The issue of the amount due to Plaintiff D.A.S. Contracting Corp. ("DAS") from

Defendant Nova Casualty Company ("Nova") on performance bonds has been determined at trial. A judgment was entered on the amount awarded and the judgment has been satisfied. The issue which remains is whether Nova is liable to pay DAS' attorney's fees.

In November 2002, DAS entered into two agreements with Sector Construction Inc. ("Sector") pursuant to which Sector was to perform work in connection with the construction of the houses. Sector secured payment and performance bonds required by its contracts from Nova. The bond provided that upon Nova being advised of Sector's default, Nova would remedy Sector's default or arrange for the performance of Sector's contractual obligations. Sector defaulted on the performance of its contracts. As a result, DAS terminated Sector for cause.

DAS notified Nova of Sector's termination and requested that Nova perform Sector's work until Nova could arrange for the completion of the contracted work. DAS also notified Nova that if it did not advise DAS that it would be performing under the performance bond, DAS would be forced to make arrangements for the completion of the project.

Nova delayed and ultimately refused to complete the work. Thus, DAS was required to complete the work to avoid a default under its contract with SBM.

Article 15.4 of the contract between DAS and Sector provided:

"Should either party employ an attorney to institute suit or demand arbitration to enforce any of the provisions hereof, to protect its interests in any matter arising under this Agreement, to collect damages for the breach

of the Agreement, or to recover on a surety bond given by a party under this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees, costs, charges, and expenses expended of incurred therein."

Under the terms of the bonds, if DAS declared Sector in default, Nova was obligated to remedy the default and complete the work or obtain a bid or bids for the completion of the work. Nova was required to pay the cost of completion less the balance of the subcontract price.

DAS asserts it is entitled to recover the attorneys fees it incurred in connection with the prosecution of this action in accordance with the aforementioned contractual provisions.

A performance bond is an undertaking that a contract once awarded will be completed in accordance with its terms. Matter of Cataract Disposal, Inc. v. Town Board of the Town of Newfane, 53 NY2d 266 (1981).

"It is well settled that a surety bond attaches to the principal contract and must be construed in conjunction with it (citations omitted)." Carrols Equities Corp. v. Villnave, 57 AD2d 1044, 1045 (4th Dept.) , lv. app. den., 42 NY2d 819 (1977); and Varlotta Construction Corp. v. Sette-Juliano Construction Corp., 234 AD2d 183 (1st Dept. 1996).

If the contractor defaults, the surety is obligated to either complete the work or pay to the obligee the amount necessary to complete the work. U.W. Marx, Inc. v. Mountbatten Surety Co., Inc., 3 AD3d 688 (3rd Dept. 2004).

Where the surety fails to perform its obligations after the contractor defaults, the surety's liability may include damages flowing from the breach in addition to the cost of completing the construction. Id. However, the consequential damages have been limited to damages resulting [*2]from the loss of use of the premises. See, Hunt v. Bankers and Shippers Ins. Co. of New York, 73 AD2d 797 (4th Dept. 1979), affd., 50 NY2d 938 (1980) (damages may be awarded for loss of rent or reduction in sales price resulting from surety's default) and Miracle Mile Shopping Center v. National Union Indemnity Co., 299 F.2d 780 (7th Cir. 1962) (damages permitted for loss of use of the property resulting from the surety's default). See also, 11 NY Jur2d Bonds §119.

DAS is not entitled to recover its attorney's fees in the absence of an agreement between the parties providing for payment of attorney's fees, a statute providing for payment of attorney's fees or a court rule authorizing the award of such fees. Crispino v. Greenpoint Mortgage Corp., 2 AD3d 478 (2nd Dept. 2003); and Glatter v. Chase Manhattan Bank, 239 AD2d 68 (2nd Dept. 1998). DAS asserts it is entitled to legal fees pursuant to Paragraph 15.4 of its contract with Sector.

