F A L L FIDELITY & SURETY 2 0 0 5 NEW YORK I S 180 Canal View Boulevard S Suite 600 U Rochester, New York 14623 E 1 EPORTER 1 317 Madison Avenue Suite 703 R New York, New York 10017 WASHINGTON, DC Second Circuit Holds Federal Court Upholds Surety’s Rights to 1050 Connecticut Avenue, NW Completion Agreement Suite 1054 Release Bond Principal's Claims and Claim for Washington, DC 20036 Invalid Due To an Unsatisfied Condition Indemnification under the Indemnity Agreement Precedent Owner’s In HRH Construction, LLC v. Fidelity and HRH from all claims asserted by Tres in Written Consent to Guaranty Insurance Co., C.A. No. 04-Civ.- connection with the project, including Assignment of 1606 (PKC) (S.D.N.Y. July 8, 2005) Tres’ pending claims. As a result of the Defaulted Contract to (unpublished decision), the United States settlement agreement, HRH moved for District Court for the Southern District of summary judgment dismissing Tres’ Completion Contractor New York analyzes the surety’s “sweeping claims. Tres opposed the motion, assert- In Aetna Casualty and Surety rights” provided by several standard ing that FGIC lacked authority to release Co. v. Aniero Concrete Co., Inc., indemnity agreement provisions in support Tres’ claims against HRH. of a surety’s right to release the claims of 404 F.3d 566 (2nd Cir. 2005) (con- In granting HRH’s motion, the Court dis- its bond principal. In addition, the court struing New York law), the cusses four provisions in the indemnity grants the surety’s motion for summary Second Circuit affirmed the dis- agreement that provide FGIC the contrac- judgment on its indemnification claim. Visit us online at: trict court’s holding that a com- tual authority to release Tres’ claims WWW.ERNSTROMDRESTE.COM pletion agreement was invalid The action arose when the project’s gen- against HRH. The first provision, the due to an unsatisfied condition eral contractor, HRH Construction, Inc. “right-to-settle clause,” expressly provided precedent—the owner’s written (“HRH”), commenced a lawsuit against that FGIC could settle or compromise any ERNSTROM & DRESTE NEWS consent to the assignment of its subcontractor’s surety, Fidelity and claim on any bond issued or procured by the defaulted contract to the Guaranty Insurance Company (“FGIC”) it and that any such settlement would be completion contractor. under a performance bond. FGIC issued binding upon the indemnitors. Furthermore, The completion contractor the performance bond on behalf of its vouchers or other evidence of payments On September 12th and 13th of this year, Kevin Peartree Theodore Baum is the co-editor of an upcoming American Bar recovered from the surety in principal and subcontractor to HRH, Tres, made by the surety are prima facie evi- presented a seminar on insurance considerations in Design- Association publication, the Performance Bond Manual. Mr. quantum meruit, predicated on Inc. (“Tres”). In a general indemnity dence of the fact and amount of liability Build Contracts and Risk Management for the Design-Build Baum will also be one of the leaders of a panel discussion of the invalidity of the completion agreement in favor of FGIC, Tres and of the indemnitors to FGIC. Institute of America in Rochester, New York. that publication at the joint meeting of the ABA’s Forum on agreement. See Aniero Concrete individual indemnitors agreed to hold the Construction Industry and the Fidelity and Surety Law The second provision, the “collateral Co., Inc. v. New York City FGIC harmless for sums paid as a result J. William Ernstrom presented a paper entitled The Changing Committee meeting to be held at the Waldorf-Astoria Hotel, assignment clause,” granted FGIC an Construction Authority, 2003 WL of having issued the bonds. World of Contract Risk Management–Understand or Die! at New York, New York in January, 2006. absolute assignment of all “collateral,” 23018789 (S.D.N.Y. Dec. 23, the 9th Annual Construction Financial Management In response, FGIC brought a third-party which is defined as, among other things, 2003). The Second Circuit’s affir- Conference sponsored by AGC and CFMA in Las Vegas, J. William Ernstrom and William Brueckner will be co- action against Tres under the indemnity all causes of action belonging to the indem- mation of the holding that there Nevada on October 27, 2005. This was an interactive session authoring a paper entitled Pre-Existing Adverse Conditions agreement; and Tres asserted claims nitors. The court emphasized that the was no valid completion agree- dealing with the risk transfer methods currently being used at the Project Site to be presented by Mr. Ernstrom at the against HRH and HRH’s own surety, indemnification agreement provided that ment effectively affirmed the by owners and a practical solution to the problems. 2006 ABA Forum Mid-Winter meeting to be held at the including a claim for wrongful termina- the assignment is an absolute assignment quantum meruit recovery. The Waldorf-Astoria Hotel, New York, New York in January. tion of its subcontract. of collateral and that “no further notice Second Circuit did, however, At the 25th IRMI Construction Risk Conference in Las Vegas, or other action by [FGIC] is required.” make note that the surety chal- While the above claims were pending, Nevada being held November 7-10, 2005, J. William Todd Braggins is the co-editor of an upcoming American Bar lenged only the validity of the HRH and FGIC entered into a settlement The third provision, the “attorney-in-fact Ernstrom will be a co-presenter for Construction Contract Association publication, the Payment Bond Manual, Third agreement, whereby FGIC agreed to satisfy clause,” designated FGIC as the indemn- Negotiation. This session examines key risk allocation and Edition. Mr. Braggins will also be a co-chairperson of the CONTINUED ON PAGE 2 HRH’s performance bond claim and release CONTINUED ON PAGE 2 insurance provisions, including indemnity provisions, insur- FSLC Spring meeting to be held in Scottsdale, Arizona in ance requirements and waivers of damages, with emphasis April of 2006. on the negotiation process. IN THIS ISSUE The 2006 Supplement to the AGC Contract Documents Federal Court Upholds Second Circuit Holds Sureties in New York News at Handbook will be co-authored by Kevin Peartree and Gavin Surety’s Rights to Completion Agreement Must Plead Affirmative Ernstrom & Dreste Lankford and will be published this spring. Release Principal’s Invalid Due to Owner’s Defense of Failure to Claims and Claim for Failure to Obtain fulfill Condition Fall news at the Firm. Indemnification Written Consent to Precedent “Specifically Assignment of and with Particularity” Defaulted Contract 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”).