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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.

Many of the decisions are accessible in full online, and links are provided to them. For those not available online, the full text can be obtained in hard copy by e-mailing Richard P. Dyer at rpdyer@thelen.com.

By Richard P. Dyer
Thelen Reid Brown Raysman & Steiner LLP

On the heals of an appellate court's decision permitting commercial and retail tenants to recover lost profits from the owners and managers of a nearby building that partially collapsed and caused street closings, the same court now has held that a law firm and others similarly situated cannot sue for "inconvenience costs" arising from a hoist tower collapse. In the earlier decision, the court held that local merchants had "a right to carry on their businesses free from the wrongful conduct of nearby property owners" but "were subjected to the consequences of defendants' failure to maintain their building in a reasonably safe manner despite obvious notice of the overt risks and potentially deleterious consequences of their misconduct. " 5th Avenue Chocolatiere, Ltd. v. 540 Acquisition Co., 2000 N. Y. App. Div. LEXIS 7573 (1st Dept. July 6, 2000) and the companion case of 532 Madison Avenue Gourmet Foods, Inc. v. Finlandia Center, Inc., 2000 N.Y. App. Div. LEXIS 7571 (1st Dept. July 6, 2000). A summary of the earlier cases is available at:
www. constructionweblinks. com/Resources/
Industry_Reports__ Newsletters/Aug_7_2000/
economic_loss_rule.htm.

The recent case arose out of the collapse of the exterior hoist tower utilized in construction of Two Times Square, which resulted in death, property damage and street closings. The purported class sought damages not limited to lost profits but also sought to recover all ancillary inconvenience costs, which were common to the entire community and thus not special or peculiar. The court held that such damages common to the community are not recoverable in a nuisance action. More importantly, the court held that the economic damages suffered "are too attenuated to be reasonably foreseeable consequences of the collapse of the elevator tower" and thus are insufficient to support a negligence action. Finally, the court noted, in distinguishing its earlier decision, that the "purported negligence of defendants. . . was not as egregious as that alleged against the defendants" in 5th Ave. Chocolatiere and 532 Madison Ave., "where the defendants allegedly punched more than 90 window holes in the wall of a building which they knew or should have known to be unstable and designed to be windowless."

Goldberg Weprin & Ustin LLP v. Tishman Construction Corp., App. Div. 1st Dept.; September 14, 2000.

Extra Work Claims Dismissed Because Contractor Did Not Request Approval of Change Orders; Delay Claims Dismissed Because Coordination Delays Were Contemplated

A contractor on a multi-prime school project sought recovery of additional costs for a variety of causes, including differing site conditions, unreasonable and untimely changes to the work, late responses to RFIs, denial of access, preferential access to other contractors, and manipulation of schedules.

Defendant moved for summary judgment, which was opposed by the contractor on the grounds of factual issues concerning the defendant's breach of fundamental obligations under the contract by providing defective plans and delaying the project. The court determined that plaintiff was unable to point to any specific provision of the contract that was breached and found that the damages for which plaintiff sued had not been the subject of change order requests although plaintiff had used the change order procedure for other items and understood it. The court held that plaintiff was barred by the contract from recovery as to these damages. Plaintiff's claims relating to delays to the work failed in view of a no damages for delay clause.

The court further found that contract provisions that referred to the planned award of 14 separate contracts alerted plaintiff to the possibility of delays caused by coordination problems and, thus, had been contemplated by the parties. The court also found that "mere bad administration on the part of the owner does not rise to the level of willful, malicious or grossly negligent conduct" so as to constitute an exception to the no damages for delay clause.

Tougher Industries v. Board of Education of the City of Rochester, Supreme Court, Monroe County; Judge Stander; June 2000.

Anti-Assignment Clause Does Not Bar Assignment Unless Clear Language Declares It Void or Invalid

Declaratory judgment was sought regarding the right of a beneficiary of a settlement agreement to sell the entitlement to receive future payments, given anti-assignment language in the agreement. A clause prohibited assignment, but the agreement elsewhere referred to assigns and successors in interest. The court ruled that the assignment was permissible since the agreement did not contain an express statement that an assignment would be void or invalid; a mere prohibition would give rise to a claim for damages but not invalidate the transfer. "Only language specifically addressing the consequences of an assignment and declaring it to be 'void' or 'invalid' or 'not binding' will render the assignment unenforceable. " In addition, the court identified other ambiguities in the agreement that suggested contemplation of assignment of the agreement.

