Scott E. Mollen
Scott E. Mollen ()

Breach of Contract—Surety’s Motion for Summary Judgment Dismissing Claims Based on a One Year Limitations Period for Filing an Action Denied—Issues of Fact as to Waiver and Estoppel Defenses Based on Allegations That Surety Lulled Claimants Into Not Commencing Litigation While the Claimants Were Responding to the Surety’s Document Requests—Owner’s Motion to Intervene Granted

An owner owned a real estate development and construction project. Plaintiff was the general contractor on the project. Defendant was a subcontractor. To guarantee the subcontractor’s performance, defendant (surety) issued surety bonds. The plaintiff made a claim against such a performance bond. The owner was named as one of the bond’s obligees. The bond provided that “[a]ny lawsuit by obligee under this bond must be instituted before the earlier of the following: (A) the expiration of one year from the date of substantial completion of the construction work under the subcontract, or (B) one year after principal ceased performing the construction work under the subcontract.”

On Jan. 7, 2015, the plaintiff “terminated the subcontract for cause, notified [the surety] of the termination and asserted a claim under the…bond based upon [the subcontractor's] alleged breach of contract….” The parties thereafter engaged in several discussions and correspondence relating to the claim.

On March 12, 2015, the subcontractor’s counsel wrote to plaintiff’s counsel disputing the termination as wrongful and improper, stating, “[p]lease be further advised that nothing herein or admitted here shall be deemed an admission or waiver of [the subcontractor's] rights and all such rights being expressly reserved.” On April 29, 2015, plaintiff’s counsel wrote to the surety, “advising, that ‘if we do not hear from you with an appropriate resolution to this matter within a reasonable time, we will have no choice but to pursue all remedies available to our client’….” On June 11, 2015 and June 23, 2015, the surety’s counsel wrote to plaintiff’s counsel, stating the following “reservation of rights”:

[n]othing heretofore nor herein…should be construed as an admission on the part of our client for any liability upon the claim submitted, nor as a waiver, estoppel or modification of any or all of our client’s rights, remedies and defenses,…all of which remain expressly reserved.

On Dec. 22, 2015, the parties and their counsel met to discuss a resolution of the bond claim. Prior to such meeting, the plaintiff provided the surety with “extensive documentation” in support of its claim “under the…bond stemming from [the subcontractor's] alleged failures to perform.” At the meeting, the surety requested additional documents. The owner explained that compliance with such requests would take several months and such delay would “insulate [the surety] from liability and therefore, if [the surety] insisted upon proceeding this way, filing suit was the only remaining option.” The surety’s counsel allegedly stated that “they were not interested in litigating the matter and would work diligently to proceed as quickly as possible within the time limitation.”

The plaintiff further alleged that in response to the concerns as to the time necessary to produce additional documentation, the surety stated that “if any time was required to complete the determination process beyond the impending deadline to commence a legal action…, [the surety] would have no objection to agreeing to an extension.” Based on those representations, the plaintiff and the owner allegedly “agreed that they would comply with the requests provided that [the surety] would work as quickly as possible and forego enforcing the deadline of on or about Jan. 12, 2016 to commence a legal action under the…bond.”

On Dec. 28, 2015, after meeting with all of the parties and their counsel, the surety issued a “fourth” request for documents and included the prior reservation of rights. On Feb. 19, 2016, the plaintiff provided the further documentation requested by the surety. By letter dated April 4, 2016, the surety denied the bond claim and stated, inter alia, that “the time to commence a legal action against [the surety] under the bond expired on Jan. 12, 2016,” and again, stated that its letter was being “sent under a full reservation of all of [the surety's] and [the subcontractor's] rights and defenses under the bond, the contract documents, at equity and under law, and [the surety] expressly reserves those rights and defenses whether mentioned herein or not….”

On April 21, 2016, the plaintiff commenced an action against the subcontractor and the surety, alleging breach of contract against the subcontractor; performance under the bond as against the surety; and fraud against the surety, based on the allegation that the surety falsely represented that the bond claim would be resolved “by ‘submissions and interactions of the parties…in lieu of commencing litigation.’”

