Gulf Ins. Co. v Fidelity & Deposit Co. of Md.

[*1] Gulf Ins. Co. v Fidelity & Deposit Co. of Md. 2007 NY Slip Op 51440(U) [16 Misc 3d 1116(A)] Decided on July 20, 2007 Supreme Court, New York County Freedman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through August 17, 2007; it will not be published in the printed Official Reports.

Decided on July 20, 2007
Supreme Court, New York County

Gulf Ins. Co., Plaintiff,

against

Fidelity & Deposit Co. of Maryland & Tri-State Environmental Contracting, Inc., Defendants.



602448/04

Appearances:
Attorneys for Plaintiff Gulf Insurance Company
McElroy, Deutsch, Mulvaney & Carpenter, LLP
100 Mulberry Street
Newark, New Jersey 07102-4079
By: Keith Hemmings, Esq. and Christopher Hempel, Esq.

Attorneys for Defendant Fidelity and Deposit Company of Maryland
Torre, Lentz, Gamell, Gary & Rittmaster, LLP
100 Jericho Quandrangle, Suite 309
Jericho, New York 11753-2702
(516) 240-8900
By: Steven H. Rittmaster, Esq. and Jonah C. Grill, Esq.

Attorneys for Defendant Tri-State Environmental Contracting, Inc.
Marshall M. Stern, Esq.
17 Cardiff Court
Huntington Station, New York 11746

Helen E. Freedman, J.

Plaintiff Gulf Insurance Company ("Gulf"), as the construction surety for a subcontractor named Remco Maintenance Corporation ("Remco"), brought this action against Remco's former sub-subcontractor, defendant Tri-State Environmental Contracting, Inc. ("Tri-State"), and Tri-State's surety, defendant Fidelity and Deposit Company of Maryland ("F & D"). As Remco's subrogee and assignee, Gulf seeks to recover amounts that it paid out on its performance bond to the general contractor, non-party Tishman Construction Corp. ("Tishman"), once Tishman terminated Remco after Remco had terminated Tri-State.

F & D now moves and Tri-State cross-moves for an order dismissing the complaint on the grounds that (1) defendants were relieved of liability once Remco failed to follow the contractual procedures for terminating Tri-State, (2) defendants did not proximately cause Gulf's damages; and (3) Gulf failed to mitigate its damages. Tri-State additionally cross-moves for an order directing Gulf to pay it about $ 226 thousand owed by Remco that Gulf allegedly holds in trust for Tri-State under the Lien Law. For the reasons set forth below, the motion by F & D is granted and the complaint is dismissed against it, that branch of the Tri-State cross-motion which seeks dismissal is granted and the complaint is dismissed against it, and the Tri-State cross-motion for an order directing payment is denied.

Background

Structure of Construction Documents This action arises from a project to renovate the Battery Maritime Building in lower Manhattan (the "Project"). In February 2003, the non-party owner, The New York City Economic Development Agency ("NYCEDC"), engaged Tishman as general contractor for the Project pursuant to a prime construction contract. Thereafter Tishman hired Remco as a subcontractor to perform "painting and lead paint abatement" on the exterior of the Project building, pursuant to a subcontract dated February 26, 2003 (the "Tishman/Remco Contract"). Pursuant to the contract, Remco obtained a Performance Bond and a Labor and Material Payment Bond, in the total sum of $ 1,665,750, that were issued by Gulf for the benefit of Tishman (the "Gulf Bonds") . Under those bonds, Gulf agreed under certain conditions to guarantee Remco's undertakings under the Tishman/Remco Contract. In turn, Remco indemnified Gulf for its obligations under the Gulf Bonds in a separate indemnity agreement (the "Gulf Indemnity Contract").

After Remco entered into the Tishman/Remco Contract and procured the Gulf Bonds, Remco entered into a sub-subcontract dated as of April 9, 2003 with Tri-State (the "Remco/Tri-State Contract") for Tri-State to perform the lead paint abatement work required under the Tishman/Remco Contract. To guarantee Tri-State's performance of the Remco/Tri-State Contract, F & D issued a "Subcontract Performance Bond" in the amount of $ 840,000 for Remco's benefit (the "F & D Bond"). The F & D Bond conditioned F & D's surety obligations to "[Remco] having [*2]performed [Remco's] obligations under the [Remco/Tri-State Contract]."

