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New York Court Rules that Failure to Comply with A312 Performance Bond Requirements Precludes Recovery for Defective Work Discovered After Project Completion

December 12, 2012

A recent decision by a New York court rejected a project owner’s attempt to circumvent the requirements set forth in the most commonly used performance bond, thereby once again enforcing the conditions upon which sureties rely.

The New York State Supreme Court, County of Nassau, recently held that the conditions set forth in an AIA Document A312 performance bond (issued in this case by one of Wolff & Samson’s surety clients) are express conditions that must be strictly complied with before the surety can be held liable thereunder. The court went on to find that the project owner’s failure to strictly comply with the conditions set forth in paragraph 3 of the bond required denial of the owner’s claim against the surety. The court therefore granted the surety’s summary judgment motion dismissing the cause of action that had been alleged against it.

The lawsuit involved a 20-building residential housing development on Long Island. Eighteen months after construction of the development was completed and all of the units were rented, the project owner discovered water intrusion and water entrapment issues in all 20 buildings, and determined that it was necessary to evacuate the tenants and remove the exterior building materials from all 20 buildings. The owner sought damages in excess of $40 million from the project architect, the supplier of the manufactured stone veneer, the general contractor and the general contractor’s surety.

In support of its claim against the surety, the owner alleged that the surety should be precluded from arguing that it did not receive adequate or prompt notice of the claim, since the surety had attended an “informational meeting” near the project site, had visited some of the apartment units, and had retained an engineering consultant and legal counsel.

In addition, although none of the preconditions in the performance bond were met, the owner argued that mere substantial compliance was sufficient. It also urged the court that the conditions in the bond apply only to projects where there is ongoing construction work and not to completed construction contracts such as this.

The court rejected the owner’s arguments and held that because the owner failed to comply with the conditions precedent contained in the bond, recovery against the surety was precluded. Darryl Weissman of Wolff & Samson, assisted by Marc R. Lepelstat, represented the surety in this case.

If we can answer any questions for you or you would like additional information, please contact:

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