Article by: Nell M. Hurley

Claims for non-payment asserted against a prime contractor and its surety by an errant asbestos abatement subcontractor were dismissed in a recent New York appellate case.¹ Notably, the court specifically rejected the sub’s assertion that the surety’s action against the obligee rendered the completing surety a “volunteer” precluding it from use of its principal’s rights and defenses. Finding a prior material breach of the subcontract by the sub, the court not only upheld the dismissal of the subcontractor’s payment claims, but permitted the affirmative claims against the subcontractor to proceed. 

The matter involved asbestos abatement work as part of renovations to a state office building in Albany, New York per a contract between the Office of General Services (“OGS”) and Murnane Building Contractors, Inc. (“MBC”). Travelers² issued performance and payment bonds for the project. The abatement work was later subcontracted to Classic Environmental, Inc. (“Classic”). 

Classic used a power washer on a building beam covered in lead-based paint with the resulting water runoff causing significant lead contamination in the area and infiltration of the local storm water drainage system. Shortly thereafter, as containment efforts failed, OGS terminated the prime contract with MBC and work ceased. Travelers entered into a takeover agreement with OGS in accordance with its surety obligations and the prime contract and completed the project. 

The interesting twist appeared in the subsequent litigation. In another party’s action against MBC and Travelers, they impleaded Classic for breach of contract and indemnification, alleging the termination of the prime contract was due to Classic’s conduct. Classic then brought its own separate action against MBC and Travelers for breach of the subcontract, account stated and payment bond recovery. MBC and Travelers also sued OGS in the New York State Court of Claims for breach of the underlying prime contract, including improper termination of MBC. 

MBC and Travelers moved for summary judgment for indemnification and for dismissal of Classic’s separate action against them for subcontract payments. In opposition, Classic argued, among other things, that due to Travelers’ position in the OGS case that MBC was wrongfully terminated, Travelers had completed the project as a “volunteer” and was foreclosed from seeking damages from Classic or denying payment.³ The motion court found in favor of MBC and Travelers on all counts. Classic appealed.

The appellate court affirmed, finding that Classic’s actions regarding the lead paint removal “defeat[ed] the essential purpose of the [sub]contract” by violating laws, rules, regulations, and orders of the governing public authority. This material breach by Classic excused performance by MBC, including payment obligations, and prevented recovery for account stated.⁴ Further, the court held Travelers “entitled to assert any defense available to its principal…” barring Classic’s recovery under the payment bond. 

The court was unpersuaded by Classic’s argument that Travelers acted as a volunteer in completing the project or was unable to use MBC’s defenses and rights to damages against Classic. Despite claims by MBC and Travelers that OGS improperly terminated the prime contract, the court concluded that Travelers acted in good faith and “in accordance with well-established obligations of a surety… on a performance bond… regardless of its belief as to what occurred or caused the claims of default.” Travelers’ takeover agreement with OGS also contained a full reservation of the rights that Travelers and MBC had or would have regarding indemnification and recovery, noted the court, and it dismissed Classic’s motion.⁵ 

Sometimes sureties must take inconsistent positions in claim situations or litigation. Occasionally, the conclusion reached by the surety when a performance bond is called upon may be reconsidered as full facts become known. Thankfully, as this case shows, a completing surety is not easily deprived of its principal’s rights and defenses in doing so.

1. SCE Envtl Grp., Inc. v. Murnane Bldg. Contrs., Inc., 242 A.D.3d 1457 (3d Dept. 2025).
2. Travelers Casualty and Surety Company of America.
3. If OGS wrongfully terminated MBC, a breach of the prime contract, Travelers was discharged from its bond obligations and thus acted as a volunteer, losing important surety rights regarding indemnification and recovery.
4. The court rejected as “speculation” Classic’s claims that OGS exaggerated the severity of the lead incident because it wanted to terminate MBC for other reasons.
5. Classic also asserted unsuccessfully that the doctrine of judicial estoppel precluded MBC and Travelers’ claims regarding the lead incident as a breach of contract. There had been no final determination on the issue in the OGS action, so the doctrine did not apply, said the court. The result here could impact the OGS suit.