Moore, Smith and Hays, Circuit Judges.
This is an appeal by the Board of Education Central School District No. 2, of the Towns of Bedford, New Castle, North Castle and Pound Ridge (the Board), from a judgment granting the Aetna Casualty and Surety Co.'s (Aetna) motion for summary judgment dismissing the complaint and denying the Board's cross-motion for summary judgment.
The sole issue on this appeal is whether the District Court was correct in stating that Aetna could not be liable on any cause of action brought by the Board because New York law absolves a surety of all liability on a performance bond once it has been determined that the principal's construction contract was illegal because it was not let in conformity with the New York State competitive bidding statute.*fn1 For the reasons stated below, we find that the District Court was in error. The judgment is therefore reversed insofar as the Board's complaint was dismissed and the case is remanded for proceedings consistent with this opinion.
In November 1963 the Board published an advertisement requesting bids for the general construction and site work for its Middle School.*fn2 Six bids were submitted. The three lowest bids were as follows:
Rand Construction Co. $2,276,800
Fabrizio & Martin, Inc. $2,326,900
Walter A. Stanley Construction Co. $2,549,000
The contract was awarded to the Rand Construction Co. in January 1964. Subsequently, the Rand Co. asked to withdraw its bid because it had made an error in computation. The Board consented.
The contract was then awarded to Fabrizio & Martin, Inc. (Fabrizio), the next lowest bidder. However, Fabrizio also discovered a mathematical error in its computation, which it claimed had been understated in the amount of $171,000. Fabrizio also asked either to withdraw or correct its bid.
Fabrizio's request was followed by a series of meetings, letters and telephone calls between representatives of Fabrizio and the Board during which it was decided to change the plans and specifications to compensate for the error. The changes were made with the consent of the Board, the Board's attorney, the architect and Fabrizio. To effectuate the changes, a change order was signed on March 17, 1964. The Board, however, did not submit the change order to the State Education Department for approval, as it was required to do, until June 1967.
At the same time that the change order was signed, the Board and Fabrizio entered into a general construction contract which incorporated the change order. Pursuant to the contract, Fabrizio as principal, and Aetna as surety, executed a performance bond and delivered it to the Board as obligee. Thereafter Fabrizio ...