The owner moved to intervene, claiming that following the plaintiff’s termination of the subcontract, the plaintiff asked the owner to fund certain advance payments to plaintiff’s subcontractors and suppliers and certain other project costs, expenses and damages. The owner claimed that “in order to complete the project and mitigate damages, it advanced the monies to [plaintiff], without prejudice to its right to seek reimbursement….” The plaintiff’s contract with the owner contained “a $5,000 per day liquidated damages charge for late completion.” The project was completed after the contractual deadline, and, as a result, the owner claimed that the plaintiff owes the owner liquidated damages as well.

The owner also claimed that the subcontractor breached its contract and that as a third-party beneficiary of that subcontact, the owner could enforce the subcontract’s provisions. The owner further asserted that it had a direct claim against the subcontractor under the subcontract which required the subcontractors to indemnify the owner for losses or expenses relating to the contract work. The owner claimed that if the plaintiff establishes that the subcontractor breached the subcontract, the subcontractor would be directly liable to the owner for damages.

The owner also alleged a claim against the surety, based on the alleged breach of the subcontract, since the surety is responsible for the subcontractor’s deficient performance by its wrongful denial of the bond claim. The owner is a co-obligee under the performance bond. Therefore, if the plaintiff establishes that the surety wrongfully denied the bond claim, the owner would be entitled to recover directly from the surety.

The plaintiff and the subcontractor did not oppose the owner’s motion to intervene. However, the surety opposed the motion and argued that the owner “is not entitled to intervene ‘as of right’” against the surety as the surety claims that the owner’s “claims are premature and adequately represented by [plaintiff].” The surety also argued that the owner’s claims, despite being a co-obligee, are barred by a one-year contractual limitation period embodied in the bond.

The subcontractor stopped work on Jan. 12, 2015. The plaintiff commenced the litigation on April 21, 2016. The owner filed its proposed complaint in intervention on June 23, 2016. Since the lawsuit on the bond had not been commenced within the one-year contractual limitations period, the surety argued that “the claim must fail as a matter of law.” The owner countered that the insurer had “willfully” prolonged settlement negotiations, “lulling the defendant into deferring limitation until after the expiration of the limitations period….” The surety also argued that permitting intervention will cause delay in litigation, since “it relates to [the surety's] pending summary judgment motion, and will substantially prejudice it.”

The owner sought intervention not only to assert a claim against the surety under the bond, but to also assert claims against the subcontractor and the plaintiff for breach of contract. The owner contended that “the adversity between [itself and plaintiff] prevents [plaintiff] from adequately representing [the owner's] interests in litigation, particularly given that the proposed intervention complaint asserts claims against [plaintiff and the subcontractor], in addition to [the surety].”

The court reasoned, inter alia, that the owner’s interest “cannot be adequately represented by a party it is suing in the litigation.” The owner had “demonstrated as co-obligee, its statutory right to intervene…pursuant to CPLR 3012 ‘as the action involves the disposition or distribution…or a claim for damages…and the person may be adversely affected by the judgment. (CPLR 3012).’” The court also granted intervention pursuant to CPLR 1013, i.e., “by permission.” Courts have discretion to grant intervention “when there is a common question of law or fact, when a substantial right of a party will not be prejudiced by undue delay, and when the proposed intervenor has a real and substantial interest in the outcome of the litigation….”

Here, the court found that the owner had “a real and substantial interest in the outcome of this litigation, and has been involved in negotiations prior to the commencement of legal action.” Moreover, there was “no showing of undue delay or substantial prejudice to [the surety] or the other defendants.” Thus, the court granted the owner’s motion to intervene.

With respect to the surety’s motion for summary judgment, the court acknowledged that the bond provided for a one-year limitations period, the subcontractor stopped work on Jan. 12, 2015 and the plaintiff did not commence suit until approximately 15 months later on April 21, 2016. The surety contended that therefore, there were “no triable issues of fact, and summary judgment should be granted.” However, the court found that “summary judgment at this stage of the proceedings is premature.” The court cited the parties’ “repeated interactions” in connection to the bond claim and the plaintiff and intervenor owner, claimed that the surety “misled, deceived, defrauded and lulled [plaintiff] into sleeping on its rights under the bond.”

The court explained that “an insurer’s request for documentation regarding an insured’s claim does not waive or toll a contractual limitations period….” and that a waiver “‘should not be lightly presumed’ and must be based on ‘a clear manifestation of intent’ to relinquish a contractual protection…. In order to establish waiver and avert summary judgment, plaintiff must show a ‘clear manifestation of intent by defendant to relinquish the protection of the contractual limitations period’….” Moreover, “the existence of an intent to forgo such a right is a question of fact.”

