Surety Case Law Note: General Contractor’s Default Barred Surety’s Obligation Under the Bond
January 9, 2024
In this Surety Today Blog post we consider a Case Law Note addressing the issue of the general contractor’s failure to provide clear work space constituting a default under the bond and creating a failure to satisfy a condition precedent under the bond. The case is:
E & T SKYLINE CONSTRUCTION, LLC v. TALISMAN CASUALTY INSURANCE COMPANY, LLC, No. 19-cv-8069 JSR (S.D.N.Y., November 6, 2023)
This case concerns a construction dispute about the installation of custom windows, imported from Italy, at a 40 story luxury condominium building in Manhattan. Plaintiff, E & T Skyline Construction, LLC (“E&T”), the general contractor responsible for the building’s construction, hired subcontractor NY Renaissance Corp. (“NYR”) to deliver and install the windows. A performance bond in the amount of $1.8M was issued by Talisman Casualty Insurance Company, LLC. E&T eventually terminated NYR for default and made demand to Talisman to pay under the performance bond. Talisman refused, pointing to E&T’s own failure to fulfill each of its obligations under the bond, which was a precondition for Talisman’s payment.
The bond provided that Talisman’s obligation under the bond only arose if there was no default by E&T. The bond defined “default” as “[f]ailure of [E&T] . . . to pay the Contractor as required under the Construction Contract or to perform and complete or comply with the other material terms of the Construction Contract.”
Although the subcontract initially listed a completion date of January 2018 for NYR’s work, it was not possible to complete the work by that date because the building’s concrete superstructure, the responsibility of a separate subcontractor with no involvement by NYR, had not been fully erected. The building’s concrete superstructure was ultimately not completed until “May or June of 2018.” Because of the delays, E&T accepted a revised schedule that NYR proposed which listed June 2019 as the end date for the installation of the windows. The revised schedule was expressly subject to E&T providing the upper floors of the site available for installation free of current debris and protrusions into the window openings.
As construction continued, numerous communications were provided by NYR to E&T detailing numerous impediments to window installation. A consultant also issued a report noting the obstructions and impediments blocking window installation. Nevertheless, E&T terminated NYR and sent a copy of the Notice of Termination to Talisman. Talisman suggested that E&T and NYR meet to “work out the differences on the site conditions.” However, there were no discussions because E&T refused to meet.
Talisman then sent a letter to E&T stating that it “has no obligation under [the Bond Agreement] because the Owner is in default under the Construction Contract.” In particular, Talisman concluded, “[t]he actions of the Owner prevented the Principal from being able [to] perform its work under the Construction Contract.” The letter listed numerous aspects of E&T’s default, including failure to provide safe space for the materials to be delivered, the unclean, inaccessible, unorganized, and dangerous conditions of the worksite and obstructions to the window openings.
The Court noted that under applicable law it looks to standard principles of contract interpretation to determine the rights and obligations of a surety under a bond. “One of those principles is that, before a surety’s obligations under a bond can mature, the obligee must comply with any conditions precedent.” 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. The Court found that under the plain terms of the Performance Bond, Talisman’s obligations as surety “shall arise” only “[i]f there is no [E&T] Default under the Construction Contract.” In other words, the Bond specifically provided that Talisman had no bond obligations to E&T, if E&T itself defaulted under its subcontract with NYR and the Bond defined such a default to include a failure “to perform and complete or comply with the other material terms of the” subcontract.
The Court further noted that there was no dispute that the terms of the revised schedule stated in no uncertain terms that it is “subject to . . . the Owner providing the upper floors of the site available for installation (free of current debris and protrusions into the window openings).” The Court concluded that because E&T failed to make the upper floors of the Project site where the custom windows were to be installed available for installation by clearing those floors of debris and obstructions, E&T was in default of its obligations under the subcontract. The Court held that because of E&T’s default, E&T failed to satisfy the condition precedent to Talisman’s obligations under the Bond. Therefore, Talisman had no obligations under the bond and was not liable.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.