Contelmo’s Sand & Gravel, Inc. v. Reliance Ins. Co., 28 N.Y.2d 725 (1971)
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A third-party providing services or materials under a contract does not have a direct cause of action against a bonding company under a performance bond unless the bond’s paramount purpose is payment to such third parties, rather than merely guaranteeing the completion of the overall project.
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Summary
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Contelmo’s Sand & Gravel sought to recover payment for materials and labor provided for the improvement of private property from Reliance Insurance Company, the surety on a performance bond. The bond was issued to ensure the landowner paid for improvements and dedicated the land to the town free of liens. Contelmo’s had filed a lien for unpaid work. The New York Court of Appeals affirmed the denial of a direct cause of action, holding that the bond was primarily a performance bond, not a payment bond. However, the court suggested Contelmo’s could pursue an action to enforce its lien against the town, which took title to the land with the lien outstanding, and the town could then implead the bonding company.
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Facts
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Contelmo’s Sand & Gravel, Inc. furnished materials and labor to improve privately owned real property. The landowner contracted with Reliance Insurance Company for a performance bond. The bond ensured that the landowner would pay for the improvements and dedicate the land to the town free and clear of all liens and encumbrances. The town was the obligee on the bond. The landowner failed to pay Contelmo’s $33,716.28 for their work. Contelmo’s filed a lien, which remained outstanding when the town took title to the property. The lien had been extended by court orders.
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Procedural History
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The Appellate Division held that Contelmo’s, as the provider of materials and labor, had no direct cause of action against Reliance Insurance Company under the performance bond. Contelmo’s appealed to the New York Court of Appeals.
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Issue(s)
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Whether a third-party providing services for the improvement of privately owned property has a direct cause of action against a bonding company under a performance bond issued pursuant to a contract with the private owner, where the town is the obligee and the bond is intended to ensure the land is dedicated to the town free of liens.
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Holding
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No, because the bond was essentially a performance bond, not a payment bond, and therefore the third-party beneficiary lacked a direct right of action against the surety.
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Court’s Reasoning
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The court relied on established precedent, citing Fosmire v. National Sur. Co., 229 N.Y. 44 and McGrath v. American Sur. Co. of N.Y., 307 N.Y. 552, to support its holding that a third-party performing services does not have a right of direct action on a performance bond. The court distinguished this type of bond from a payment bond, where the