Additionally, “[a]n estoppel…rests upon the word or deed of one party upon which another rightfully relies, and, so relying, changes his position to his injury.” The court explained that “[a] party may not, even innocently, mislead an opponent and then claim the benefit of his deception.”

Here, the plaintiff and the owner both affirmed that the surety’s counsel had “indicated that they agreed to waive the limitation period in which to submit a lawsuit provided [plaintiff] and [the owner] comply with [the surety's] additional request for documents.” The court opined that it was “not unreasonable to find given the circumstances presented herein that [plaintiff] did not file its claim, based on alleged assurances from [the surety] and its counsel during the Dec. 22, 2015 meeting.” However, the court noted that “such a determination is not for the court but rather for the trier of fact to decide.” The court stated that there were “unanswered questions as to whether those assurances were given and to what extent, given the absence of discovery and taking the facts in the light most favorable to plaintiff, defendant is not entitled to summary judgment at this stage of the proceedings….”

Since questions of fact remain, the court denied summary judgment with leave to renew upon completion of discovery, with respect to the breach of contract claim. The court dismissed the fraud claims since they essentially recast “the allegations of the contract claim.” Thus, the court dismissed the fraud claim without leave to replead.

Comment: To the extent that the surety had also moved, in the alternative, to dismiss based on documentary evidence (CPLR 3211(a)(1) and on statute of limitations grounds, those motions were denied as “untimely” pursuant to CPLR 3211(e). The court explained that, although motions made, pursuant to CPLR 3211(a)(7), to dismiss for failure to state a claim, those motions may be made “after service of the party’s answer.” Since the surety moved pursuant to CPLR 3211 in the alternative, and the surety “charted a summary judgment course,” the court addressed the motion as one for summary judgment pursuant to CPLR 3212.

Rinaldi v. Anchorage Construction, 450691/2016, NYLJ 1202781298225, at *1 (Sup., NY, Decided March 2, 2017), Singh, J.

Breach of Contract—Surety’s Motion for Summary Judgment Dismissing Claims Based on a One Year Limitations Period for Filing an Action Denied—Issues of Fact as to Waiver and Estoppel Defenses Based on Allegations That Surety Lulled Claimants Into Not Commencing Litigation While the Claimants Were Responding to the Surety’s Document Requests—Owner’s Motion to Intervene Granted

An owner owned a real estate development and construction project. Plaintiff was the general contractor on the project. Defendant was a subcontractor. To guarantee the subcontractor’s performance, defendant (surety) issued surety bonds. The plaintiff made a claim against such a performance bond. The owner was named as one of the bond’s obligees. The bond provided that “[a]ny lawsuit by obligee under this bond must be instituted before the earlier of the following: (A) the expiration of one year from the date of substantial completion of the construction work under the subcontract, or (B) one year after principal ceased performing the construction work under the subcontract.”

On Jan. 7, 2015, the plaintiff “terminated the subcontract for cause, notified [the surety] of the termination and asserted a claim under the…bond based upon [the subcontractor's] alleged breach of contract….” The parties thereafter engaged in several discussions and correspondence relating to the claim.

On March 12, 2015, the subcontractor’s counsel wrote to plaintiff’s counsel disputing the termination as wrongful and improper, stating, “[p]lease be further advised that nothing herein or admitted here shall be deemed an admission or waiver of [the subcontractor's] rights and all such rights being expressly reserved.” On April 29, 2015, plaintiff’s counsel wrote to the surety, “advising, that ‘if we do not hear from you with an appropriate resolution to this matter within a reasonable time, we will have no choice but to pursue all remedies available to our client’….” On June 11, 2015 and June 23, 2015, the surety’s counsel wrote to plaintiff’s counsel, stating the following “reservation of rights”:

[n]othing heretofore nor herein…should be construed as an admission on the part of our client for any liability upon the claim submitted, nor as a waiver, estoppel or modification of any or all of our client’s rights, remedies and defenses,…all of which remain expressly reserved.

