FALL 2005 ISSUE 11 - - e, AGE 2 mor elease ed.” m. ther es’ claims r equir CONTINUED ON P prima facie evi e elease T emphasized that the ety ar t News at Ernstrom & Dreste Fall news at the Fir The cour res’ pending claims. As a result of the res’ pending claims. As a result of indemnification agreement provided that the assignment is an absolute assignment of collateral and that “no further notice or other action by [FGIC] is r The third provision, the “attorney-in-fact clause,” designated FGIC as the indemn dence of the fact and amount of liability of the indemnitors to FGIC. The second provision, the “collateral assignment clause,” granted FGIC an absolute assignment of all “collateral,” which is defined as, among other things, all causes of action belonging to the indem- nitors. vouchers or other evidence of payments made by the sur against HRH. The first provision, the against HRH. The first provision, “right-to-settle clause,” expressly provided any that FGIC could settle or compromise by claim on any bond issued or procured be it and that any such settlement would binding upon the indemnitors. Fur HRH from all claims asserted by Tres in asserted by Tres HRH from all claims the project, including connection with T for settlement agreement, HRH moved summary judgment dismissing Tres’ opposed the motion, assert- claims. Tres ing that FGIC lacked authority to r claims against HRH. Tres’ dis- motion, the Court In granting HRH’s cusses four provisions in the indemnity agreement that provide FGIC the contrac- tual authority to r t d es, r pending, e ted claims eed to satisfy Sureties in New York Must Plead Affirmative Defense of Failure to fulfill Condition Precedent “Specifically and with Particularity” July 8, 2005) . es asser r FIDELITY & SURETY FIDELITY eby FGIC agr EPORTER mance bond. FGIC issued IN THIS ISSUE for ovided by several standar mance bond on behalf of its res”). indemnity In a general for eement; and T eement, wher HRH’s performancebond claim and release HRH’s In HRH Construction, LLC v. Fidelity and LLC v. In HRH Construction, Co., C.A. No. 04-Civ.- Guaranty Insurance 1606 (PKC) (S.D.N.Y (unpublished decision), the United States of District Court for the Southern District “sweeping analyzes the surety’s New York rights” pr against HRH and HRH’s own surety, against HRH and HRH’s including a claim for wrongful termina- tion of its subcontract. While the above claims wer HRH and FGIC entered into a settlement agr indemnity agreement provisions in support right to release the claims of of a surety’s its bond principal. In addition, the cour motion for summary grants the surety’s judgment on its indemnification claim. gen- The action arose when the project’s Inc. HRH Construction, eral contractor, (“HRH”), commenced a lawsuit against Fidelity and surety, its subcontractor’s Guaranty Insurance Company (“FGIC”) under a per the per principal and subcontractor to HRH, T and agreement in favor of FGIC, Tres hold individual indemnitors agreed to FGIC harmless for sums paid as a result of having issued the bonds. In response, FGIC brought a third-party under the indemnity action against Tres agr Inc. (“T Federal Court Upholds Surety’s Rights to Federal Court Upholds Surety’s and Claim for Principal's Claims Release Bond Agreement under the Indemnity Indemnification R Second Circuit Holds Completion Agreement Invalid Due to Owner’s Failure to Obtain Written Consent to Assignment of Defaulted Contract - fir af s ety chal- ork City cuit’ ete Co., Inc., med the dis- ecovery. The ecovery. fir ork law), the CONTINUED ON PAGE 2 CONTINUED ON PAGE New Y uit r uit, predicated on Concr om the surety in . o cuit af ed fr Anier . Federal Court Upholds Rights to Surety’s Release Principal’s Claims and Claim for Indemnification uing New Y ecover In Aetna Casualty and Surety Co. v 404 F.3d 566 (2nd Cir. 2005) (con- 566 (2nd Cir. 404 F.3d str Second Cir that a com- holding trict court’s pletion agreement was invalid due to an unsatisfied condition written precedent—the owner’s consent to the assignment of the defaulted contract to the completion contractor. The completion contractor r quantum mer the invalidity of the completion agreement. See Aniero Concrete Co., Inc. v Construction Authority, 2003 WL Construction Authority, Dec. 23, 23018789 (S.D.N.Y. 2003). The Second Cir mation of the holding that there was no valid completion agree- ment effectively affirmed the quantum mer Second Circuit did, however, make note that the sur lenged only the validity of the Second Circuit Holds Second Circuit Completion Agreement an Invalid Due To