In Hunt v. Bankers and Shippers Ins. Co. of New York, 73 A.D.2d 797, 423 N.Y.S.2d 718 (4th Dep't 1979) (" Hunt I"), a surety provided two performance bonds for its principal (on two construction projects), and also executed an agreement to complete the construction projects after the principal defaulted.Summary of this case from International Fidelity Ins. v. County of Rockland
December 14, 1979
Appeal from the Erie Supreme Court.
Present — Dillon, P.J., Cardamone, Simons, Callahan and Moule, JJ.
Judgment unanimously modified and, as modified, affirmed, without costs, in accordance with the following memorandum: This is an action to recover damages on two performance bonds issued by defendant in connection with two construction contracts entered into between plaintiffs, as owners, and Ferguson and Johnson, Inc., as general contractors, for the construction of separate Ponderosa Restaurants in the State of Georgia. Plaintiffs also asserted causes of action with respect to each project under a certain letter of agreement, dated July 6, 1973, wherein defendant agreed to complete the construction projects following the general contractor's default. On a prior appeal from a grant of summary judgment to plaintiffs on the issue of liability, we reversed and held that there was "a triable issue as to whether defendant's interests were adversely affected by any failure of the plaintiffs substantially to perform their obligations under the construction contracts and the bonds" (Hunt v. Bankers Shippers Ins. Co. of N.Y., 60 A.D.2d 781, 783). We also held that there was a triable issue "as to whether plaintiffs complied with the terms of the letter of agreement" (Hunt, supra, p 783). At trial those issues were resolved against defendant and defendant appeals from the entry of judgment on plaintiffs' causes of action on the performance bonds. The underlying contracts called for the construction in the State of Georgia of two Ponderosa Restaurants, known, respectively, as the Stewart and Arrowhead projects. Each contract was in the sum of $130,000 and defendant issued performance bonds on each project in that amount. Judgment was entered against defendant on the Stewart project in the sum of $133,000 and on the Arrowhead project in the sum of $67,000. Initially, we note that the judgment entered on the Stewart project exceeds the amount of defendant's performance bond by $3,000. Since the amount recoverable from a surety shall not exceed the amount specified in the undertaking (General Obligations Law, § 7-301; United States Fid. Guar. Co. v Koehler, 36 Ga. App. 396, 414-415), the judgment must be reduced accordingly. Defendant's claim that the judgment should be further reduced by $22,500 must be rejected, however, because the record fails to demonstrate the source of those funds. Defendant also argues that it should not have been held in damages for plaintiffs' loss on the sale of these restaurants to a third party. Plaintiffs were forced to reduce the sale price because of the failure of defendant to complete the construction. Ordinarily the only obligation of a surety on a performance bond is to complete the building (Juell v. New Amsterdam Cas. Co., 223 App. Div. 612). It has been held, however, that the primary obligation under a performance bond is the surety's promise to be bound to the owner unless the contractor has faithfully performed, and where the surety fails to perform, it is liable for loss of use of the premises (Miracle Mile Shopping Center v National Union Ind. Co., 299 F.2d 780). Had defendant performed its obligation, it would not have been liable for damages beyond its duty to complete or pay for the completion of the construction. Since it did not perform, however, defendant is liable for those damages which flow reasonably and naturally (Chapman v. Fargo, 223 N.Y. 32, 38; Motif Constr. Corp. v. Buffalo Sav. Bank, 50 A.D.2d 718, 719, app dsmd 38 N.Y.2d 894) from the contractor's breach, as well as its own (Miracle Mile Shopping Center v. National Union Ind. Co., supra). Since defendant was aware that the restaurants were being constructed for use by Ponderosa Systems, Inc., the damages which would have flowed naturally from defendant's breach would have been loss of rents. It having been established that loss of rents would have exceeded the loss suffered as a result of the forced reduction of the sale price of the restaurants, plaintiffs were entitled to damages as thus mitigated (cf. Wilmot v. State of New York, 32 N.Y.2d 164). We have reviewed the other issues raised by defendant and we find them to be without merit. Plaintiffs cross appeal from the trial court's denial of its application for award of prejudgment interest. In our view, the court erroneously applied Georgia law to a dispute between two corporations doing business in New York on an issue in which this State has expressed a strong public policy (see CPLR 5001; General Obligations Law, § 7-301; Kilberg v. Northeast Airlines, 9 N.Y.2d 34, 41-42). The State of Georgia has little or no concern about whether such interest is awarded but the New York view is that such an award is essential if the plaintiffs are to be made whole (cf. Prager v. New Jersey Fid. Plate Glass Ins. Co., 245 N.Y. 1, 5-8). On this record it appears reasonable that interest from August 1, 1974 should be added to the judgment.