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GENERAL AUTH. v. INSURANCE CO. OF NORTH AMERICA

January 6, 1997

GENERAL AUTHORITY FOR SUPPLY, COMMODITIES, CAIRO, EGYPT, Plaintiff, against INSURANCE COMPANY OF NORTH AMERICA, Defendant.


The opinion of the court was delivered by: EDELSTEIN

 EDELSTEIN, District Judge :

 Currently before the Court are plaintiff's and defendant's cross-motions for summary judgment, pursuant to Federal Rule of Civil Procedure 56 ("Rule 56"). For the foregoing reasons; plaintiff's motion is denied in its entirety, and defendant's motion is granted.

 BACKGROUND

 The instant motions arise from a contract dispute between plaintiff and defendant. Plaintiff General Auth. for Supply Commodities, Cairo, Egypt ("GASC") is an entity of the Egyptian government located in Cairo, Egypt. (Complaint, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046 ("Complaint") P 2 (Sept. 12, 1989).) Defendant Insurance Company of North America, Inc. ("INA") is a Pennsylvania corporation, licensed to do business in the state of New York. Id. P 3; (Answer, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046, P 3 (Oct. 10, 1989).)

 On or about November 20, 1979, GASC entered into a contract ("the Contract") with American Export Group, Inc. ("AEG"), under which AEG agreed to design, supply, install, and test for GASC thirty-nine automatic and semi-automatic bakery lines for the production of bread in Egypt. Id. P 4; (Memorandum in Support of Plaintiff's Motion for Summary Judgment, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046 ("Pltf.'s Memo") at 3 (Oct. 20, 1992)); (Defendant's Rule 3(g) Statement, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046 ("Def.'s 3(g) Stmt.") P 1 (Feb. 10, 1993).) The Contract was funded by a grant from the United States Agency for International Development ("AID"), an entity financed and operated under the auspices of the United States Department of State. (Dft.'s 3(g) Stmt. P 1); (Reply Memorandum in Further Support of Plaintiff's Motion for Summary Judgment and in opposition to Defendant's Cross-Motion for Summary Judgment, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046 ("Pltf.'s Reply") at 1 (Nov. 5, 1993).)

 Pursuant to both AID's regulations and its customary practices, AEG was required to furnish a performance bond to GASC. (Memorandum in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Defendant's Cross-Motion for Summary Judgment, General Auth. for Supply Commodities, Cairo, Egypt v. Insurance Co. of North America, 89 Civ. 6046 ("Deft.'s Memo") at 4 (Feb. 10, 1993)); see (Complaint P 5.) Accordingly, Article 9 of the Contract calls for a "Performance Guarantee Deposit." Paragraph 9.1 of the Contract states:

 
The Contractor shall submit to GASC a one (1) year with automatic renewal clause performance guarantee, for each category, in the form of a certified check, irrevocable letter of credit, bank bond, bank guarantee, or surety bond acceptable to GASC and A.I.D. in the total amount of US $ 1,812,620 which is ten percent of the total contractual price fully protecting GASC against loss incurred by GASC as a result of Contractor failure to perform any obligations under this Contract. This performance guarantee will be held by GASC on the conditions and subject to the stipulations herein contained, as a final guarantee for the due execution and proper performance of the Contract and the recovery of any penalties or their sums for which the Contractor may become liable to GASC under the Contract. It shall be valid until the fulfillment by the Contractor of all his obligations and guarantees under the Contract. The GASC may, at any time on giving prior notice to the Contractor, deduct from the amount of the said performance guarantee any sums for which the Contractor may become liable to the GASC under this Contract and which are not paid by him within thirty (30) days of receipt of written claims stating all evidence. If the Contractor has not so paid, the GASC shall be entitled on his first demand to the immediate payment by the Bank or surety up to the full amount of the performance guarantee, not withstanding any contestation by the Contractor or any third party.

 (Arab Republic of Egypt, General Authority for Supply Commodities, Contract GASC/90-78/ARE ("GASC Contract") Art. 9.1 (Nov. 20, 1979).)

