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Posted: May 3, 2015

No Summary Judgment Against Sureties Where There Were Questions of Fact Regarding Whether They Were Bound by Prior Proceeding

On April 21, 2015, the First Department issued a decision in Five Star Electric Corp. v. Federal Ins. Co., 2015 NY Slip Op. 03277, holding that a surety was not bound by an arbitral award.

In Five Star Electric, the trial court granted the plaintiff partial summary judgment against “defendants-third party plaintiffs-co-sureties Federal Insurance Company and St. Paul Fire and Marine Insurance Company on the payment bond.” The First Department reversed, explaining:

The motion court erred in concluding that . . . the sureties on the payment bond at issue in this action, were collaterally estopped from challenging the arbitration award rendered between plaintiff . . . and third-party defendant. Based on the record before this Court, the sureties did not have the full opportunity to contest the prior determination.

The surety bond’s principal is the two-company consortium formed by third-party defendants Siemens Industry Inc. and Transit Tech. Siemens, although not a party to the subcontract between plaintiff Five Star and Transit Tech, voluntarily agreed to participate in the arbitration and be bound by its result. However, Five Star would only permit Siemens’ participation on what could only be described as extortionate terms which Siemens could not rationally accept. Under these circumstances, with one of the surety bond’s principals unable to participate in the underlying arbitration, the sureties cannot be collaterally estopped from contesting the result.

Moreover, given the fact that Five Star was a subcontractor to Transit Tech only, there is, at best, questionable privity between Five Star and the sureties, creating a question of fact concerning whether the sureties could reasonably be found to have consented to arbitration with Five Star.

(Internal quotations and citations omitted). This decision illustrates the challenges of seeking to hold a party liable based on a decision in a proceeding to which they were not a party.

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