New York's Appellate Division Reverses Collateral Estoppel Ruling Against Payment Bond Sureties In Suit To Enforce Arbitration Award

A recent decision by the First Department of the Supreme Court, Appellate Division, addresses the preclusive effect of arbitration awards in subsequent judgment enforcement suits against payment bond sureties. In Five Star Electric Corp. v. Federal Insurance Co., 127 A.D.3d 569, 8 N.Y.S.3d 98 (1st Dep't 2015), the First Department unanimously reversed an order of the New York County Supreme Court (Five Star Elec. Corp. v. Federal Ins. Co., 2014 NY Slip Op 31221 (Sup. Ct. N.Y. Co., May 6, 2014) which had granted partial summary judgment against defendant construction sureties Federal Insurance Company ("Federal") and St. Paul Fire and Marine Insurance Company ("St. Paul") based on the collateral estoppel effect of an arbitration award previously rendered in favor of plaintiff Five Star Electrical Corp. ("Five Star"). The lawsuit arose out of a construction contract for the installation of a signage and public address system in various New York City subway stations. Schnader represented Federal on the appeal, and on the underlying summary judgment motion.

The Appellate Division's decision, though brief, is a notable addition to the law of collateral estoppel in the suretyship context. The decision undercuts the implication, raised by two prior Second Department decisions, that a surety is necessarily bound by an arbitration award against its principal, whether or not the surety was a party to the arbitration proceeding, or otherwise consented to the arbitral process. Here, the appeals court found that the sureties were not precluded from challenging their liability for the award, based on an unusual factual predicate that called the sureties' consent to the arbitration into question.

Facts In 2003, the Metropolitan Transportation Authority ("MTA") entered into a contract with a "consortium," named Siemens Transit Technologies, for the installation of a public address and customer information screen system in portions of New York City's subway system (the "Project"). The consortium had been formed the previous year for the sole purpose of bidding on, and if successful, performing, that contract. Its two members were Siemens Transportations Systems, Inc. ("Siemens") and Transit Technologies, LLC ("Transit Tech"). Federal and St. Paul jointly issued payment and performance bonds for the Project, as sureties for the consortium.

The relationship between Siemens and Transit Tech was described in a contract that defined the scope of each party's work in connection with the Project: Siemens was to design the system and its software, and furnish equipment, while Transit Tech was to perform all electrical installation work. The consortium contract provided, among other things, that each consortium member would be solely responsible for its own work scope, and for any...