On Dec. 22, 2015, the parties and their counsel met to discuss a resolution of the bond claim. Prior to such meeting, the plaintiff provided the surety with “extensive documentation” in support of its claim “under the…bond stemming from [the subcontractor's] alleged failures to perform.” At the meeting, the surety requested additional documents. The owner explained that compliance with such requests would take several months and such delay would “insulate [the surety] from liability and therefore, if [the surety] insisted upon proceeding this way, filing suit was the only remaining option.” The surety’s counsel allegedly stated that “they were not interested in litigating the matter and would work diligently to proceed as quickly as possible within the time limitation.”

The plaintiff further alleged that in response to the concerns as to the time necessary to produce additional documentation, the surety stated that “if any time was required to complete the determination process beyond the impending deadline to commence a legal action…, [the surety] would have no objection to agreeing to an extension.” Based on those representations, the plaintiff and the owner allegedly “agreed that they would comply with the requests provided that [the surety] would work as quickly as possible and forego enforcing the deadline of on or about Jan. 12, 2016 to commence a legal action under the…bond.”

On Dec. 28, 2015, after meeting with all of the parties and their counsel, the surety issued a “fourth” request for documents and included the prior reservation of rights. On Feb. 19, 2016, the plaintiff provided the further documentation requested by the surety. By letter dated April 4, 2016, the surety denied the bond claim and stated, inter alia, that “the time to commence a legal action against [the surety] under the bond expired on Jan. 12, 2016,” and again, stated that its letter was being “sent under a full reservation of all of [the surety's] and [the subcontractor's] rights and defenses under the bond, the contract documents, at equity and under law, and [the surety] expressly reserves those rights and defenses whether mentioned herein or not….”

On April 21, 2016, the plaintiff commenced an action against the subcontractor and the surety, alleging breach of contract against the subcontractor; performance under the bond as against the surety; and fraud against the surety, based on the allegation that the surety falsely represented that the bond claim would be resolved “by ‘submissions and interactions of the parties…in lieu of commencing litigation.’”

The owner moved to intervene, claiming that following the plaintiff’s termination of the subcontract, the plaintiff asked the owner to fund certain advance payments to plaintiff’s subcontractors and suppliers and certain other project costs, expenses and damages. The owner claimed that “in order to complete the project and mitigate damages, it advanced the monies to [plaintiff], without prejudice to its right to seek reimbursement….” The plaintiff’s contract with the owner contained “a $5,000 per day liquidated damages charge for late completion.” The project was completed after the contractual deadline, and, as a result, the owner claimed that the plaintiff owes the owner liquidated damages as well.

The owner also claimed that the subcontractor breached its contract and that as a third-party beneficiary of that subcontact, the owner could enforce the subcontract’s provisions. The owner further asserted that it had a direct claim against the subcontractor under the subcontract which required the subcontractors to indemnify the owner for losses or expenses relating to the contract work. The owner claimed that if the plaintiff establishes that the subcontractor breached the subcontract, the subcontractor would be directly liable to the owner for damages.

The owner also alleged a claim against the surety, based on the alleged breach of the subcontract, since the surety is responsible for the subcontractor’s deficient performance by its wrongful denial of the bond claim. The owner is a co-obligee under the performance bond. Therefore, if the plaintiff establishes that the surety wrongfully denied the bond claim, the owner would be entitled to recover directly from the surety.

The plaintiff and the subcontractor did not oppose the owner’s motion to intervene. However, the surety opposed the motion and argued that the owner “is not entitled to intervene ‘as of right’” against the surety as the surety claims that the owner’s “claims are premature and adequately represented by [plaintiff].” The surety also argued that the owner’s claims, despite being a co-obligee, are barred by a one-year contractual limitation period embodied in the bond.

The subcontractor stopped work on Jan. 12, 2015. The plaintiff commenced the litigation on April 21, 2016. The owner filed its proposed complaint in intervention on June 23, 2016. Since the lawsuit on the bond had not been commenced within the one-year contractual limitations period, the surety argued that “the claim must fail as a matter of law.” The owner countered that the insurer had “willfully” prolonged settlement negotiations, “lulling the defendant into deferring limitation until after the expiration of the limitations period….” The surety also argued that permitting intervention will cause delay in litigation, since “it relates to [the surety's] pending summary judgment motion, and will substantially prejudice it.”

