Ten Hoeve Bros., Inc. v. New Jersey Transit Corp.

A-1856-96T3 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: June 30, 1998

CONTRACTORS; SURETIES; INDEMNIFICATION—A surety under a payment and performance bond is entitled to indemnification regardless of whether termination of the underlying construction contract was meritorious.

As a condition of a contract, a construction contractor had its surety issue a payment and performance bond. In conjunction with the issuance of the bond, certain principals of the contractor agreed to indemnify the surety against any losses and expenses. When a dispute arose between the contractor and the project owner, the project owner terminated the contract and turned to the surety for satisfaction. The contractor and the owner eventually settled their dispute.

Following a period of investigation and negotiation with the project owner, the surety eventually took over the project and arranged with an independent builder to complete the work. Then the surety sought to collect from the indemnitors based upon the indemnity agreement. The fundamental defense raised by the indemnitors was that the project owner had wrongly terminated the construction contract and therefore the surety should never have hired another contractor to complete the project. A second argument posed by the indemnitors was that the surety had not acted in good faith in taking over the project and contracting with the completion contractor.

The lower court, with the approval of the Appellate Division, analyzed certain key provisions of the indemnity agreement. Those provisions were as follows: “the indemnitors shall… indemnify…the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature…which the Surety may sustain and incur… by reason of having executed…the bonds… . Payment shall be made to the Surety…as soon as liability exists or is asserted… . [T]he Surety shall be entitled to charge for any and all disbursements made by it in good faith…under the belief that it is or was liable…or that it was necessary or expedient…, whether or not such liability, necessity or expediency existed… .” In addition, the indemnity agreement provided that “in the event of any breach…or [where] the Contractor has suspended or ceased work…the Surety shall have the right at its option and its sole discretion…to take possession…of the work…to complete…the same and the Contractor and Indemnitors shall promptly upon demand pay to the Surety all losses and expenses so incurred.” Finally, the indemnity agreement provided that the Surety had “the right to adjust, settle or compromise any claim, demand [or] suit…upon the Bond” unless the indemnitors requested that the surety litigate or defend the claim, demand or suit and posted sufficient cash or collateral with the surety to satisfy “any judgment or judgments” rendered against the surety.

Each court found the language of the indemnity agreement to be clear and unambiguous and rejected the indemnitor’s argument that, absent a determination that the owner’s termination of the initial construction contract was meritorious, any payments by the surety were those of a volunteer, for which it could not recover. The Court ruled that “so long as the Surety acted in good faith in making payments and completing the performance under the construction contracts,” it was entitled to reimbursement by the indemnitors. Since the performance bond was for the benefit of the project owner, the surety was not obligated to act on the contractor’s claims of the project owner’s default.

As to the indemnitor’s argument that the surety did not act in good faith in taking over the project, the record was clear that counsel for the contractor rejected the surety’s proffer that the contractor itself act as the completion contractor. Also, neither the original contractor nor the indemnitors agreed to post the collateral called for under the indemnity agreement. The surety’s obligation to litigate the contractor’s defenses was dependent upon the indemnitor’s posting of sufficient collateral.