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You could be managing construction of a high-rise project in New York City, a power plant in India or a paper mill in Brazil, and on any of those projects your legal disputes could be subject to resolution under New York law. While it is common to provide that domestic construction project disputes are to be governed by the law of the place where the project is located, often on large, international projects and on project-financed jobs, the contracts are subject to the law of New York, where the financing parties and their legal counsel often are located.
Decisions from New York courts on construction-industry-related topics will be summarized here periodically. Some of the decisions will be from appellate courts, which establish new law or clarify existing law. Others will be from trial courts, whose decisions on construction disputes generally are not reported to the industry or public. Nevertheless, these trial court decisions reflect how common construction contract disputes are likely to be resolved in similar cases.
To obtain the full text of these decisions, e-mail Richard P. Dyer at rpdyer@thelen.com.
By Richard P. Dyer
Thelen Reid Brown Raysman & Steiner LLP
A contractor encountered conditions requiring extra work not included in the contract for a street reconstruction project. The contractor advised the city of the conditions in writing, requesting additional monies and a time extension. A review of the claims by the city's engineer ensued, followed by discussions and a written response by the engineer approving some of the claims. After failing to achieve full resolution of the claims, the contractor brought suit to collect for the claimed extra work. The city asserted a defense that the contractor had not followed all notice requirements (a detailed notice of claim was required in 10 days) and other conditions precedent, including a requirement for review and determination by the engineer. Both parties moved for summary judgment. The Supreme Court granted the city's motion. The contractor appealed.
The Appellate Division acknowledged the city provided proof that the contractor had not complied with all notice and documentation requirements. But, the court noted that the contract did not "explicitly require plaintiff to strictly comply with its terms, nor did it include a provision prohibiting estoppel or waiver on the part of the city." These clauses were present in other public contracts where notice provisions were applied strictly against a contractor (e.g. A.H.A. General Construction v. New York City Housing Authority, 92 N.Y.2d 20, 677 N.Y.S.2d 9). The court further observed that failure to give notice "compliant in every technical respect" has been excused when there is an extensive record of timely written correspondence and contact between the contractor and the public agency. Here, the court found there were questions of fact as to whether the city had actual knowledge of the claims and whether the city, through its engineer, waived strict compliance. City's motion for summary judgment was denied. G. DeVincentis & Son Construction, Inc. v. City of Oneonta, 304 A.D.2d 1006, 759 N.Y.S.2d 216 (3rd Dept. 2003).
Mis-Description of Owner Is Not Fatal to Notice of Mechanic's Lien
Contractor filed a notice of mechanic's lien and named as owner a former owner, 32 AA Associates (32AA), rather than the current owner, 32 Sixth Avenue Company, LLC (32 Sixth), which was solely owned by 32AA. In a foreclosure action on the lien, 32AA moved to dismiss the action, and plaintiff cross-moved seeking permission to amend to correct the owner's name.
The Supreme Court reviewed Lien Law §9 (2), which requires a notice of lien to state the name of the owner and its interest; §9 (7), which provides that a failure to state the true owner or a mis-description of the true owner does not affect the lien's validity; §12-a (2), which permits an amendment when there is no prejudice; and §23, which requires the lien law to be construed liberally to secure its beneficial interests and purposes.
After also reviewing prior decisions involving identification problems in notices of lien, the court concluded that 32AA and 32 Sixth were different entities and, thus, the underlying transaction did not involve a mere name change of the owner as contended by plaintiff. However, because 32AA had complete control over all aspects of 32 Sixth, it could fairly be said that 32AA was the beneficial owner of the property. Thus, although 32AA was not the record owner when the lien was filed, given the liberal direction of §23, the naming of 32AA was a mere mis-description. Because the notice was sent to an address maintained by both 32AA and 32 Sixth, where both had an agent for receipt of process, the notice was deemed effective. PM Contracting Co. v. 32 AA Associates, LLC; Supreme Court, New York County, Justice Lehner; Index No. 604088/02; August 7, 2003.
On appeal, the outcome remained substantially the same - the lienor's action was permitted to proceed. The Appellate Division concluded that the contractor, at the time the lien was filed, had not updated the title search it apparently had obtained when commencing the work. However, the neglect caused no prejudice to any existing lienor, mortgagees or good faith purchasers and thus did not warrant rejection of the lien. The court found 32AA and 32 Sixth to be one and the same entity for lien purposes and thus found substantial compliance with the lien law's requirements that the owner be identified and served a copy of the notice. The court did modify the trial court order by dismissing 32AA as a defendant because 32 Sixth, the actual owner, now was a defendant and by dismissing a mortgagee, which had assigned its mortgage before the lien filing. PM Contracting Co., Inc. v. 32AA Associates, LLC, 4 A.D.3d 198, 772 N.Y.S.2d 269 (1st Dept. 2004).
Releases in Payment Applications Did Not Reflect Unmistakable Intent to Surrender Rights; Course of Conduct Raises Issues of Fact Precluding Summary Judgment
A subcontractor sued a general contractor and its sureties for $4.1 million for additional work allegedly performed during the construction of a stadium at the USTA National Tennis Center in Flushing Meadows, New York. Subcontractor had executed periodic releases in exchange for payments by the contractor during construction. Defendant sought summary judgment based on the releases.