The owner sought intervention not only to assert a claim against the surety under the bond, but to also assert claims against the subcontractor and the plaintiff for breach of contract. The owner contended that “the adversity between [itself and plaintiff] prevents [plaintiff] from adequately representing [the owner's] interests in litigation, particularly given that the proposed intervention complaint asserts claims against [plaintiff and the subcontractor], in addition to [the surety].”

The court reasoned, inter alia, that the owner’s interest “cannot be adequately represented by a party it is suing in the litigation.” The owner had “demonstrated as co-obligee, its statutory right to intervene…pursuant to CPLR 3012 ‘as the action involves the disposition or distribution…or a claim for damages…and the person may be adversely affected by the judgment. ( CPLR 3012 ).’” The court also granted intervention pursuant to CPLR 1013 , i.e., “by permission.” Courts have discretion to grant intervention “when there is a common question of law or fact, when a substantial right of a party will not be prejudiced by undue delay, and when the proposed intervenor has a real and substantial interest in the outcome of the litigation….”

Here, the court found that the owner had “a real and substantial interest in the outcome of this litigation, and has been involved in negotiations prior to the commencement of legal action.” Moreover, there was “no showing of undue delay or substantial prejudice to [the surety] or the other defendants.” Thus, the court granted the owner’s motion to intervene.

With respect to the surety’s motion for summary judgment, the court acknowledged that the bond provided for a one-year limitations period, the subcontractor stopped work on Jan. 12, 2015 and the plaintiff did not commence suit until approximately 15 months later on April 21, 2016. The surety contended that therefore, there were “no triable issues of fact, and summary judgment should be granted.” However, the court found that “summary judgment at this stage of the proceedings is premature.” The court cited the parties’ “repeated interactions” in connection to the bond claim and the plaintiff and intervenor owner, claimed that the surety “misled, deceived, defrauded and lulled [plaintiff] into sleeping on its rights under the bond.”

The court explained that “an insurer’s request for documentation regarding an insured’s claim does not waive or toll a contractual limitations period….” and that a waiver “‘should not be lightly presumed’ and must be based on ‘a clear manifestation of intent’ to relinquish a contractual protection…. In order to establish waiver and avert summary judgment, plaintiff must show a ‘clear manifestation of intent by defendant to relinquish the protection of the contractual limitations period’….” Moreover, “the existence of an intent to forgo such a right is a question of fact.”

Additionally, “[a]n estoppel…rests upon the word or deed of one party upon which another rightfully relies, and, so relying, changes his position to his injury.” The court explained that “[a] party may not, even innocently, mislead an opponent and then claim the benefit of his deception.”

Here, the plaintiff and the owner both affirmed that the surety’s counsel had “indicated that they agreed to waive the limitation period in which to submit a lawsuit provided [plaintiff] and [the owner] comply with [the surety's] additional request for documents.” The court opined that it was “not unreasonable to find given the circumstances presented herein that [plaintiff] did not file its claim, based on alleged assurances from [the surety] and its counsel during the Dec. 22, 2015 meeting.” However, the court noted that “such a determination is not for the court but rather for the trier of fact to decide.” The court stated that there were “unanswered questions as to whether those assurances were given and to what extent, given the absence of discovery and taking the facts in the light most favorable to plaintiff, defendant is not entitled to summary judgment at this stage of the proceedings….”

Since questions of fact remain, the court denied summary judgment with leave to renew upon completion of discovery, with respect to the breach of contract claim. The court dismissed the fraud claims since they essentially recast “the allegations of the contract claim.” Thus, the court dismissed the fraud claim without leave to replead.

Comment: To the extent that the surety had also moved, in the alternative, to dismiss based on documentary evidence ( CPLR 3211(a)(1) and on statute of limitations grounds, those motions were denied as “untimely” pursuant to CPLR 3211(e) . The court explained that, although motions made, pursuant to CPLR 3211(a)(7) , to dismiss for failure to state a claim, those motions may be made “after service of the party’s answer.” Since the surety moved pursuant to CPLR 3211 in the alternative, and the surety “charted a summary judgment course,” the court addressed the motion as one for summary judgment pursuant to CPLR 3212 .

Rinaldi v. Anchorage Construction, 450691/2016, NYLJ 1202781298225, at *1 (Sup., NY, Decided March 2, 2017), Singh, J.