C. U. Annuity Service Corp. v. Young; Supreme Court, New York County; Judge Cahn; June 19, 2000.

Public Owner's Attempt to Require Notice of Claim to Recover Contract Balance Rejected

Plaintiff asbestos abatement contractor sued the New York City Housing Authority for the balance of the contract price for removal of asbestos and re-insulation. The Housing Authority asserted that it had the right to reduce the contract price because the amount of asbestos to be removed and replaced was less than the Housing Authority's estimate, which was included in the bid documents. The court rejected the Housing Authority's contention that the changes clause empowered it to reduce the contract price. The court also rejected the Housing Authority's procedural defense, finding that a notice of claim was not a prerequisite to maintaining an action for a contract balance because the contract's notice of claim clause applied only to claims for additional compensation. In rejecting the Housing Authority's substantive and procedural defenses, the court concluded they were "based on serious misreadings of the contractual provisions upon which they were based."

J&R Contracting and Environmental Consulting v. New York City Housing Authority; Civil Court, New York County; Judge Samuels; May 30, 2000.

Designation of Contractor's Representative as Final Arbiter in a Subcontract Is Upheld

A dispute resolution provision in a subcontract provided that the parties authorized the contractor's representative to decide all questions of any nature arising out of the subcontract, and his decision was to be final and binding. His decision was subject to review only on the grounds that it was arbitrary, capricious or grossly erroneous so as to evidence bad faith. The provision further provided that use of the procedures was a "precondition" to any lawsuit. The subcontractor challenged the provision on the grounds that it was not a clear and unequivocal ADR agreement that must be followed before seeking relief in court. The court disagreed, citing New York's public policy in favor of arbitration and ADR and the clear language of the subcontract, which the subcontractor accepted "with its business eyes open."

Fergusson Electric Co. v. Kendal at Ithaca, Inc., 711 N.Y.S.2d 246 (3rd Dept., March 27, 2000).

Claim Barred by Lack of Verification

The contractor on a public contract for capping a landfill sought an equitable adjustment because of the rejection of and subsequent modification of the site grading plans. The contract included typical public contract notice-of-claim and record-keeping requirements. The contractor was to file a written notice of claim within 30 days of an order to perform extra work or the commencement of such work and, within the same time period, "a verified, detailed statement, with documentary evidence, of the items and the basis of his claim. "The contract further specifically precluded commencing an action on a claim unless there was strict compliance with the notice provisions for the claim. The contractor provided a timely written notice of its claim. However, the court found that the notice was not "properly verified in any manner nor sufficiently supported by documentary evidence." Because strict compliance was required, the complaint was dismissed on grounds that the claim was patently insufficient.

Tug Hill Construction, Inc. v. County of Broome, 704 N.Y.S.2d 391 (3rd Dept., March 23, 2000).

Bid Is Binding for 120 Days; Contract Formed When Bid Accepted

The City of New York defaulted a contractor before work began and called on the contractor's surety to arrange for performance. The surety sought and obtained competitive bids and issued a notice of award to the low bidder. The bidder withdrew its bid and refused to enter into a completion contract. With only two options available to the surety, award to the second low bidder or settling with the city, surety chose to settle and pay the city $150,000. The surety then sued the low bidder for funds it expended to settle with the city. The court granted summary judgment to the surety on the issue of liability, finding that under the terms of the bid documents, any bid submitted was irrevocable for 120 days. When the surety accepted defendant's bid within that time period, a binding contract was formed.

Carolina Casualty Ins v. ADC Contracting and Construction; Supreme Court, New York County, Judge Cahn, September 22, 2000.

Subcontractor Delayed by Contractor's Inept Administration Gets No Relief

A subcontractor on a public works project sought damages due to delays and extra work caused by the conduct of the prime contractor. The court enforced the subcontract's no-damage-for-delay provision, finding that the record did not establish that the prime contractor's actions rose to the level of one of the four recognized exceptions: (1) the product of willful, malicious or grossly negligent conduct; (2) uncontemplated delays; (3) so unreasonable as to constitute abandonment of the subcontract; or (4) the result of a breach of a fundamental obligation of the subcontract. While the record did reflect delays caused by "inept administration" by the prime contractor, such conduct was covered by the subcontract's exculpatory provisions. This case follows previous decisions holding that mal-administration of construction contracts by public bodies does not fall within the noted exceptions to a no damage for delay clause.

S. N. Tannor, Inc. v. A.F.C. Enterprises, Inc.; App. Div. 1st Dept.; October 19, 2000

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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.





©2000 Thelen Reid Brown Raysman & Steiner LLP