Unsatisfied Condition Precedent Owner’s to Written Consent Assignment of Defaulted Contract to Completion Contractor d ’s Forum on ’s American Bar nstrom at the Er . ueckner will be co- of a panel discussion of illiam Br Payment Bond Manual, Thir esented by Mr om and W nstr uction Industry and the Fidelity and Surety Law uction Industry and the Fidelity and Baum is the co-editor of an upcoming oject Site to be pr e illiam Er Theodor authoring a paper entitled Pre-Existing Adverse Conditions at the Pr Association publication, the Performance Bond Manual. Mr. Baum will also be one of the leaders of the ABA that publication at the joint meeting the Constr Hotel, Committee meeting to be held at the Waldorf-Astoria 2006. in January, New York New York, J. W 2006 ABA Forum Mid-Winter meeting to be held at the in January. New York Hotel, New York, Waldorf-Astoria Braggins is the co-editor of an upcoming American Bar Todd Association publication, the Edition. Mr. Braggins will Braggins Mr. Edition. also be a co-chairperson of the FSLC Spring meeting to be held in Scottsdale, Arizona in April of 2006. at ee tr egas, Contract The Changing Kevin Pear uction , ently being used r New York. , ERNSTROM & DRESTE NEWS ERNSTROM & DRESTE esenter for Constr ocess. ed by AGC and CFMA in Las V nstrom presented a paper entitled ements and waivers of damages, with emphasis and will be published this spring. d ence sponsor equir om will be a co-pr illiam Er the negotiation pr .ERNSTROMDRESTE.COM nstr The 2006 Supplement to the AGC Contract Documents Handbook will be co-authored by Kevin PeartreeGavin and Lankfor on At the 25th IRMI Construction Risk Conference in Las Vegas, Nevada being held November 7-10, 2005, J. William Er by owners and a practical solution to the problems. Nevada on October 27, 2005. This was an interactive session dealing with the risk transfer methods cur the 9th Annual Construction Financial Management Confer World of Contract Risk Management–Understand or Die! or of Contract Risk Management–Understand World On September 12th and 13th of this year On September 12th and 13th of this Negotiation. This session examines key risk allocation and Negotiation. This session examines key risk allocation insurance provisions, including indemnity provisions, insur- ance r presented a seminar on insurance considerations in Design- presented a seminar on insurance considerations for the Design-Build Build Contracts and Risk Management Institute of America in Rochester J. W WWW Visit us online at: Visit Washington, DC 20036 Washington, Suite 1054 New York, New York 10017 New York New York, NW 1050 Connecticut Avenue, Suite 703 DC WASHINGTON, 317 Madison Avenue Rochester, New York 14623 York New Rochester, Suite 600 NEW YORK Boulevard View 180 Canal FALL 2005 ISSUE 3 REPORTER

CONTINUED “SECOND CIRCUIT HOLDS COMPLETION AGREEMENT INVALID” CONTINUED “FEDERAL COURT” prior to settlement, and other documen- completion agreement and not the “District Court’s Memorandum Opinions itors’ attorney-in-fact with full power to tation. Through this documentation, Sureties in New York Must Plead quantum meruit recovery on appeal: and Orders” in the matter, dated enter into any agreements necessary to FGIC had, the court observed, met its "Specifically and with Particularity" January 2, 1997; February 27, 1997, and provide FGIC with the “full protection initial burden on the motion to demon- “Because Aetna does not challenge the March 30, 1998. These three district intended” under the indemnity agreement. strate that “it acted in good faith both quantum meruit judgment except to a Claimant’s Failure to Perform a court opinions set forth the background in performing its obligations as surety ask that it be vacated if we conclude Finally, the “settlement clause” of the facts and the litigation’s convoluted and in settling HRH’s claims” and that that there was a valid contract, and indemnity agreement provided FGIC Condition Precedent motion practice that dealt with various the amounts incurred in doing so were because we reach no such conclusion, we with the right to assert or prosecute pleading deficiencies as well as whether reasonable. intimate no view as to the merits of the any claim assigned or otherwise con- Sureties in the State of New York take note: affirmative defenses that a condition prece- Aniero had waived its right to claim that Court’s determination of Aetna’s veyed in the name of Tres and to settle The court found that Tres and the dent has not been fulfilled must be pled “specifically and with particularity” pursuant to the bidding documents