 On February 26, 1980, defendant INA issued two surety bonds ("the Bonds") on AEG's behalf in favor or GASC in the amount of $ 1,812,620.00. (Def.'s 3(g) Stmt. P 3); (Complaint P 7.) The texts of the two bonds are identical, each stating that

 
the Principal [AEG] and Surety(ies) [INA] hereto, are firmly bound to the General Authority for Supply Commodities (hereinafter called GASC) in the above penal sum for the payment of which we bind ourselves, our heirs, executors, administrators, and successors, jointly and severally: Provided, That, where the Sureties are corporations acting as co-sureties, we, the Sureties, bind ourselves in such sum "jointly and severally" as well as "severally" only for the purpose of allowing joint action or actions against any or all of us, and for all other purposes each Surety binds itself, jointly and severally with the Principal, for the payment of such sum only as is set forth opposite the name of such Surety, but if no limit of liability is indicated, the limit of liability shall be the full amount of the penal sum.
 
THE CONDITION OF THIS OBLIGATION IS SUCH, that whereas the Principal [AEG] entered into the contract identified above;
 
NOW, THEREFORE, if the Principal shall:
 
(a) Perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term of said contract and any extensions thereof that may be granted by the GASC with or without notice to the Surety(ies), and during the life of any guaranty required under the contract, and shall also perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the Surety(ies) being hereby waived; and
 
(b) Pay to the GASC the full amount of the taxes imposed by the Government which are collected, deducted, or withheld from wages paid by the Principal in carrying out the construction contract or the furnishing of supplies or services with respect to which this bond is furnished; then the above obligation shall be void and of no effect.

 (Performance Bond between Principal American Export Group and Surety Insurance Company of North America, 67 HF 4552 (Feb. 26, 1980)); (Performance Bond between Principal American Export Group and Surety Insurance Company of North America, 67 HF 4553 (Feb. 26, 1980).)

 Shortly after INA issued the Bonds, AEG submitted the Bonds to plaintiff and to AID for their approval. (Def.'s 3(g) Stmt. P 4.) By letter dated January 5, 1981, L. Fred Bruney, an INA Representative Agent, stated to Nelson Joyner of AEG that "the bonds, in [INA's] opinion, complies [sic] with Article 9 of the contract." (Letter from L. Fred Bruney, INA Representative Agent, to Nelson Joyner of AEG ("January 1981 Letter") (Jan. 5, 1981)); (Plaintiff's Memo at 4.) AID subsequently approved the Bonds. (Deft.'s 3(g) Stmt. P 4.)

 Plaintiff, however, was "concerned about the security afforded by these documents in the case of a failure by AEG to perform any of its obligations under the Contract." (Pltf.'s Reply at 1.) Defendant explains, and plaintiff does not dispute, "that the performance bonds issued by INA, by their express, unambiguous terms, are conditional--i.e., that they obligate INA to pay damages only if AEG defaults in its obligation to perform the underlying contract." (Dft.'s Memo at 2.) Plaintiff objected to the conditional nature of the Bonds, "and requested that so-called 'on first demand' or 'forfeiture bonds' be issued," which would "require [defendant] to make payment upon demand, even in the absence of any breach by its principal [AEG]." (Deft.'s 3(g) Stmt. P 4); see (Pltf.'s Reply at 1.) Defendant states that "AEG advised plaintiff that it would not furnish forfeiture bonds and AID advised plaintiff that the conditional INA bonds satisfied paragraph 9.1 of the Contract and AID's regulations." (Deft.'s 3(g) Stmt. P 5.) Plaintiff concurs that AID confirmed that the Bonds "fully complied" with the provisions of Article 9 of the Contract, and that AID advised GASC in writing that the Bonds "were acceptable in AID-financed transactions." (Pltf.'s Reply at 2-3.)

 According to plaintiff, plaintiff "continued to express concern about the security afforded by the [Bonds]. . . ." (Pltf.'s Reply at 3-4.) Plaintiff thus sought further assurances from both AID and AEG regarding the protection afforded by the Bonds. Id. at 2-4. In response, both AID and AEG continued to advise plaintiff that each was aware of the text of the Bonds, and that each believed the Bonds complied with the requirements of Article 9 of the Contract. Id. at 2-6. Moreover, in a letter from AID to GASC, AID notified plaintiff that in AID's opinion, INA's January 5, 1981 letter "represents the surety's intention to accept the proof requirements as set forth in Article 9 of the Contract . . . [which] in effect, removes the conditionality of the bonds, at least in the first instance." Id. at 6 (quoting letter from L. Michael Hager, Legal Advisor to the United States Agency for International Development, to Mohammed El-Saadany, Esq., Legal Advisor and Project Manager of General Authority for Supply Commodities ("Hager Letter") at 1) (Jan. 19, 1981).) Given these assurances, GASC accepted the bonds as the performance guarantee required by the Contract, and advised AID of this decision. Id. at 7. In addition, defendant states, and plaintiff does not dispute, that "at no time did AEG attempt to obtain forfeiture bonds and none were issued." (Deft.'s 3(g) Stmt. P 5.)

