New York Appellate Court Confirms Viability of Surety’s Claims for Affirmative Monetary Relief Against Owner-Obligee Arising from Owner-Obligee’s Material Modifications of Bonded Contracts

In an appeal filed by CSG on behalf of a surety client, New York’s Appellate Division, Second Department, confirmed that “material modification” is not simply a defense to a bond claim, but can be the basis for a claim for affirmative, monetary relief against the owner where the owner’s material modification of the bonded contract increases the surety’s exposure under its payment bond.

In T. Mina Supply, Inc. v. Clemente Bros. Contracting Corp., the surety executed performance and payment bonds in connection with two public improvements for the City of New York. Both of these projects involved what are known as “requirements” contracts, in which the principal-contractor agrees to perform all of the subject work required by the City for a specific amount of time, and up to the amount of the contract. In this case, both contracts were to run for a term of one year. The surety alleged that, after receiving claims against its payment bonds on the two projects, it learned that the City, without the surety’s knowledge or consent, materially extended both the terms of the contracts and the amount of work to be performed thereunder. The surety maintained that these modifications and extensions were contrary to, and in violation of, the express terms of the bonded contracts, which specifically precluded such changes. To the extent that the surety’s liability under its payment bonds was increased as a result, the surety sought damages from the City for the City’s breach of the bonds and bonded contracts.

The City moved to dismiss the surety’s claims, arguing, among other things, that the City’s bond forms contain a so-called “consent to modification” clause.1 The City maintained that this clause constitutes a waiver of any and all claims or defenses the surety may have relating to modifications of the bonded contracts. The trial court granted the City’s motion. On May 25, 2016, the Second Department reversed and denied the City’s motion. The Second Department stated that the Surety’s claims against the City are “valid causes of action” (notwithstanding the documentary evidence presented by the City, including the “consent to modification” clause contained in the bonds).

The Second Department’s decision is noteworthy because it confirms that not only is “material modification” a defense to a performance bond claim, but that it can also form the basis of an affirmative claim against the owner, where the material modification increases the surety’s payment bond exposure, and at least where the material modification breaches terms contained in the bonded contract. This result is consistent with, and gives full effect to, the bedrock principal of surety law that exonerates a surety from liability under its bonds where the underlying bonded obligation has been increased or modified without the surety’s consent.

In addition, the Second Department effectively rejected the City’s argument that the surety waived any such claims (and related defenses) by virtue of the “consent to modification” clause in the City’s bond form. While the procedural posture was a motion to dismiss, requiring that all of the surety’s factual allegations be taken as accurate, there was no dispute that the bonds contained the “consent to modification” clause. Nevertheless, the Second Department specifically allowed the surety’s claim for damages resulting from the City’s material modification of the bonded contracts in contravention of their express terms to proceed, notwithstanding the “consent to modification” clause contained in the bonds.

1 The clause reads, in relevant part:
And the Surety (Sureties), for value received, for itself and its successors and assigns, hereby stipulates and agrees that the obligation of said Surety (Sureties), and its bonds shall be in no way impaired or affected by any extension of time, modification, omission, addition, or change in or of the said Contract or the work to be performed thereunder, or by any payment thereunder before the time required therein, or by any waiver of the provisions thereof, or of any Work to be performed, or any moneys due to become due thereunder, and said Surety (Sureties) does hereby waive notice of any and all of such extensions, modifications, omissions, additions, changes, payments, waivers, assignments, subcontracts and transfers …

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