were defective. liability to Aneiro in quantum meruit.” such claims. individual indemnitors could not Civil Practice Law and Rules (“CPLR”) 3015(a). CPLR 3015(a) provides as follows: The district court stated that the Waiver survive FGIC’s motion for summary Our story begins on July 1, 1992, when Having cited these “sweeping rights” Conditions precedent. The performance or occurrence of a condition precedent Clause in the bid documents and the judgment because they could offer no the New York City School Construction provisions, the court reviewed a litany in a contract need not be pleaded. A denial of performance or occurrence shall be Completion Agreement would bar evidence of “fraud, collusion or other Authority (“SCA”) contracted with P.J. of cases construing New York law on a made specifically and with particularity. In case of such denial, the party relying Aniero from claiming reliance on infor- malfeasance that would call into ques- Carlin Construction Company (“Carlin”) surety’s entitlement under certain upon the performance or occurrence shall be required to prove on the trial only mation provided by Aetna unless it tion any of FGIC’s actions and rights for the modernization of Morris High clauses of an indemnity agreement such performance or occurrence as shall have been so specified. could demonstrate that its claims were under the Indemnity Agreement.” The School (“the Carlin Contract”). Carlin to release its principal’s claims. In par- based on facts peculiarly within the court specifically stated that a question In a recent New York case, some of the surety’s affirmative defenses were dismissed for was ultimately terminated from the ticular the court discussed Hutton knowledge of Aetna (“special facts as to whether HRH or Tres was in failure to comply with this strict pleading provision. In 1199 Housing Corp. v. project, and its surety, Aetna and Construction Co. v. County of Rockland, doctrine”). The court thus determined default is insufficient to create a gen- International Fidelity Insurance Co., 14 A.D.3d 383, 788 N.Y.S.2d 88 (1st Dept. 2005), the Casualty and Surety Company (“Aetna”), 52 F.3d 1191 (2d 1995), in which the there were issues of fact and denied uine issue of material fact to withstand court reversed an order granting in part the surety’s motion to dismiss and denying the was called upon to complete the work. Second Circuit made it clear that Aetna’s motion for summary judgment summary judgment. claimant’s motion to strike the surety’s affirmative defenses based on the claimant’s Aetna entered into a Completion assignment and attorney-in-fact clauses on the waiver issue. “‘own improper actions’” and failure to comply with provisions concerning “‘notice, Agreement with Aniero Concrete similar to those in the instant matter The moral of this story, as in so many default and/or termination.’” Company (“Aniero”) based upon a bid Of particular interest to sureties is give the surety authority to settle all similar ones, is each surety should of $18,800,000. The Completion the district court opinion set forth claims on behalf of its principal, including ensure that its indemnity agreement In this action, the surety on a performance bond sought to dismiss the complaint of the Agreement purported to assign Aetna’s in Appendix C that analyzes the not only claims against the bonds, but contains clauses that give it “sweeping obligee that included delay claims and damages. The opinion does not give any infor- interest under the Carlin Contract to “Effectiveness of Completion Agreement.” also the principal’s affirmation claims rights in the event a claim is made mation on the nature of the problems or the damages. The surety asserted a number of Aniero. The assignment clause in the Aniero and its surety argued that, if arising out of the bonded contracts. against it on the performance bond.” affirmative defenses, which included the failure of the obligee to allege compliance with Completion Agreement provided that Aetna failed to obtain the written con- In addition, each surety must submit unspecified conditions of the bond. In response, the obligee sought to dismiss those The court stated that, as a result of the Aetna would transfer to Aniero not only sent of the SCA to the assignment of the proper documentation, pursuant to defenses based on the surety’s failure to state with specificity in its affirmative defenses relevant provisions in the indemnity all of its duties under the Carlin con- Carlin’s contract to Aniero, then the the specific language of its indemnity the conditions precedent that the