Travelers admitted liability and thereby "waiv[ed] the subcontract provisions on which DASNY relies," such that the no-damages-for-delay clause does not apply. This argument is without merit.
Finally, DASNY also seeks dismissal of Travelers' Bond Losses Claim. Although that claim is inartfully pleaded in the Complaint, Travelers explains in its opposition to DASNY's motion that the claim seeks to recover "[s]ubstantial attorneys fees and expenses [that] were incurred in the defense of the prior law suits which involved subcontractors suing both Travelers and Trataros ... seeking to recover damages due to delay based on negligence and/or of breaches in connection with the Project and/or DASNY's failure to make payment."
Travelers' Bond Losses Claim cannot succeed because it is barred by exculpatory language in the Payment Bonds. Paragraph 2 of each Payment Bond provides:
(Emphasis added). The language above clearly provides that DASNY "shall not be liable for the payment of any costs or expenses" resulting from the litigation underlying the Payment Bond claims. Travelers does not proffer any authority suggesting that this provision should not be enforced in accordance with its clear and unambiguous terms. Accordingly, the Bond Losses Claim is dismissed.
Travelers, while opposing summary judgment on its own claims against DASNY, seeks summary judgment in its favor with respect to DASNY's three Counterclaims against it. For the following reasons, two of the Counterclaims are dismissed, while the third requires trial.
DASNY's second counterclaim, the Breach-of-Contract Counterclaim, asserts that Travelers is liable for Trataros' alleged breaches of Contracts 15 and 16 "[b]y virtue of Travelers' assumption of Trataros' obligations" under those Contracts. Travelers seeks dismissal of this counterclaim, asserting that Travelers did not "assume" Trataros' contractual obligations and therefore cannot be liable on those Contracts.
"`It goes without saying that a contract cannot bind a nonparty.'" Davis v. Blige, 505 F.3d 90, 103 (2d Cir.2007) (quoting EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002)). "As a general rule, privity or its equivalent remains the predicate for imposing liability for nonperformance of contractual obligations." Smith v. Fitzsimmons, 180 A.D.2d 177, 584 N.Y.S.2d 692, 695 (4th Dep't 1992). An exception to this rule exists, however, where a non-party "manifests an intent to be bound by the contract," Horsehead Indus., Inc. v. Metallgesellschaft AG, 239 A.D.2d 171, 657 N.Y.S.2d 632, 633 (1st Dep't 1997) ("Horsehead"), for instance, by "accept[ing] the written agreement and [] act[ing] upon it." Argo Marine Sys., Inc. v. Camar Corp., 755 F.2d 1006, 1011 (2d Cir.1985) (citation omitted).
DASNY does not dispute that Travelers never entered into a "takeover agreement" with Trataros and DASNY with respect to the Project.
The fact that Travelers and Trataros entered into the Financing Agreement does not raise a triable issue of fact as to whether Travelers assumed Trataros' obligations under the Contracts. Courts facing similar fact patterns have held that a surety's provision of financing to its contractor principal does not expand the surety's obligations to the obligee beyond the penal sum of the bond or, absent compliance with conditions precedent in the bond, make the surety liable for performance of the principal's contracts. See U.S. ex rel. Maris Equip. Co., Inc. v. Morganti, Inc., 163 F.Supp.2d 174, 193-95 (E.D.N.Y.2001) ("Morganti"); John G. Lambros Co., Inc. v. Aetna Cas. & Sur. Co., 468 F.Supp. 624, 628 (S.D.N.Y.1979) ("Lambros"). In Lambros, Judge Weinfeld observed that "[i]t is not unusual for either a surety or secured creditor ... to become intimately involved in the debtor's financial affairs," and "[s]uch involvement does not `merge' the identities of the creditor and debtor ... nor does it expose the creditor to contract liability on obligations of its debtor other than those it has agreed to assume." Lambros, 468 F.Supp. at 628 (citation omitted). Thus, "even when a surety advances large sums of money to the contractor and becomes `intimately involved' in the contractor's financial affairs, the surety will not, without more, face exposure beyond the parameters of its bond."