In a decision handed down in 2002, the Supreme Court granted summary judgment. It rejected the sub's arguments that the parties' conduct varied the terms of the releases; the releases violated public policy; and the release defense was procedurally flawed.
On appeal, the Appellate Division reversed the grant of summary judgment. The sub argued on appeal that each release constituted only a receipt pertaining to each specific progress payment owed at the time the release was provided and thus did not constitute a general release covering outstanding extra work, unpaid contract balances and damages. The general contractor countered that the releases were clear and unambiguous. They provided:
[Subcontractor] waives and releases all liens, actions, debts, claims, demands and other rights now existing, against OWNER and CONTRACTOR on account of all work, services, equipment, and/or materials performed or furnished by it in connection with the construction of the above-described Project through and including the date hereof provided, however, that the foregoing waiver and release are (i) expressly limited, and unconditional, to the extent of, and as covered by, payments actually received by the Undersigned through the date hereof and (ii) conditioned upon the receipt of payment.. This waiver is executed and delivered simultaneously with or after receipt of a payment in the amount of $________, and the Undersigned certifies that it has received a total of $________ (including such payment) for the work, services, materials and/or equipment furnished by the Undersigned through the date hereof. The Undersigned represents that the total of all sums now due the Undersigned does not exceed $zero and that the amount now due to the Undersigned's subcontractor and suppliers does not exceed $zero.
The Appellate Division found that the limiting language ("to the extent of, and as covered by, payments actually received by the Undersigned") did not reflect an intent "unmistakenly manifested" to release and surrender plaintiff's rights to additional monies. The court also found that plaintiff had raised issues of fact based on the parties' prior conduct and cited authority holding that when a waiver purports to acknowledge no further payments are owed but conduct indicates otherwise, the instrument will not be construed as a release. Here, the general contractor issued multiple change orders after execution of the last periodic release, thus undermining the contractor's claim that the release was a final one. Because issues of fact as to intent existed, the Supreme Court erred in granting summary judgment. Navillus Tile, Inc. v. Turner Construction Co., 2 A.D.3d 209, 770 N.Y.S.2d 3 (1st Dept. 2003).
MBE Violations Held Not Susceptible to Liquidated Damages
A city's attempt to obtain liquidated damages for MBE hiring shortfalls in an amount equal to 125 percent of the dollar shortfall has been ruled an unenforceable penalty.
A contractor challenged the enforceability of the provision after it was assessed such liquidated damages. The city contended the assessment was to compensate for past discrimination and to ensure compliance with hiring goals. The Supreme Court ruled in favor of the contractor, finding that the city's failure to cite actual economic damages essentially acknowledged that the liquidated damages served only as an unenforceable penalty. Indeed, the provision was not supported by testimony of the city's employees, who could not identify the damages that were being liquidated or how the 125 percent figure was arrived at. Summary judgment was granted to the contractor. City of Rochester v. E&L Piping, Inc., 196 Misc. 2d 572, 764 N.Y.S. 2d 514; Supreme Court, Monroe County; June 2, 2003.
Notice of Claim Provision Held Condition Precedent to Suing; Case Dismissed
A contractor hired by a construction manager on a public housing project sued for breach of contract and foreclosure of a mechanic's lien. The New York City Housing Authority moved for summary judgment, and the Supreme Court dismissed the complaint for failure to comply with a notice of claim requirement. It also dismissed the complaint against the construction manager.
The Appellate Division affirmed, noting: 1.) Notice of claim provisions, which are intended to avoid the credibility contests that often arise out of oral contract modifications, were a significant "factor to be considered"; 2.) The clause at issue was unlike other clauses (e.g., Barsotti's, Inc. v. Consolidated Edison Co., 254 A.D.2d 211, 680 N.Y.S.2d 88), which did not mandate strict compliance or set out the consequences of noncompliance; 3.) For purposes of the public policy regarding notice of claim requirements, there was no reason to treat the current contracting situation any differently than those in which a public agency was a direct contracting party. Promo Pro, Ltd v. Lehrer McGovern Bovis, Inc., 306 A.D.2d 221, 761 N.Y.S.2d 655 (1st Dept. 2003); Motion for Leave to Appeal Denied, 100 N.Y.2d 628, 769 N.Y.S.2d 192 (2003). Unfortunately, the short Appellate Division decision did not quote the notice provisions.
Subcontractor's Failure to Procure Insurance Was Not a Material Breach of Contract
In a briefly worded decision, the Appellate Division held that a subcontractor's failure to procure insurance was not a material breach justifying termination when: 1.) The contract allowed the contractor to procure insurance in the subcontractor's name and to recover the premium costs; and 2.) The contractor exercised that option, permitting the subcontractor to continue working on the project for two months before declaring a default and terminating the subcontractor. The court further held that the contractor breached the subcontract when it unilaterally assigned items of work included in the subcontract to other subcontractors. Contrary to the contractor's contentions, the subcontract did not allow for such unilateral reassignment of work. Syed v. Normal Construction Corp., 4 A.D.3d 303, 773 N.Y.S.2d 345 (1st Dept. 2004).