Contract terms Key provisions of the main documents are pertinent. To draft the Remco/Tri-State Contract, the parties marked up a commercially-printed copy of a form, "AIA Document A101-1997" (the "Form"), which the American Institute of Architects ("AIA") provides for use by the construction industry. The Form is titled "Standard Form of Agreement Between Owner and Contractor," and throughout uses the defined terms "Owner" and "Contractor" to refer to the parties to the contract. However, the parties added language to the Form that identifies Remco and Tri-State as the parties to the Remco/Tri-State Contract, and clarifies their actual roles in the Project. On the front page of the contract, the parties define Remco as the "Subcontractor" and Tri-State as the "Sub-subcontractor", and specify that "[t]hroughout this document all references to Owner' or Contractor' will mean SubContractor' and Sub-subcontractor' respectively." The front page also identifies the "Project" as the Battery Maritime Building and the "Architect" as Jan Hird Pokorny Architects, Inc.

Article 6.1 of the Remco/Tri-State Contract provides that "[t]he Contract may be terminated by the Owner or the Contractor as Provided in Article 14 of AIA Document A201-207," which is another common AIA form titled "General Conditions of the Contract for Construction;" henceforth, it will be referred to as the "General Conditions Form." The Remco/Tri-State Contract further identifies the General Conditions Form as one of a number of "Contract Documents" that form the parties' contract "and are as fully a part of the [c]ontract as if attached to [the Remco/Tri-State Contract] or repeated herein."

In relevant part, Article 14 of the General Conditions Form provides as follows: ARTICLE 14 TERMINATION OR SUSPENSION OF THE CONTRACT

. . .

14.2 TERMINATION BY THE OWNER FOR CAUSE

14.2.1[Remco] may terminate [Tri-State] if [Tri-State]:

. . .

.4. . . is guilty of substantial breach of a provision of the Contract Documents.

14.2.2When any of the above reasons exist, [Remco], upon certification by the Architect that sufficient cause exists to justify such action, may . . . after giving [Tri-State] and [Tri-State's] surety, if any, seven days' written notice, terminate employment of [Tri-State] . . . . (emphasis supplied)

The Remco/Tri-State Contract also refers to the Tishman/Remco Contract and provides that Remco "is contractually bound by all aspects of the [Tishman/Remco Contract] including all plans, drawings, specifications and documents related thereto." Remco/Tri-State Contract art. 7.6. The Tishman/Remco Contract is also identified as a "Contract Document" under the Remco/Tri-State Contract, which, as noted, is deemed as part of the Remco's and Tri-State's agreement. Remco/Tri-State Contract art. 8.13 & 8.1.7.

The Tishman/Remco Contract defines NYCEDC as the "Owner," Tishman as the "Construction Manager," and Remco as the "Subcontractor". The termination procedures in the Tishman/Remco Contract differ from those in the Remco/Tri-State Contract. Under section 26(g) of the Tishman/Remco Contract, titled "TERMINATION BY CONSTRUCTION MANAGER", Tishman may terminate as follows: If the Subcontractor shall fail to comply with any of the provisions of this contract on its part to be performed, the Construction Manager shall have the right after three (3) days' written notice to the Subcontractor, to terminate this contract and the employment of the Subcontractor . . . .

The F & D Bond also contains key terms. First, it refers to the Remco/Tri-State Contract and incorporates it by reference. Second, it provides that F & D's obligations under the F& D Bond only arise [w]henever [Tri-State] shall be, and declared by [Remco] to be in default under the [Remco/Tri-State Contract], [Remco] having performed [Remco's] obligations thereunder. . . . (emphasis supplied).

Termination by Remco and Tishman After the Project commenced, disputes arose over Tri-State's performance. In a letter dated July 10, 2003 from Remco to Tri-State, Remco alleged that Tri-State had defaulted because it had failed both to meet work deadlines and prove that it carried pollution liability insurance. Remco [*3]specified that "[i]f you fail to cure the aforesaid default within three days from date of this letter, the [c]ontract shall be deemed terminated . . . ." This letter was not sent to F& D.

