Bond Issuer Lacks Authority to Release Claims Related to Construction

Eaton Elec., Inc. v. Dormitory Auth. of New York, 852 N.Y.S.2d 363 (N.Y. App. Div. 2008)

In this case, plaintiff contracted with Dormitory Authority of New York to perform electrical work in the renovation of a library.  Plaintiff experienced delays and financial problems, eventually forcing it to assign its payment interest in the construction contract to AXA Global Risks U.S. Insurance Company in exchange for financial assistance.  Later, in return for payment from Dormitory Authority, AXA executed a release to discharge Dormitory Authority from any claims of liability in relation to the underlying construction project.  That release later became problematic when plaintiff sought an additional $12 million from Dormitory Authority as reimbursement for unanticipated and unforeseen additional costs incurred on the project.  Dormitory Authority moved for summary judgment, arguing that AXA had released it from any such liability.  The Supreme Court denied Dormitory Authority’s motion, reasoning that AXA lacked authority to release any such claims.

On appeal, the Second Department affirmed, but for different reasons.  It explained that the unambiguous terms of the assignment assigned to AXA not only the right to collect certain contract proceeds, but also “all rights of action accrued or which may accrue thereunder.”  Nonetheless, the court held that the release had to be examined in relation to the surrounding factual circumstances, i.e. where AXA’s involvement in the project was limited to providing financial support to plaintiff and receiving payment from Dormitory Authority.  The court explained, “the meaning and scope of a release must be determined within the context of the controversy being settled.”  Upon examining extrinsic evidence and the surrounding circumstances, the court concluded that the parties did not intend the release to relate to Dormitory Authority’s liability for the causes of action at issue in this dispute.

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