Environmental Noncompliance as Material Breach: Subcontractor Barred from Payment and Bond Recovery; Surety’s Takeover with Reservation of Rights Upheld; No Judicial Estoppel Without Prior Success

Introduction

In SCE Environmental Group, Inc. v. Murnane Building Contractors, Inc., 2025 NY Slip Op 05997 (3d Dept Oct. 30, 2025), the Appellate Division, Third Department, affirms a comprehensive set of rulings arising from a state office building renovation and abatement project in Albany. The case sits at the intersection of public construction contracting, suretyship, and environmental compliance. It addresses whether a subcontractor’s regulatory violations—here, lead contamination caused by pressure washing—amount to a material breach that:

Excuses the prime contractor’s further performance (including payment) under the subcontract,
Defeats the subcontractor’s account stated theory for unpaid requisitions, and
Precludes recovery against the surety’s payment bond because the surety may assert the principal’s defenses.

The decision also clarifies two important doctrines: the scope of a performance surety’s obligations when it elects to complete a project under a takeover agreement with a reservation of rights, and the limits of judicial estoppel when allegedly inconsistent positions are taken in parallel litigation that has not reached a final merits determination.

Parties include: Murnane Building Contractors, Inc. (MBC), the prime contractor on an Office of General Services (OGS) project; Classic Environmental, Inc. (Classic), the asbestos abatement subcontractor; Travelers Casualty and Surety Company of America (Travelers), issuer of the performance and payment bonds; and SCE Environmental Group, Inc. (SCE), a prior abatement subcontractor. After Classic’s use of a power washer caused lead-laden runoff to infiltrate a storm drain, OGS terminated MBC for cause. Litigation then ensued on multiple fronts, including a Court of Claims action by MBC/Travelers against OGS and the Supreme Court actions addressed in this appeal.

Summary of the Opinion

The Third Department affirms Supreme Court’s (Platkin, J.) order that:

Granted partial summary judgment to MBC and Travelers on liability for Classic’s breach of the subcontract based on the “lead incident,” deeming Classic’s noncompliance a material breach that defeats the essential purpose of the agreement.
Dismissed Classic’s breach of contract and account stated claims against MBC in Action No. 3, concluding MBC was excused from further performance and payment.
Dismissed Classic’s claim on Travelers’ payment bond because a surety may assert any defense available to the principal; with Classic’s claims against MBC defeated, the bond claim fails.
Rejected Classic’s arguments that: (a) Travelers’ takeover under the performance bond barred Travelers from seeking damages; and (b) judicial estoppel precluded MBC/Travelers from positions allegedly inconsistent with those in the pending Court of Claims action, given the absence of a final adjudication endorsing those positions.

The court thus confirms that environmental and regulatory noncompliance by an abatement subcontractor can constitute a material breach as a matter of law, with significant consequences for payment, bond rights, and litigation strategy.