DASNY also asserts that it can recover for breach of contract because "New York law clearly allows for the imposition of liability on a corporation that completely controlled and dominated another corporation for the liabilities of that other corporation, thereby causing an injury to a third party." This argument invokes a theory of "piercing the corporate veil" or "alter ego" liability. See, e.g., Babitt v. Citibank, N.A. (In re Vebeliunas), 332 F.3d 85, 90-92 (2d Cir.2003) (discussing New York law on alter-ego liability); accord Morris v. N.Y. State Dep't of Taxation & Fin., 82 N.Y.2d 135,
DASNY may not resist summary judgment by relying on an alter-ego theory. As a threshold matter, DASNY did not plead its alter-ego theory in its Counterclaims nor interpose it as an affirmative defense, and DASNY has also never sought leave to amend its pleadings to assert it. "[T]he central purpose of a complaint is to provide the [opposing party] with notice of the claims asserted against it." Greenidge v. Allstate Ins. Co., 446 F.3d 356, 361 (2d Cir.2006). Because DASNY did not give notice of this claim to Travelers in its pleadings, DASNY may not raise it for the first time in opposing Travelers' motion for summary judgment.
Second, even if DASNY were to move for leave to amend its Counterclaims, the motion would now be denied. The cut-off for amendment of pleadings, established by the Court as required by the Federal Rules of Civil Procedure, was February 1, 2008.
DASNY has not explained its failure to plead the alter-ego claim, nor has it attempted to demonstrate the existence of diligence supporting "good cause" for permitting those claims to be asserted now.
The third counterclaim, the Performance Bond Counterclaim, asserts that Travelers "wrongfully rejected" DASNY's demand for payment under the Performance Bonds. Travelers responds that the Performance Bond Counterclaim must be dismissed because DASNY has failed to comply with the conditions precedent to Travelers' obligations under the Performance Bonds.
"In New York, a bond is a contract[,] and [a court] therefore `look[s] to standard principles of contract interpretation to determine the rights and obligations of a surety under a bond.'" Arch Ins. Co. v. Precision Stone, Inc., 584 F.3d 33, 39 n. 4 (2d Cir.2009) ("Arch") (quoting U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 51 (2d Cir.2004) ("Braspetro")); see also Walter Concrete Constr. Corp. v. Lederle Labs., 99 N.Y.2d 603, 605, 758 N.Y.S.2d 260, 788 N.E.2d 609 (2003) ("Walter Concrete"). "Surety bonds, like all contracts, are to be fairly construed so as to effectuate the intent of the parties as it has been expressed in the terms of the contract." Arch, 584 F.3d at 39 n. 4 (citation omitted); accord Gillies v. Nat'l Fire Ins. Co. of Hartford, 56 A.D.3d 1236, 867 N.Y.S.2d 295, 296 (4th Dep't 2008). "Where the terms are unambiguous, interpretation of the surety bond is a question of law." Caravousanos v. Kings County Hosp., 74 A.D.3d 716, 904 N.Y.S.2d 444, 446 (2d Dep't 2010) (citation omitted).
Surety bonds issued by commercial surety companies are not construed strictly. "[W]hile the liability of a surety cannot be extended beyond the plain and explicit language of the contract, a surety is not entitled to any particular tenderness in the interpretation of the language of his contract." Compagnie Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31, 34 (2d Cir.1999) (citation omitted). "[T]he status of a `favorite of the law' once enjoyed by the surety, at a time when most suretyship obligations were uncompensated, is clearly a thing of the past." Braspetro, 369 F.3d at 51 (citation omitted). Indeed, "[w]here a compensated surety has assured a standard form of bond, it is to be interpreted liberally, and all ambiguities are to be resolved in favor of those for whose benefit the bond is given." Rich v. N. Am. Specialty Ins. Co., 26 A.D.3d 237, 809 N.Y.S.2d 68, 69 (1st Dep't 2006) (citation omitted).
"`[B]efore a surety's obligations under a bond can mature, the obligee must comply with any conditions precedent.'" Elm Haven Constr. Ltd. P'ship v. Neri Constr. LLC, 376 F.3d 96, 100 (2d Cir.
(Emphasis added). The above three paragraphs are common conditions of performance bonds which, as Travelers observes, resemble the conditions included in the standard American Institute of Architects 312 ("AIA 312") Performance Bond. See Braspetro, 369 F.3d at 41; Walter Concrete, 99 N.Y.2d at 605, 758 N.Y.S.2d 260, 788 N.E.2d 609 (noting that the AIA-312 bond requires "a declaration of default" before the surety is liable, while the AIA-311 bond does not); 120 Greenwich Dev. Assocs., LLC v. Reliance Ins. Co., No. 01 Civ. 8219(PKL), 2004 WL 1277998, at *1, *12 (S.D.N.Y. June 8, 2004) ("120 Greenwich") (interpreting an AIA-312 bond and determining that it contains express conditions precedent); see also N.Y. Jur.2d Bonds §§ 44, 105 (discussing conditions precedent within surety bonds).