Owner's Claim Against Architect is Subject to 3-Year Statute Even if Sounding in Contract
Owner of an office building project commenced an arbitration for breach of contract against the architect. Architect sued to stay the arbitration on the ground that it was barred by the three-year statute of limitation on malpractice claims. The Supreme Court concluded that because the owner contended the architect had breached a particular contract provision -- to design to applicable building codes, specifically fireproofing requirements - the owner was entitled to the six-year statute of limitation for breach of contract and denied the petition to stay.
The Appellate Division reversed. It found that the bargained for result of the contract was not compliance with the building code per se but rather the performance of architectural services in a professional, non-negligent manner. The court further noted that the applicable statute (CPLR 214 (6)) had been amended in 1996 by the Legislature to include a clarification -- "regardless of whether the underlying theory is based in contract or tort" -- which reflected the Legislature's intent in no uncertain terms. The petition to stay arbitration was granted. In re R.M. Kliment & Frances Halsband, Architects, 3 A.D.3d 143, 770 N.Y.S.2d 329 (1st Dept. 2004); Affirmed, 3 N.Y.3d 538, 788 N.Y.S.2d 648 (2004).
Claim Against Architect, Consultant Barred by Statutes of Limitations
The Appellate Division affirmed dismissal of actions against an architect and its consultant by the project owner. The owner had commenced a professional malpractice action against its architect and a breach of contract action against the architect's consultant. The architect had completed its performance on the project and ended its professional relationship with the owner more than three years before the action was commenced. Thus, the professional malpractice cause of action against the architect was barred. The plaintiff's breach of contract action against the consultant -- apparently not an architect or engineer -- was subject to a six-year statute of limitations. Because consultant's performance was completed more than six years before the action's commencement, it also was barred. The issue of privity was not addressed by the decision. County of Rockland v. Kaeyer Garment & Davidson Architects, P.C., 309 A.D.2d 891, 766 N.Y.S.2d 359 (2nd Dept. 2003).
Contractor May Change Grounds for Termination from Default Termination to Convenience Termination
A subcontractor sued a contractor for damages arising out of a claimed wrongful termination. The contractor contended in an affirmative defense that if the subcontract was not terminated properly, then the subcontract termination was for convenience, as permitted by the contract. The subcontractor sought to dismiss this affirmative defense. The U.S. District Court characterized this as a question of first impression because neither the 2nd U.S. Circuit Court of Appeal nor any New York state court had directly addressed the question.
The court concluded that the contractor would not be bound by its initial rationale for termination provided: 1.) It was not acting in bad faith; and 2.) The subcontractor had not changed its position in reliance on the initial decision. Because neither condition was appropriate for summary judgment, the defense was permitted to stand.
This conclusion provides support for the enforceability of contract clauses providing that if a default termination is determined to be wrongful, the termination shall be deemed to be a termination for convenience. The Millgard Corp. v. E.E. Cruz/NAB/Fronier-Kemper, 2003 WL 22801519, 2003 U.S. Dist. LEXIS 21287 (S.D.N.Y. 2003).
Arbitration Cannot be Compelled Absent Clear Agreement Providing for It
Contractor and subcontractor executed a letter agreement fixing payment for work to be performed, applicable standards and prevailing wage guidelines. The letter also provided: "Pending the issuance of a formal contract, AIA A401, this confirms our agreement covering paving work at the above site." The AIA form cited includes an arbitration clause.
The parties did not enter into a more formal contract. Subcontractor proceeded with the work, and disputes arose. Subcontractor commenced an action, and contractor sought to stay the action and compel arbitration. The court identified three issues to be determined when addressing an application to stay: 1.) Whether the parties entered into a valid agreement to arbitrate; 2.) Whether the parties have complied with that agreement; and 3.) Whether the claim advanced is time-barred. As to whether there is a valid agreement, applicable law requires it to be in writing but not necessarily signed by the party charged. It must, however, clearly, expressly and unequivocally demonstrate an intent to submit disputes to arbitration.
Here, the court concluded that the letter agreement did not contain such a clear, unequivocal statement of an intent to arbitrate. The letter did not state the intent of the parties to be bound by AIA A401 and its provisions pending execution. The letter contained nothing indicating that the parties were aware of the arbitration provision of AIA A401. In fact, there was no intent manifested to incorporate the terms of AIA A401 into the letter agreement. Finding no agreement to arbitrate, the court denied the petition to stay the action. Carlo Lizza & Sons Paving, Inc. v. New York Contracting & Construction Corp.; Supreme Court, Nassau County, Justice Austin; Index No. 14376-02; February 19, 2004.
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For more information about the issues covered in this report, please contact Richard P. Dyer in our New York office at 212-895-2117 or at rpdyer@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2005 Thelen Reid Brown Raysman & Steiner LLP
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