Analysis

Precedents Cited and Their Role

Material breach doctrine: The court relies on Feldmann v Scepter Group, Pte. Ltd., 185 AD3d 449 (1st Dept 2020), defining material breach as a failure so fundamental that it defeats the contract’s essential purpose. It also cites U.W. Marx, Inc. v Koko Contr., Inc., 124 AD3d 1121 (3d Dept 2015), and EXRP 14 Holdings LLC v LS-14 Ave LLC, 228 AD3d 498 (1st Dept 2024), for the rule that a material breach excuses the nonbreaching party’s performance and bars the breaching party’s contract claims. The Restatement (Second) of Contracts § 241 is invoked to underscore this framework.
Summary judgment standards: Yeshiva Gedolah Zichron Moshe v Church Mut. Ins. Co., 233 AD3d 1220 (3d Dept 2024) and Davis v Marshall & Sterling, Inc., 217 AD3d 1073 (3d Dept 2023) support the burden-shifting after movants establish entitlement to judgment. Classic failed to raise triable disputes once MBC/Travelers proffered robust documentary and testimonial proof.
Account stated: Solartech Renewables, LLC v Techcity Props., Inc., 167 AD3d 1316 (3d Dept 2018), Levine v Harriton & Furrer, LLP, 92 AD3d 1176 (3d Dept 2012), Walter Boss, Inc. v Roncalli Frgt. Co., Inc., 210 AD3d 1124 (2d Dept 2022), Raytone Plumbing Specialities, Inc. v Sano Constr. Corp., 92 AD3d 855 (2d Dept 2012), and related authorities confirm that account stated requires an agreement, which can be implied only when invoices are retained without objection under circumstances indicating assent. Here, contemporaneous objections and termination foreclosed implication of agreement.
Withholding payments for defective work: Sabre Intl. Sec., Ltd. v Vulcan Capital Mgt., Inc., 95 AD3d 434 (1st Dept 2012) and Enviroclean Servs., LLC v CEM, Inc., 12 AD3d 1042 (4th Dept 2004) affirm that contractual payment provisions permitting withholding to protect against loss due to defective work or damage are enforceable. The subcontract here expressly allowed such withholding.
Suretyship—payment and performance bonds: Clayton B. Obersheimer, Inc. v Travelers Cas. & Sur. Co. of Am., 96 AD3d 1284 (3d Dept 2012) and Brownwell Steel, Inc. v Great Am. Ins. Co., 28 AD3d 842 (3d Dept 2006) reiterate that a surety on a payment bond may assert the principal’s defenses. WBP Cent. Assoc., LLC v DeCola, 91 AD3d 861 (2d Dept 2012), Matter of Cataract Disposal v Town Bd., 53 NY2d 266 (1981), U.W. Marx, Inc. v Mountbatten Sur. Co., 3 AD3d 688 (3d Dept 2004), and First Nat. Ins. Co. of Am. v Joseph R. Wunderlich, Inc., 358 F Supp 2d 44 (NDNY 2004), affd, 144 Fed Appx 125 (2d Cir 2005) explain that a surety may, in good faith, undertake completion under a performance bond (often via takeover agreement) and reserve rights; the surety’s entitlement to indemnity and to pursue damages is not negated by uncertainty over whether the principal’s default was “properly” declared.
Judicial estoppel: Northacker v County of Ulster, 212 AD3d 86 (3d Dept 2022), 12 New St., LLC v National Wine & Spirits, Inc., 196 AD3d 883 (3d Dept 2021), Stefanik v Hochul, 229 AD3d 79 (3d Dept 2024), affd 43 NY3d 49 (2024), and Walker v GlaxoSmithKline, LLC, 201 AD3d 1272 (3d Dept 2022) articulate that judicial estoppel applies only when a party succeeds in maintaining a position in prior litigation and obtains a final determination endorsing that position. Mere inconsistent stances across unresolved matters do not trigger estoppel.
Speculation insufficient to defeat summary judgment: Nellenback v Madison County, 2025 NY Slip Op 02263 (2025) and Espinal v Trezechahn 1065 Ave. of the Ams., LLC, 94 AD3d 611 (1st Dept 2012) support the rejection of speculative assertions about OGS’s motives where concrete proof established Classic’s noncompliance and resulting contamination.

Legal Reasoning

The court’s reasoning proceeds in four principal steps:

Material breach by Classic as a matter of law. The subcontract required Classic to comply with all applicable laws, ordinances, rules, and directives; it expressly deemed violations a default. Unrebutted evidence showed Classic used a pressure washer on lead-painted steel, causing orange-tinted runoff that breached containment and infiltrated a storm drain without a permit. OGS issued deficiency notices both before and after the incident (including directives to remove pressure washers), DEC and DOL became involved, DEC issued notices of violation (later settled by fine), and a separate contractor had to be retained to remediate contamination under agency supervision. Classic’s own expert acknowledged Classic contributed to the contamination. These facts demonstrate a failure that went to the heart of an abatement subcontract’s purpose—safe, compliant hazardous materials work—thereby constituting a material breach.
Alleged OGS motive is immaterial to Classic’s breach; termination causation goes to damages, not liability. Classic’s argument that OGS wanted MBC off the job before the incident is beside the point. Even if true, it does not undo Classic’s regulatory violations. The appellate court emphasizes a clean doctrinal separation: whether Classic materially breached the subcontract is distinct from whether Classic’s conduct caused OGS to terminate MBC’s prime contract. The latter bears on damages (and is the subject of pending Court of Claims litigation), while the former establishes liability and excuses MBC’s further performance to Classic.
Account stated fails; payment withholding justified. An account stated requires agreement as to correctness of invoices. After the lead incident, MBC told Classic to stop abatement and warned no payment would issue due to deficient work; OGS soon terminated MBC. With these clear, contemporaneous objections and the subcontract’s express withholding rights for defective/damaging work, no implied agreement could arise from Classic’s later requisitions. The account stated and related CPLR 3016(f) computation theories cannot circumvent a substantive breach.
Surety consequences and estoppel. - Payment bond: Because Classic has no viable claim against MBC, Travelers may assert MBC’s defenses and defeat Classic’s bond claim.
- Performance bond takeover: Travelers’ decision to enter a takeover agreement with OGS under a reservation of rights is consistent with suretyship principles. A performance surety can act in good faith to mitigate and complete while preserving claims; it does not “voluntarily” waive damages claims against parties whose misconduct caused the completion costs, even if the propriety of the principal’s termination is being litigated elsewhere.
- Judicial estoppel: Without a final adjudication endorsing MBC/Travelers’ positions in the Court of Claims, there is no “success” or “benefit” to trigger estoppel. Parallel inconsistent theories remain permissible until one is judicially accepted to a party’s advantage.

