In July 2022, a trial court in New York dismissed a contractor’s claim against its subcontractor’s performance bond due to its failure to comply with the bond’s notice requirements. JDS Development LLC v. Parkside Construction Builders Corp., 2022 NY Slip Op 32604 (Sup. Ct. N.Y. County 2022).
In JDS, the general contractor sued a subcontractor’s surety on its performance bond claiming that it was liable for damages caused by the subcontractor’s delays and overall breach of contract. The performance bond required that the contractor give the surety timely notice of any subcontractor default and an opportunity to perform. Instead of doing so, the general contractor permitted the subcontractor to continue working, after holding it in breach, and did not notify the surety until months after the alleged default.
Because of this, the trial court dismissed the contractor’s bond claim, concluding that the contractor’s failure to comply with the bond’s notice provisions precluded any claim for relief under the performance bond. In doing so, the court rejected the contractor’s argument that strict compliance with notice provisions in a performance bond is not required to hold the surety liable for the acts of its principal subcontractor.
As noted by the trial court, under New York law, ‘surety bonds – like all contracts – are to be construed in accordance with their terms.’ In addition, a contractor who obtains a performance bond from its subcontractor, becomes the obligee on the bond, and is therefore required to comply with its terms. Thus, where a contractor fails to provide the surety with a timely opportunity to exercise its performance under the terms of the bond, it discharges the surety from any liability. The bottom line is that contractors and owners securing performance bonds must review their terms carefully and comply with any notice provisions prior to taking matters into their own hands with a non-performing contractor or take the risk of releasing the surety from its obligations.
About the author: George Marco is an attorney practicing in the field of construction law. He also holds a Bachelor of Science in Mechanical Engineering and was previously employed as a Project Manager for a public improvement contractor.
Disclaimer: This article is for informational purposes only and not intended to serve as legal counsel.