By: WBG, LLP Published: April 2014

Contract Language May Affect the Limitations Period of a Bond

By: Rick Ward, Law Clerk, 3rd year law student at Pace Law School

Edited by: Thomas S. Tripodianos, Partner

The specific language of a performance bond can cause the limitations period for claims against the bond to run before the full contract amount is paid. In City of Yonkers v 58A JVD Indus., Ltd., the second department found that the performance bond claim accrued when final payment on a contract had been made, even though 1% of the contract price was still unpaid to the contractor. The City’s claim was dismissed.

In April of 2007, Yonkers contracted with JVD to perform the concrete and related work for its project, the McLean Avenue Streetscape Improvement Program. The contract required JVD to secure a performance bond in favor of the City, which it executed along with the Colonial Surety Company. The specific language of the bond included a limitation that claims on the bond must be made within two years after the date of Final Payment under the contract. JVD agreed to hold Colonial harmless for any claim arising out of the performance bond.

In October of 2007, the City notified JVD that several loads of concrete supplied for the project fell short of the contractual specifications. Notwithstanding this notification, in October of 2008 the city issued a certification that JVD was entitled to 80% of the retainage on the contract, and paid JVD accordingly.  By the terms of the construction agreement this was defined as final payment. The unpaid 20% of the retainage was withheld as security for faithful performance of JVD’s obligation pursuant to the terms of the contract. In March of 2009, the City informed JVD that portions of the project had rapidly and prematurely deteriorated and that the contract required JVD to repair, replace, restore or rebuild the affected areas. JVD failed to do so and the City filed a claim with Colonial, which Colonial rejected. In January of 2013, the city commenced an action against JVD and Colonial for breach of contract. JVD, as indemnitor of Colonial, moved to dismiss the action against Colonial on the ground that it was time-barred by the language of the bond.

The Supreme Court of New York initially denied the motion agreeing with the City that the limitations period did not begin to run until payment of the remaining 1% of the contract. However, on appeal, the Second Department reversed that determination. It found that two sections of Article 28 of the contract, when read together, establish that Final Payment under the contract occurred upon the City’s certification of the work as complete and tender of payment thereon. It also found that the October 2008 certification and payment indisputably met the contract definition of final payment, even though 1% of the contract price was still retained by the city pursuant to the security provision of the contract. Since the City brought its claim against the Surety more than four years later in January of 2013, the court dismissed the City’s claim.

Practice Tip: Contracting parties utilizing performance bonds must pay close attention to the detailed language of the bond and the contract, especially when dealing with time limiting language on a bond that incorporates a term defined by the underlying contract.

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