Impact and Significance

This decision carries concrete implications for public construction, environmental abatement work, and surety practice:

Environmental compliance = core contractual obligation. The Third Department reinforces that compliance with environmental and safety regulations in abatement work is not ancillary—it is essential. Violations (e.g., containment breaches, unpermitted discharges) can be a material breach as a matter of law, swiftly cutting off the breaching subcontractor’s rights to payment and to pursue the contract.
Strategic limits on “account stated” in construction disputes. Contractors and subs cannot use account stated to revive payment claims where the core contract is defeated by a material breach and there is documented objection. Expect tighter scrutiny of post-breach requisitions in New York construction litigation.
Surety rights preserved despite takeover. Performance sureties may enter takeover agreements to complete work while reserving rights. This opinion confirms that such takeovers do not bar the surety from pursuing damages or indemnity against defaulting parties (including subcontractors), even amid disputed default narratives in other forums.
Judicial estoppel requires a win, not merely a pleading. Litigants advancing alternative theories in parallel matters face estoppel only when a prior tribunal adopts their position in a final determination or confers a benefit. Here, with the Court of Claims matter pending, estoppel did not apply—an important procedural check on premature estoppel arguments.
Damages vs. liability bifurcation preserved. The court expressly cabins the unresolved causation-of-termination question to damages, ensuring that disputes with the public owner (OGS) do not derail clear liability determinations between prime and sub.

Complex Concepts Simplified

Material breach: A serious violation that defeats the core purpose of the contract. Here, an abatement subcontract’s core purpose is safe, lawful hazardous materials removal. Regulatory violations causing contamination undermined that purpose and excused the prime contractor from further obligations to the sub.
Account stated: A theory that an invoice becomes agreed-to by silence if not objected to within a reasonable time. It cannot be used when the recipient has timely objected or where a material breach justifies withholding, and it cannot override express contract rights to withhold for defective or damaging work.
Payment bond vs. performance bond: - A payment bond guarantees payment to subs and suppliers if the prime fails to pay, but the surety stands in the principal’s legal shoes and can assert the principal’s defenses.
- A performance bond ensures completion of the work if the principal defaults. The surety may take over the project (often via a takeover agreement) and still reserve its rights to pursue parties responsible for increased costs.
Takeover agreement with reservation of rights: A contract under which a performance surety steps into the principal’s role to complete the project while expressly preserving defenses and claims. Acting under such a reservation is not a voluntary waiver of claims.
Judicial estoppel: Prevents a party from winning in one case on a position and then taking the opposite position in another. It applies only if the party previously succeeded and a court endorsed their position; merely asserting inconsistent pleadings in ongoing litigation does not trigger estoppel.
Regulatory context: In abatement work, containment and proper disposal are paramount. Discharging filtered water into a storm drain typically requires permitting; failure to obtain permits and maintain containment can trigger agency intervention, fines, and project-wide stoppages, all of which increase the risk of a material breach finding.

Key Observations on the Record

OGS issued deficiency notices to Classic early, including directives against using pressure washers during gross removal of spray-on fireproofing.
Classic’s vice president acknowledged pressure washing and observed orange-tinted water; Classic’s own expert conceded contribution to the contamination.
DEC questioned the legality of discharging to a storm drain without a permit; DEC notices of violation were resolved by a fine.
OGS documented delays and remediation needs following the incident and ultimately terminated MBC, citing Classic’s improper procedures and inadequate filtration leading to storm drain contamination.
The court expressly separated the ongoing dispute over whether OGS properly terminated MBC (relevant to damages) from Classic’s breach of the subcontract (established for liability purposes).

Practical Implications and Guidance

For subcontractors: Strict compliance with environmental and safety regulations is not optional. Deviations—especially those leading to contamination—can void payment rights and expose you to indemnity claims by primes or sureties.
For prime contractors: Maintain thorough documentation of directives, deficiency notices, and objections to invoices. Enforce contractual withholding provisions when defective work causes damage or regulatory exposure.
For sureties: Takeovers under performance bonds should be executed with clear reservations of rights. This preserves the ability to pursue indemnity or contribution against parties whose conduct led to increased completion costs, even amid disputes over the propriety of the principal’s termination.
For litigators: Be cautious invoking judicial estoppel based on parallel litigation positions. Without a final adjudication endorsing the allegedly inconsistent position, estoppel will likely fail in the Third Department.

Conclusion

SCE Environmental Group, Inc. v. Murnane Building Contractors, Inc. crystallizes a critical rule for New York’s construction and abatement sector: environmental noncompliance that causes contamination can constitute a material breach as a matter of law, excusing the nonbreaching party’s performance and foreclosing the breaching subcontractor’s payment and bond claims. The decision underscores that account stated cannot be used to bypass substantive breaches, that a payment surety may assert its principal’s defenses, and that a surety’s good-faith takeover under a performance bond with reservation of rights does not preclude it from seeking damages. Finally, the court reinforces that judicial estoppel requires a prior success or final endorsement of a litigant’s inconsistent position; mere pendency in another forum is insufficient.

In the broader legal landscape, the opinion strengthens the linkage between regulatory compliance and contract performance in hazardous abatement work, clarifies suretyship practices around takeovers, and maintains disciplined boundaries around estoppel. It is likely to be cited in future disputes where environmental infractions collide with payment disputes and bond claims on public works.