Claims Made by an Obligee

When an obligee makes a claim under a performance bond, more often than not it will be seeking the completion of the work by the surety, or funding for the completion of a project. If a surety refuses an obligee’s demand under the claim, whether for reasons such as the surety’s belief that the obligee breached the contract or otherwise, there is a potential for the obligee to suffer damages as a result of the refusal. As a result, the obligee may be entitled to delay damages, liquidated damages, attorney’s fees, incidental or consequential damages, punitive damages, or interest.

Regardless of the measure of damages, the surety’s liability is normally limited to the bond’s penal amount, including interest in the even that there is a default, and the surety will be liable to the obligee only to the extent that the surety’s principal would be liable. Rockland County v. Aetna Cas. & Sur. Co., 129 A.D.2d 606 (2nd Dep’t 1987). In Rockland County it was held that a surety’s obligation to complete work left unfinished by its principal was conditional pursuant to the performance bond issued. Therefore, the surety could only be held liable for failure to comply with the obligee’s demand to complete the work on the principal’s contract if the principal had defaulted on its contract. Once an obligee has no cause of action against the performance bond principal for default on a contract, an obligee is collaterally estopped from suing the surety for failure to honor its obligation as surety to complete the contractual work upon demand by the obligee.

An obligee is entitled to recover from the surety excess costs of completion up to the penal amount of the bond. If reimbursement follows a defective performance, the surety is liable to the obligee in the amount necessary to correct the defect. Board of Ed. of Central School Dist. No. 1 of Towns of Allegany, Carrollton, Humphrey and Olean, Cattaraugus County v. Matthew L. Carroll, Inc., 157 N.Y.S.2d 775 (Sup 1956). Normally, a surety issuing a performance bond will not be liable for attorney’s fees incurred by the oblige under the bond. Davis Acoustical Corp. v. Hanover Ins. Co., 22 A.D.2d 843 (3d Dep’t 1964). The surety will only be liable for attorney’s fees if the contract and bond specifically state provide for such liability. Generally, a surety is also not liable for interest that is due to the obligee. An exception, however, exists to this rule in that a defaulting surety may be held liable for interest on the amount it should have paid the obligee from the time of default by the surety. N.Y. Gen. Obli. Law §7-301.