The opinion of the court was delivered by: LASKER
Defendants move to amend their answer by filing a counterclaim and for a preliminary injunction ordering plaintiff to furnish performance bonds required under defendants' contracts with the Board of Education. Defendant City Wide Transportation Company, a New York corporation ("City Wide") is engaged in the business of providing bus service primarily for pupils attending the New York public schools (among them physically handicapped, mentally retarded and emotionally disturbed children). Plaintiff, American Motorists Insurance Company ("American"), is a corporation of the State of Illinois whose insurance business includes the furnishing of performance bonds.
In 1968 City Wide was the successful bidder on two three-year contracts with the Board of Education of the City of New York. Prior to bidding on these contracts, City Wide negotiated with American to secure assurances that American would provide performance bonds in the event that City Wide was the successful bidder. As the result of such negotiations, the manager of American's Eastern Bond and Burglary Underwriting Department wrote on April 11, 1968 to the Board of Education advising as follows:
"We, as Surety, on the enclosed Bid Bond fully intend to provide any Performance Bonds required if our principal, The City Wide Transportation Company, should be awarded this contract, being bid upon."
Thereafter, on May 6, 1968, American's manager again wrote on behalf of American Motorists to the Board of Education, stating:
"This letter is in response to your phone call of May 3rd. We understand that the subject company submitted the low bids for several bus contracts for the transportation of school children. As Surety on the Bid Bonds, we are prepared to execute the Performance Bonds as required by the Board of Education in the formal contracts. We understand that such bonds have been required for the first year only of the three-year contracts but that the new contracts may specify bonds covering the entire term. Thus, our obligation as Surety is to guarantee performance of the contracts by our principal.
"I trust that this complies with your request."
City Wide proved to be the successful bidder and entered into the contracts with the Board of Education referred to in the above correspondence. In connection with the execution of the contracts by City Wide and the Board of Education, American furnished one-year performance bonds. In accordance with customary practice, the performance bonds incorporated by reference the terms of the contracts between City Wide and the Board of Education, a relevant portion of which stated:
"The Performance Bond shall be from a surety company licensed to do business in the State of New York guaranteeing the full and faithful performance for the initial first year period of such contract as may be awarded to him. Thereafter, the contractor shall be required to provide a bond guaranteeing the performance at the beginning of each additional year beyond the operation of the first year of said contract.
"Inability on the part of a contractor to obtain a bond guaranteeing performance as required herein shall be deemed sufficient cause for cancellation of balance of contract."
From January 15, 1969 to February 11, 1969, employees of City Wide struck the company, thereby preventing it during that period from meeting its obligation to provide bus service under its contract with the Board of Education. Upon the conclusion of the strike, City Wide resumed its service to the City uninterruptedly until the end of the 1968-1969 school year.
In the spring of 1969, negotiations took place between City Wide and the Board of Education as to the assessment of damages against City Wide. The matter was settled by City Wide's payment to the Board of Education of $70,000 and a waiver by the Board of Education as to any default by City Wide.
On April 23, 1969, American commenced this suit against City Wide seeking the cancellation of its existing bond with City Wide and for other relief. Prior to the commencement of the new school year, City Wide requested American to furnish a performance bond for the impending school year. Although as recently as August 21, 1969, the office of the Comptroller of the City of New York, on behalf of the Board of Education, wrote to City Wide to advise it "that the City of New York has no claim, nor does it intend to assert a claim, against you or the American Motorists Company under the above numbered bonds in connection with the Board of Education's school bus contracts for services performed by your company during the school year commencing September 1968 and ending June 30, 1969," American has refused to furnish bonds for the current school year on the grounds that by its nonperformance during the period January 15, 1969 to February 11, 1969, City Wide had defaulted on its agreement with the Board of Education, and further, that American had never agreed to furnish a second or third year bond. City Wide thereafter made efforts to secure a performance bond from other surety companies with total lack of success, which it alleges was caused by American's having brought ...