In a second letter dated July 31, 2003, Remco notified Tri-State that "in accordance with section 26g of your contract [FN1], we are terminating you[r] contract dated April 9, 2003 . . . effective immediately for failure to correct contract violations." Remco sent a copy of the July 31 letter to F & D.

F & D responded to Remco by letter dated August 3. F & D stated that the July 31 letter comprised the first notice Remco had given F & D that it was terminating Tri-State. In a subsequent letter dated September 29, 2003 from F & D to Remco, F & D disclaimed any obligation to Remco under the F & D Bond on the ground that Remco had not terminated Tri-State in accordance with the procedures set forth in the General Conditions Form. In particular, F & D noted that (1) Remco had not obtained the Architect's certification that termination was justified, and (2) it had not given F & D seven days' notice before terminating, as was required by the General Conditions Form.

After F & D disclaimed, Remco hired non-party P.A.L. Environmental Safety Corp. ("P.A.L.") to complete the lead paint abatement work. Remco has never paid Tri-State any money for the work it had performed on the Project. After further disputes over the Project, in October 2003 Tishman declared Remco in default of the Tishman/Remco Contract on the grounds that Remco had failed to fully pay Tri-State, P.A.L., and other sub-subcontractors, failed to satisfy the mechanics' liens that they had filed as a result, and failed to complete the work that Remco had subcontracted.

In December 2003, Tishman terminated the Tishman/Remco Contract, and demanded that Gulf satisfy Remco's obligations pursuant to the Gulf Bonds. Remco filed a voluntary petition for relief under the United States Bankruptcy Court in June 2004. In September 2004, Gulf and Tishman negotiated a settlement whereby Gulf paid Tishman the full amount ($ 1,665,750) of the bonds.

Complaint Gulf commenced this action in September 2005. The gist of its claims is that Tri-State's breach of the Remco/Tri-State Contract and F & D's breach of the F & D Bond prevented Remco from performing the Tishman/Remco Contract, which proximately caused Tishman to terminate Remco and forced Gulf to pay under the Gulf Bonds upon Tishman's demand. Gulf asserts four causes of action: As Remco's subrogee, Gulf seeks recovery against Tri-State for breach of the Remco/Tri-State Contract (first cause of action), and against F & D for breach of the F & D Bond (second). Also, since under the Gulf Indemnity Agreement Remco had assigned its rights in the Remco/Tri-State Contract and F & D Bond to Gulf, Gulf sues Tri-State and F & D directly for breach of those contracts (third and fourth).

Motions Applying for summary judgment, both defendants argue that Gulf's subrogated and assigned claims, all of which derive from Remco's rights under the Remco/Tri-State Contract and the F & D Bond, fail because Remco did not comply with article 14.2 of the General Conditions Form, which require that (1) the Architect certify that termination for cause is justified and that (2) Remco give Tri-State and F & D seven days written notice before terminating Tri-State. Remco took neither action: it never sought the architect's opinion and terminated Tri-State on the same day it notified Tri-State and F & D.

In opposition, Gulf first argues that the termination provisions in the General Conditions Form were superseded by the more lenient provisions in the Tishman/Remco Contract, which did not require an architect's certificate and only required three days' advance notice to the "Subcontractor," as defined therein. Gulf contends that the General Conditions Form terms in the Remco/Tri-State Contract are inoperative because the Remco/Tri-State Contract incorporated the Tishman/Remco Contract by reference. However, it is well settled that "incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor." Bussanich v. 310 E. 55th St. Tenants, 282 AD2d 243, 244 (1st Dept. 2001). Moreover, the termination provisions in the Tishman/Remco Contract only address how Tishman, as the "Construction Manager"under the Tishman/Remco Contract, can terminate Remco, as the "Subcontractor" under the same contract. Those provisions have no bearing on how Remco can terminate Tri-State. [*4]Accordingly, the General Conditions Form set forth the required procedure for terminating Tri-State.[FN2]