DASNY does not dispute that it never declared Trataros in default with respect to either Contract 15 or Contract 16.
In opposition, DASNY argues that "Travelers may not escape liability to DASNY ... by relying upon an alleged failure by DASNY to satisfy conditions precedent when Travelers itself caused the alleged failure." While it is true that "a party cannot insist upon a condition precedent, when its non-performance has been caused by himself," A.H.A., 92 N.Y.2d at 31, 677 N.Y.S.2d 9, 699 N.E.2d 368 (citation omitted), DASNY has not tendered any evidence to show that Travelers caused DASNY to fail to comply with the Performance Bonds' notice provisions. Moreover, to the extent that DASNY indicates that the basis for its equitable argument was "discussed at length" in the section of its brief devoted to the Breach-of-Contract Counterclaim, DASNY may not rely on its unpleaded alter-ego theory in order to excuse its noncompliance with the bonds' conditions precedent. Accordingly,
The first counterclaim, and the final one to be addressed in this Opinion, alleges that Travelers breached its obligations under the Payment Bonds to compensate various subcontractors whom Trataros failed to pay. DASNY further contends that some of Trataros' subcontractors filed mechanics' liens on the Project and subsequently sued DASNY to foreclose on those liens, with the result that DASNY was compelled through a settlement process accompanying that litigation to make payments that should have been made by Travelers.
A payment bond is an undertaking whereby a surety guarantees to an obligee that all bills for labor and materials contracted for, and actually used by the contractor, will be paid by the surety if the contractor defaults. N.Y. Jur.2d Bonds § 61. Payment bonds "work like insurance policies designed to guarantee payment to the general contractors' suppliers, employees and subcontractors." Quantum Corp. Funding, Ltd. v. Westway Indus., Inc., 4 N.Y.3d 211, 214, 791 N.Y.S.2d 876, 825 N.E.2d 117 (2005) ("Quantum").
Travelers seeks summary judgment on the theory that DASNY is not a proper "claimant" under the Payment Bonds and that DASNY lacks standing to assert a claim for their breach. The Payment Bonds accompanying Contracts 15 and 16 provide:
(Emphasis added). Travelers further contends that any payments made by DASNY to subcontractors were made voluntarily, such that DASNY cannot avail itself of the doctrine of equitable subrogation to seek reimbursement from Travelers.
The Payment Bonds issued in connection with Contracts 15 and 16 were "statutory" bonds required by New York law. A consideration of the Payment Bond Counterclaim requires an understanding of the purpose of statutory payment bonds as well as an examination of when, if ever, an owner-obligee has legal standing to sue for damages under such bonds.
New York State Finance Law § 137 provides that, for any "contract for the prosecution of a public improvement for ... a public benefit corporation," a condition to the approval of such contract is "a bond guaranteeing prompt payment of moneys due to all persons furnishing labor or materials to the contractor or any subcontractors in the prosecution of the
Section 137 also provides a private right of action to subcontractors and suppliers on public improvement projects who are not promptly paid by the hiring contractor:
N.Y. State Fin. Law § 137(3). The statute provides a one-year statute of limitations for any "action on a payment bond furnished pursuant to this section," which begins to run on "the date on which final payment under the claimant's subcontract became due."
Courts have identified at least two main purposes for the statutory bonding requirement. First, it evidences a legislative intent to benefit and protect subcontractors and suppliers. See Spanos Painting Contractors, Inc. v. Union Bldg. & Constr. Corp., 334 F.2d 457, 459 (2d Cir.1964); Quantum, 4 N.Y.3d at 216, 791 N.Y.S.2d 876, 825 N.E.2d 117; Davidson Pipe Supply Co., Inc. v. Wyoming County Indus. Dev. Agency, 85 N.Y.2d 281, 285, 624 N.Y.S.2d 92, 648 N.E.2d 468 (1995); Harsco, 752 N.Y.S.2d at 62. Second, § 137 protects the State, as owner, as well. Acknowledging that the "interests protected by performance bonds are very different from those protected by payment bonds," the Second Circuit noted that "the utility of a payment bond" is the role it plays in helping "maintain[] the [owner's] property free of any mechanics' liens by unpaid materialmen, suppliers, or laborers." Braspetro, 369 F.3d at 69; see also HNC Realty Co. v. Bay View Towers Apts., Inc., 64 A.D.2d 417, 409 N.Y.S.2d 774, 779 (2d Dep't 1978). The New York Court of Appeals likewise observed that "[a]n additional purpose" of § 137 at the time of its enactment was to "reduce the cost of state
Before turning to the resolution of the Payment Bond claim under New York law, it is useful to review relevant common law principles. In the traditional scenario—wherein a general contractor is required to procure a payment bond to satisfy payment claims for labor or materials supplied by the general contractor's subcontractors—the project's owner is the obligee (the "owner-obligee").
