Archive: November 30, 2010

1
Court rules on reasonable amount of collateral that contractor must provide to insurer of construction project
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Surety That Did Not Fully Perform Could Not Succeed to Payment Rights
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Contractors Beware: Court Vacates $1 Million Award That Exceeded Government Contract Funding Authorization

Court rules on reasonable amount of collateral that contractor must provide to insurer of construction project

Safeco Ins. Co. v. M.E.S., Inc., No. 09-cv-3312, 2010 WL 4828103 (E.D.N.Y. Nov. 22, 2010)

In Safeco Ins. Co. v. M.E.S., Inc., the court decided which parameters should be considered when determining the amount of collateral to which an insurer of construction projects is entitled.  In this case, defendant construction companies executed indemnity agreements with plaintiff insurer.   Plaintiff sued to secure collateral under the indemnity agreements, arguing that it was entitled to several million dollars from each defendant as collateral security.  Defendants argued that the amounts should be reduced for several reasons, including (i) the fact that the insurer failed to revise its costs estimate to reflect the actual amounts of the subcontract awarded, and (ii) the insurer had several accounts receivable whose proceeds should be used to cover insurer’s costs.  The court agreed with the defendants on the first argument but not the second; the court determined the appropriate amount of collateral not by seeking mathematical certainty, but by applying New York’s reasonableness standard to construe the facts and the documentation submitted by the parties.

Surety That Did Not Fully Perform Could Not Succeed to Payment Rights

Mount Vernon City School Dist. v. Nova Cas. Co., 78 A.D.3d 1028, 912 N.Y.S.2d 98 (N.Y. App. Div. Nov. 23, 2010)

In Mount Vernon City School District, the plaintiff school district contracted with the defendant to provide heating, ventilation, and air conditioning work at a middle school.  The defendant secured a performance bond from the defendant surety.  Ultimately, the contractor failed to complete the work, and the surety refused to perform under the bond.  The district sued both the surety and the contractor for breach of contract.  The contractor had requested that payment be sent to the state Department of Labor, to be applied to a claim in another school district, and the surety argued that it should succeed to the contractor’s rights under its contract.

The Appellate Division, Second Department, disagreed, holding that the surety was not a fully paying and performing party, and that therefore it did not succeed to the rights of the payment beneficiaries.  Furthermore, the court held that the district did not breach the payment terms of the performance bond by paying the money over to the Department of Labor on request.  Finally, the court found that the school district was not entitled to attorney’s fees, since nothing in the parties’ agreements provided for such fees.

Contractors Beware: Court Vacates $1 Million Award That Exceeded Government Contract Funding Authorization

By: Carleton O. Strouss, C. G. Bowman & George A. Bibikos, K&L Gates, Harrisburg

The United States Court of Appeals for the Third Circuit recently vacated a $1 million award to a contractor for extra work it performed on a moving services contract because the award would have exceeded the funding authorization of the project owner, Wayne Moving & Storage of New Jersey, Inc. v. The School District of Philadelphia. [1]  The case is a cautionary tale for contractors and subcontractors.  In it, a subcontractor asserted that it should be paid extra costs that exceeded the project funding authorization.  It asserted that representations by the government should estop it from being able to rely on the statutory defense that the funding was not authorized.  The Third Circuit concluded that the doctrine of equitable estoppel may be asserted against governmental entities in Pennsylvania.  However, in applying the doctrine to the case before it, the Third Circuit found that the contractor seeking compensation from the governmental entity had failed to meet the elements of an estoppel claim.  Therefore, it reversed the District Court which had granted the claim and vacated an award in excess of $1 million.

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