Since Remco terminated Tri-State without following the contractual procedures, the termination was invalid and breached the Remco/Tri-State Contract.Where a contract provides that a party must fulfill specific conditions precedent before it can terminate the agreement, those conditions are enforced as written and the party must comply with them. A.S. Rampell, Inc. v. Hyster Co., 3 NY2d 369, 381-82 (1957). This general rule fully applies to construction agreements, whose parties cannot terminate contractors unless they follow the contractual procedures to the letter. Gen. Supply & Constr. Co. v. Goelet, 241 NY 28, 35 (1925) (finding the owner had wrongfully rescinded its agreement with a contractor because it had not provided the architect's certificate that the contract required); MCK Bldg. Assocs., Inc. v. St. Lawrence U., 301 AD2d 726, 727-28 (3d Dept.), leave dismissed, 99 NY2d 651 (2003) (construction manager wrongfully terminated its agreement with subcontractor when it failed to provide ten days' notice, as contract required, and instead declared the termination effective immediately); Paragon Restoration Group v. Cambridge Square Condos., 2006 WL 4094363 at *6 [Sup. Ct., Erie Co., May 11, 2006, Fahey, J.]) (in connection with a contract that incorporates the same General Conditions Form found in the Remco/Tri-State Contract, the owner breached the contract by terminating the contractor without providing an architect's certificate or advance notice).

Moreover, since Remco wrongfully terminated Tri-State and constructively evicted it from the work site, and then replaced Tri-State with another contractor to finish its work, Remco cannot seek recovery from Tri-State for its allegedly defective performance under the Remco/Tri-State Contract and the cost of correcting it. See, e.g., Gen. Supply & Constr. Co. , 241 N.Y at 35; MCK Building Assoc., 301 AD2d at 728. Remco's breach of the Remco/Tri-State Contract also relieves F & D from any liability to Remco under the F & D Bond, because F & D's obligation to perform was conditioned upon Remco's performance of the Remco/Tri-State Contract. Remco materially breached the contract by wrongfully terminating Tri-State and by failing to provide F & D with seven days' notice of the termination and an opportunity to cure.

Since Remco's claims against Tri-State are not viable and all of Gulf's claims derive from those non-viable claims, summary judgment is granted to F & D. That branch of Tri-State's cross-motion which seeks analogous relief is likewise granted. However, the branch that seeks an order directing Gulf to pay Tri-State what it allegedly holds in trust for its work on the Project is denied. The application is procedurally improper, since Tri-State has not counterclaimed against Gulf seeking such relief in this action. In any event, Tri-State seeks the same relief in another action before this Court. Tri-State v. Gulf, index no. 600338/2004.

ORDERED that the motion by defendant Fidelity and Deposit Company of Maryland for summary judgment is granted, and it is further

ORDERED that the cross-motion by defendant Tri-State Environmental Contracting, Inc. for summary judgment is granted, and it is further [*5]

ORDERED that the cross-motion by defendant Tri-State Environmental Contracting, Inc. for an order directing plaintiff Gulf Insurance Company to pay it $ 226,329.00 is denied, and it is

further

ORDERED that the Clerk is directed to dismiss the complaint.

Dated:July 20, 2007

Helen E. Freedman, J.S.C. Footnotes

Footnote 1:Remco apparently refers to the Tishman/Remco Contract, to which Tri-State is not a party.

Footnote 2:Gulf contends that Remco and Tri-State mistakenly based their contract upon an AIA form that is intended as the basis for prime contracts between owners and general contractors. Instead, Gulf claims, the parties should have used a contract which did not require an architect's certification as a precondition to termination. However, the Remco/Tri-State Contract contains many modifications and additions to the AIA form that reflect the parties' intentions, and accordingly it shall be enforced as written.

Gulf also argues that Remco should be excused from failing to provide the certificate of the Architect, who supervised the Project, because the Architect's contract with Tishman did not obligate him to inspect Tri-State's work. Accordingly, Gulf contends, it was "impossible" to furnish a certificate. This position lacks any merit, since Tishman or Remco could have made separate arrangements for the Architect to inspect Tri-State's work in connection with the Remco/Tri-State Contract.