Nonetheless, an owner-obligee is not always foreclosed from claiming against a surety under a payment bond. The fact pattern at bar—with DASNY seeking what is, essentially, indemnification from Travelers for payments it made to Trataros' subcontractors, after Travelers refused to pay them, and after some of those subcontractors asserted mechanics' liens against DASNY-is one in which some courts have permitted recovery by obligees under a payment bond. See, e.g., Hayle Floor Covering, Inc. v. First Minn. Constr. Co., 253 N.W.2d 809, 813-14 (Minn.1977); Tropic Builders, Ltd. v. United States, 52 Haw. 298, 475 P.2d 362, 366 (1970); Maine Yankee, 183 F.Supp.2d at 86. Treatises that have considered the question of obligee standing under payment bonds have also endorsed the obligee's right of recovery in situations like those at issue here. "[T]he obligee has no right [on a payment bond] with respect to the claims of laborers and materialmen, unless, through payment, he has become subrogated to their claims." 11 Couch on Insurance § 165:14 (emphasis added); see also id. § 165:24. Indeed, Couch concludes that "where a ... [payment bond] claimant who is not paid files a mechanics' lien attaching to the owner's property, the bond implies an obligation on the part of the surety to indemnify the owner so that the property will be free of the lien." Id. § 165:14 (emphasis added); see also 17 Am.Jur.2d Contractor's Bonds § 10 (same). Bruner & O'Connor concludes that "[t]he class of protected persons under a payment bond excludes the owner, even though the owner is named as the nominal bond obligee, [as well as] co-prime
Even those courts that deny recovery to an obligee seeking remuneration under a payment bond often observe that the outcome depended, in part, on the fact that exceptional circumstances did not exist. In Elm Haven, the Second Circuit, applying Connecticut law, held that summary judgment was "properly granted against [the obligee] on its Payment Bond claim" because the obligee was neither a "claimant" under the bond, nor "was [it] assigned the rights of any claimant." Elm Haven, 376 F.3d at 101. Similarly, in a recent case in Massachusetts, the court denied an owner-obligee's claim against a payment bond surety, but distinguished the foregoing treatise authorities by observing "[t]here [was] no evidence or claim of subrogation presented in this case." American Mfrs. Mut. Ins. Co. v. Sherborn Meadows, LLC, No. 07-11711-DPW, 2008 WL 5396479, at *6 (D.Mass. Dec. 22, 2008). As a final example, in Goodbys Creek, LLC v. Arch Insurance Co. ("Goodbys"), the court rejected an owner-obligee's payment bond claim because the obligee had not shown that it had been forced to pay any of the subcontractors.
With the foregoing principles in mind, the Court turns to consider the question under New York law. "[The] role [of] a federal court sitting in diversity is not to adopt innovative theories that may distort established state law." Runner v. N.Y. Stock Exch., Inc., 568 F.3d 383, 386 (2d Cir.2009) (citation omitted). Where a federal court encounters an issue that has not yet been decided by the relevant state's law, the court "must carefully predict how the state's highest court would resolve the uncertainties that [the court has] identified." Id. (citation omitted). "In making this prediction, [the court] give[s] the fullest weight to pronouncements of the state's highest court while giving proper regard to relevant rulings of the state's lower courts." Id. (citation omitted).
There are several reasons to conclude that New York law would recognize the standing of an owner-obligee to sue under a payment bond employing a subrogation theory. First, New York law recognizes a "broad" doctrine of equitable subrogation. Broadway Houston Mack Dev., LLC v. Kohl, 71 A.D.3d 937, 897 N.Y.S.2d 505, 506 (2d Dep't 2010) ("Broadway"). The doctrine of subrogation applies "`to cases where a party is compelled to pay the debt of a third person to protect his own rights, or to save his own property.'" Id. (quoting Gerseta Corp. v. Equitable Trust Co. of N.Y., 241 N.Y. 418, 426, 150 N.E. 501 (1926)). The purpose of subrogation is "to shift a debt or obligation to a party who more properly should be accountable in order to prevent unjust enrichment and an unfair result." Hytko v. Hennessey, 62 A.D.3d 1081, 879 N.Y.S.2d 595, 600 (3d Dep't 2009); see also Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 258 (2d Cir.1999).