Since payment of the other party's attorney's fees is contrary to the general rule, the court should not infer the waiver of this rule unless it unmistakenably clear from the language of the agreement. Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 NY2d 487 (1989). See also, United States Fidelity and Guaranty Co. v. Braspetro Oil Services Co., 369 F.3d 34 (2nd Cir. 2004).

By Stipulation of Facts dated August 18, 2006, the parties stipulated " The Performance Bonds specifically incorporates the Subcontracts in the Performance Bonds." (Stipulation of Facts ¶ 8). Paragraph 15.4 of the contract between Sector and DAS specifically provides for the payment of legal fees to the prevailing party should DAS be obligated to bring an action to enforce the provisions of its contract with Sector should be required to institute an action "...to recover on a surety bond given by a party under this Agreement." (emphasis added). This is clearly an action brought to recover on a surety bond given under the contract between DAS and Sector.

A provision of one contract incorporated by reference into another contract is enforceable. See, Peter Scalamandre & Sons, Inc. v. Village Dock, Inc., 187 AD2d 496 (2nd Dept. 1992), lv. app. den., 81 NY2d 710 (1993). Where the bond incorporates the terms of the contract, the surety's liability on the bond is co-extensive with that of the contractor. Babylon Assocs. v. County of Suffolk, 101 AD2d 207 (2nd Dept. 1984).

Since Nova stipulated that the terms of the contract between DAS and Sector were incorporated into the terms of the bond and since the contract provides for payment of legal fees, DAS is entitled to recover legal fees, if it is the prevailing party.

To determine whether DAS was the prevailing party, the court must consider "...the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope." Excelsior 57th Corp. v. Winters, 227 AD2d 146, 147 (1st Dept. 1996). To be considered the prevailing party, DAS had to have "...prevailed upon the central litigated issues and obtained substantial relief." 501 East 87th St. Realty Co., LLC v. Ole Pa Enterprises, Inc., 304 AD2d 310, 311 (1st Dept. 2003). See, Board of Managers of 55 Walker Street Condominium v. Walker Street, LLC., 6 AD3d 279 (1st Dept. 2004). The court should also consider the actual amount sought by the plaintiff as stated in the pleadings with the actual recovery. Solow v. Wellner, 205 AD2d 339 (1st Dept. 1994).

When the trial commenced, DAS and Nova agreed that Nova owed DAS certain sums on the bond. The action was tried on the disputed amounts. The court found as follows:

DAS also sought to recover lost profit and overhead. The parties agreed, prior to trial, that the Court would award to DAS 10% the amount recovered for subcontractor/vendor costs and labor costs as overhead. The parties further agreed that the court would award 10% of the amount recovered for subcontractor/vendor costs, labor costs and overhead as profit.

After trial, the court awarded DAS $548,538.55 for subcontractor/vendor costs and $119,000 for labor costs for a total of $667,538.55. The court deducted from this sum $23,420.90 for back charges. Thus, the Court awarded DAS $644,117.65 This resulted in an additional award for overhead of 10% of this amount, to wit: $64,411.77.

DAS was awarded $708,529.42 for contractor/vendor costs, labor costs and overhead ($644,117.65 + $64,411.77). Based upon the agreed percentage, the Court awarded DAS profit of $70,852.89.

DAS had requested overhead of $84,898,96 and profit of $93,388.86.

Against DAS' recovery, the Court awarded Nova an overpayment credit of $120,000.

At the commencement of trial, DAS sought to recover the sum of $716,702.05 exclusive of legal fees. DAS recovered $312,535.57 or 44.2% of its claimed loss. Thus, DAS recovered substantially less than the damages it was seeking.

One who recovers less than 50% of the amount sought cannot reasonably be found to have obtained substantial relief. See, Excelsior 57th Corp. v. Winters, supra. Therefore, DAS cannot be considered to have been the prevailing party for the purposes of awarding legal fees.

Accordingly, DAS' request for legal fees is denied.

Settle order on ten (10) days notice.

Dated: January 4, 2007

Mineola, NY

_____________________________

Hon. LEONARD B. AUSTIN, J.S.C.