obligee failed to satisfy. The lower court held that the agreement, FGIC was entitled to settle tract but also all of its rights as well. Completion Agreement and the bond agreement, to support its claim failure of the obligee to comply with the notice provision in the bond constituted a bar and release Tres’ claims against HRH. The Completion Agreement contained provided by Aniero would be void. for indemnification. to recovery under the bond. Nonetheless, the court allowed the obligee to pursue the The court, accordingly, granted sum- E&D a clause that the agreement would Although Aetna did obtain a letter from delay claim, which, in its opinion, was not governed by the notice provisions. mary judgment, dismissing the claims become effective only when the SCA the SCA stating it had no objection to of Tres and the individual indemnitors The Appellate Division reversed the lower court and dismissed the surety’s affirmative consented, in writing, to the assign- the use of Aniero, the letter failed to against HRH and its surety. defenses pertaining to the obligee’s failure to comply with conditions precedent. The ment of Carlin’s contract. acknowledge an assignment. Accordingly, court held that, while the “plaintiff is afforded the benefit of a liberal construction of the the court found that, in the absence of The court further granted FGIC’s Aniero began the project but later pleadings,” the defendant is subject to “a strict pleading provision.” Pursuant to CPLR the written consent, the Completion motion for summary judgment against discovered that additional work was 3015(a), in an action on a contract, “the obligation to raise the issue of compliance with Agreement was invalid because a con- Tres and the individual indemnitors on required which, in its opinion, was conditions precedent rests on the party disputing their performance or occurrence.” The dition precedent was absent, based its claim for indemnification to recover beyond what it had intended to com- court stated that, if the obligee had specifically pled in its complaint that it had complied upon the terms of the Completion the costs, expenses, and attorneys’ fees plete, based upon an inaccurate and with a condition precedent in the contract, a general denial in the answer would have Agreement. The court thus held that incurred. The indemnity agreement misleading description of the work been sufficient. However, because the complaint had not asserted compliance with a Aniero’s bond was likewise invalid provided, in typical language, that completed by Carlin, the amount of condition precedent, the surety was required to set forth with specificity the condition because the bond attaches to the the indemnitors shall indemnify FGIC work remaining to be performed, and precedent with which the obligee failed to comply. Accordingly, the court dismissed the underlying contract that never came for, among other things, “‘all claims, This newsletter is intended purely the extent of remediation performed by surety’s affirmative defenses as deficient. into existence. E&D damages, expenses, losses, costs, as a resource guide for its readers. Carlin. Aniero ceased work on the professional and consulting fees, dis- It is not intended to provide spe- Therefore, sureties in New York that assert that an affirmative defense that a claimant project and commenced the lawsuit. bursements, interests and expenses of cific legal advice. Laws vary failed to comply with a condition precedent to maintaining a claim on a surety bond Aniero brought claims against Aetna’s every nature’” incurred by FGIC as a substantially from State to State. must particularize those conditions precedent in the answer to a complaint or run the risk consultant Hudson and Aetna for, among result of having issued the bonds. You should always retain and that the court will dismiss those defenses. E&D other things, fraudulent concealment, consult knowledgeable counsel fraudulent inducement, and negligent The court noted the evidence of the with respect to any specific misrepresentation. amount paid by FGIC in executing its legal inquiries or concerns. No duties as surety, evidence of its investi- The Second Circuit issued a pithy opinion, information provided in this gation of HRH’s claims, its extensive which appears, deceptively, quite lengthy, newsletter shall create an attor- correspondence with HRH and others as the court attaches three appendices, ney-client relationship. in connection with its the investigation; evidence of pretrial discovery conducted

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