Third, a recent New York case litigated before Suffolk County Supreme Court and the Second Department suggests that New York law is amenable to a subrogation-based recovery in circumstances comparable to those at issue here, even though that case denied recovery to the owner-obligee. In Broadway, the owner-obligee—who had already made all required payments to its prime contractor—also made certain additional payments to the prime contractor's subcontractors. See Broadway, 22 Misc.3d 1001, 870 N.Y.S.2d 748 (Sup.Ct. Suffolk County 2008) (trial court decision); Broadway, 897 N.Y.S.2d 505 (appellate decision). The owner-obligee then sued the surety to recover those payments, contending that the surety should have compensated the unpaid subcontractors under the payment bond in the first instance. The trial court concluded on the facts of that case that the owner-obligee was not actually "under a legal compulsion to pay the subcontractors to avoid mechanics' liens" and thus, that the owner-obligee did not have standing under the doctrine of equitable subrogation. 870 N.Y.S.2d at 754, 756. Among other things, while the subcontractors had threatened to file mechanics' liens, they had not yet done so. Id. at 750-51. On appeal, the Appellate Division upheld the Supreme Court's reasoning, ruling that "the party seeking subrogation must show that the act is not merely helpful but necessary to the protection of its interests." Broadway, 897 N.Y.S.2d at 506. In rendering their decisions, neither court suggested the existence of any per se bar to recovery by the owner-obligee based merely on the fact that it was the obligee of the payment bond. See also Hamlet at Willow Creek Dev. Co., LLC v. Ne. Land Dev. Corp., 64 A.D.3d 85, 878 N.Y.S.2d 97, 112 (2d Dep't 2009) ("Hamlet") (permitting recovery based on "novel" argument by a putative subrogee to the rights of a performance bond obligee against both the principal and surety).
Finally, allowing the owner-obligee in the appropriate circumstances to recover under an equitable subrogation theory against a payment bond surety would support one of the purposes of State Finance Law § 137, namely, "`protect[ing] the equity of the owner in his property against the claims of unpaid creditors.'" Braspetro, 369 F.3d at 69 (quoting HNC Realty Co., 409 N.Y.S.2d at 779). Indeed, the rationale underlying the decision of the New York Court of Appeals in Quantum, in which the court permitted assignment of payment bond claims on the basis that such a result would serve the statutory purpose of § 137, applies a fortiori where
Given the foregoing conclusions of law, DASNY's status as "obligee" under the Payment Bond does not, in itself, prevent DASNY from recovering from Travelers for the latter's alleged breaches of the Payment Bond. Instead, the relevant inquiry is whether DASNY can successfully show that it has satisfied the criteria for equitable subrogation.
Hamlet, 878 N.Y.S.2d at 105-06 (quoting Gerseta Corp., 241 N.Y. at 425-26, 150 N.E. 501); see also Broadway, 897 N.Y.S.2d at 506.
Applying the foregoing principles to this case, Travelers has failed to carry its burden of demonstrating as a matter of law that DASNY is precluded from recovering under the Payment Bonds. Although Travelers asserts that "any alleged payments from DASNY directly to Trataros' subcontractors or suppliers were made as a volunteer,"
Travelers' February 19, 2010 motion for summary judgment is granted in party. The Breach-of-Contract Counterclaim and Performance Bond Counterclaim are both dismissed, while the Payment Bond Counterclaim survives. DASNY's February 19, 2010 motion for summary judgment is granted in its entirety. A separate scheduling Order accompanies this Opinion.
SO ORDERED.
Also on September 28, 2007, DASNY and TDX filed a third-party complaint against Trataros asserting claims for breach of contract, contractual and common-law indemnification, and contribution. On or about February 19, 2010, Trataros moved for partial summary judgment as to the indemnification and contribution claims. After DASNY and TDX indicated that they did not oppose the partial motion, those claims were dismissed on June 22, 2010. DASNY's two third-party breach-of-contract claims against Trataros remain to be tried.