 The parties present this Court different versions of the remaining facts underlying the instant dispute. Plaintiff asserts the following:

 
9. AEG failed to perform its obligations under the Contract despite repeated assurances and efforts over the course of several years and GASC, as a result, demanded that AEG pay GASC, as damages and penalties, the total amount of $ 3,600,000.00, but, despite such demand, AEG did not pay GASC.
 
10. GASC further demanded that INA pay GASC, as damages and penalties, the total amount of $ 1,812,620.00 guaranteed to GASC by the Performance Bonds but, despite demand, INA did not pay GASC.
 
11. GASC has duly performed all obligations on its part to be performed.
 
12. GASC, by reason of the premises, has been damaged by INA in the amount of $ 1,812,620.00, no part of which has been paid, although due and duly demanded.

 (Complaint PP 9-12.) In support of its assertions, plaintiff submits an engineering report detailing the deficiencies in AEG's work, and estimating that these deficiencies will cost plaintiff $ 1,860,000.00 to repair. (Pltf.'s Reply at 11-12); (Report on the Automatic Bread Lines Delivered by the American Export Group (AEG) to The General Auth. for Supply Commodities, ("GASC Report") (1985).) The GASC Report further estimates that plaintiff has suffered loss as a result of AEG's faulty performance in the amount of 8,537,745.00 Egyptian Pounds, plus $ 2,264,763.00 United States Dollars. (Pltf.'s Reply at 12); (GASC Report at 42.)

 Plaintiff explains that on June 26, 1985, it forwarded to AEG letter that "highlighted the operational, installation and design defects . . . found in the bakery lines by the technical experts." (Pltf.'s Memo at 5.) In this letter, plaintiff "demanded that AEG immediately pay GASC the sum of $ 3,600,000.00 as damages and penalties." Id. Plaintiff asserts that GASC did not heed this demand. Id. On July 28, 1985, GASC forwarded a letter to INA informing INA that GASC "had given AEG the notification required by Article 9 of the Contract concerning AEG's failure to perform its contractual obligations," advising INA that AEG had failed to pay GASC the $ 3,600,000.00 demanded by GASC, and "demanding that INA confiscate the value of the Performance Bonds . . . for the benefit of GASC." Id. at 5-6. Plaintiff reports that INA did not pay the demanded sum to GASC. Id. at 6.

 Defendant, on the other hand, denies any breach of the Contract. It claims that

 
AEG completed performance of the Contract in 1984, by which time it had received total payments from AID in excess of $ 20 million. Virtually all payments to AEG were certified by plaintiff in accordance with the Contract.

 (Deft.'s 3(g) Stmt. P 6.) In support of this assertion, defendant submits the affidavit of Nelson T. Joyner, the Vice President of Planning and Administration for AEG during the time period relevant to the instant dispute. (Affidavit of Nelson T. Joyner, General Auth. for Supply Commodities v. Insurance Co. of North America, 89 Civ. 6046 ("Joyner Aff.") P 1 (Feb. 8, 1993).) Joyner states that

 
AEG procured and shipped to Egypt all of the equipment called for by the Contract and supervised the installation of equipment by GASC personnel (to the extent [AEG] received cooperation in that endeavor from GASC,) and AEG received from AID periodic progress payments (approved by GASC), as contemplated by the contract. By mid 1984 or so, AEG has received total payments under the Contract in excess of $ 20 million.

 Id. P 11.

 Plaintiff contends that "AEG never fulfilled its contractual duties or compensated GASC for its failure to do so," and that "INA never fulfilled its obligations or compensated GASC for its failure to do so." (Pltf.'s Memo at 7.) Plaintiff further states that AEG filed for bankruptcy on April 30, 1987, in Washington, D.C. Id. at 8. Although GASC has filed a ...


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