## Facts

- A watershed district contracted with a contractor in 1973 to construct a dam.
- A surety issued a performance bond guaranteeing the contractor’s performance.
- The district terminated the contractor for allegedly untimely or deficient performance and demanded performance from the surety, which refused.
- The contractor first sued the district for contract payments allegedly due.
- In that first suit, the district asserted an affirmative defense that termination was justified but did not assert a counterclaim for its own completion/defect damages.
- The jury found the contractor had damages but also found the district’s termination justified, defeating the contractor’s recovery.
- After the first action ended, the district sued the contractor and the surety for damages caused by nonperformance and for liability under the performance bond.
- The trial court granted summary judgment to the contractor and surety on the theory the district waived these claims by not asserting them earlier; the district appealed.

## Issues

1. Whether the district’s later damages claims against the contractor were barred because they were not pleaded as counterclaims in the contractor’s earlier action.
2. Whether the district’s bond claim against the surety was barred because the district did not implead the surety in the earlier action.
3. Whether the prior verdict precluded relitigation of the justification for termination while leaving affirmative damages claims unresolved.

## Decision

- The Appellate Division reversed the grant of summary judgment to the contractor and the surety.
- The court held the district’s failure to plead a counterclaim in the first action did not, by itself, waive or bar a later action for affirmative damages.
- The court held the district’s failure to implead the surety in the first action did not bar a later separate action on the performance bond.
- The prior adjudication that termination was justified could have preclusive effect as to that issue, but it did not extinguish damages claims not previously asserted.

## Legal Principles

- Under New York practice, counterclaims are generally permissive; omission of an available counterclaim does not automatically preclude a later independent action for affirmative relief.
- Issue preclusion applies only to issues actually litigated and necessarily decided in the prior action; it is distinct from barring an unasserted claim for damages.
- Litigating facts as a defense (e.g., justification for termination) does not require litigating a separate claim for affirmative damages arising from the same transaction.
- Absent a rule requiring joinder, a party’s decision not to implead a surety in an earlier action does not waive a later claim on the bond.

## Conclusion

The court allowed the district’s later suit to proceed, holding that New York’s permissive counterclaim practice and the absence of mandatory joinder meant the district did not forfeit its damages claim against the contractor or its bond claim against the surety, even though a prior verdict could bind the parties on issues actually decided, such as justified termination.


Batavia Kill Watershed Dist. v. Charles O. Desch, Inc., 83 A.D.2d 97, 444 N.Y.S.2d 958 (N.Y. App. Div. 3d Dep’t 1981)