|
 | |
|
NEW YORK REPORT: FAA Applies, So Arbitrators, Not Court, Decide Timeliness of Contract Claims, Court of Appeals Rules
|
| |
|
January 22, 2007
|
|
|
|
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
Petitioner, a waterproofing and masonry contractor, sought to stay an arbitration as barred by the six-year statute of limitations for contract actions, contending that its waterproofing job on respondent's Manhattan building was completed in 1996. Respondent contended that the Federal Arbitration Act applied and that, under the FAA, the arbitrator, not the court, decides statute-of-limitation issues.
The Supreme Court agreed with petitioner, permanently staying the arbitration. The court was not persuaded that there was a "substantial nexus" between the contract and interstate commence although it acknowledged that some of the materials and equipment came from other states. It further noted that the arbitration clause did not mention the FAA, nor could it be said that the petitioner agreed to arbitrate "before the FAA."
The contract provided that it was governed by the law of the place where the project was located, in this case New York. The court noted that under New York law, the timeliness of claims sought to be arbitrated, including those governed by the FAA, is resolved by the courts. The court concluded that respondent's demand for arbitration was untimely. Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp.; Supreme Court, New York County, Justice Lippman; July 31, 2003.
On appeal, the Appellate Division reversed. It held there was no question that the FAA was applicable because the project "affected" interstate commerce in numerous ways, which the court listed. Because the FAA was applicable, the trial court improperly determined the statute of limitations issue, which should have been left to the arbitrators.
The Appellate Division further noted that the contract's choice of law provision did not evidence an intent to have New York law control the question of who decides statute of limitations issues because the clause did not explicitly provide that the agreement and "its enforcement" would be governed by New York law. Thus, the question of timeliness was for the arbitrators, not the court. Diamond Waterproofing Co., Inc. v. 55 Liberty Owners Corp., 6 A.D.2d 101, 774 N.Y.S.2d 32 (1st Dept. 2004); Motion for Leave to Appeal Granted, 2 N.Y.3d 822, 781 N.Y.S.2d 285 (2004).
The Court of Appeals held that the FAA applied to the dispute because the contract evidenced a transaction involving or "affecting" interstate commerce, noting that numerous out-of-state entities were involved in the transaction even though the project was based in Manhattan.
The project manual and the engineer's drawings were created in a joint effort with a structural engineering firm headquartered in Illinois; the contractor's largest suppliers were New Jersey companies; and project meetings often were held in New Jersey.
The court noted that applicability of the FAA triggered the presumption that the arbitrator should decide defenses of waiver, delay or arbitrability. Further, questions concerning whether prerequisites such as time limits, notice, laches, estoppel and conditions precedent to an obligation to arbitrate have been met generally are for the arbitrators to decide. However, in recognition of the FAA's policy of honoring private terms of arbitration agreements, the court will not apply this presumption if the parties have agreed otherwise. In re Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 826 N.E.2d 802, 793 N.Y.S.2d 831 (2005).
Subcontractor's Assignee May Recover Under Payment Bond for Public Works Projects
The Court of Appeals has stepped in to provide guiding precedent on the ability of a subcontractor's assignee to sue under State Finance Law §137 and recover payment from bond sureties on public works projects. The statute is silent on this point, and the First and Second Departments of the Appellate Division had rendered conflicting decisions.
A subcontractor sold its accounts receivable to a company that specializes in financing and collecting these payments. The general contractor had gone out of business. So, the collection company pursued the guaranty company that had provided a payment bond under State Finance Law §137.
The court noted claims typically remain transferable under General Obligations Law §13-101 and Restatement (Second) of Contracts §317 (2). The court also noted that State Finance Law §137 was designed to protect workers, material suppliers and subcontractors from payment risks on public works projects and that the statute is intended to provide subcontractors a remedy by which they may recover sums due to them.
The court held that because the legislature intended to protect suppliers, workers and subcontractors, a subcontractor's assignee may stand in the shoes of the subcontractor and make a claim on a public works payment bond.
The court reasoned that allowing assignees of subcontractors to pursue claims would not expand the number of claims as the collection company simply was more efficient at collecting sums due than the subcontractor. The court further reasoned that economically weak beneficiaries under State Finance Law §137 should not be precluded from recovering their deserving and lawful claims against bonds. Quantum Corporate Funding, Ltd. v. Westway Industries, Inc., 4 N.Y.3d 211, 825 N.E.2d 117, 791 N.Y.S.2d 876 (2005).
Requirement that Parties Be in Privity or in Relationship Approaching Privity to Claim for Pecuniary Loss Is Reaffirmed
The U.S. District Court for the Southern District of New York has denied a motion to dismiss by defendant architects in a claim for negligent misrepresentation by a surety, as assignee from a contractor, and rejected the architects' argument that the surety was not in privity with the architects and thus could not pursue claims of the contractor.
The court applied the New York Court of Appeals' ruling in Ossining Union Free School District v. Anderson LaRocca Anderson, 73 N.Y.2d 417, 539 N.E.2d 91, 541 N.Y.S.2d 335 (1989), which held: The "long-standing rule is that recovery may be had for pecuniary loss arising from negligent [mis]representation where there is actual privity of contract between the parties, or a relation so close as to approach that of privity."
The Court of Appeals determined that a relationship will be "so close as to approach that of privity" if the plaintiff can demonstrate: (1) awareness by engineers hired by the architect and not in privity with the owner that the reports prepared by the engineers were to be used for a particular purpose or purposes; (2) reliance by a known party in furtherance of that purpose; and (3) some conduct by the defendants linking them to the party and evincing defendant's understanding of the reliance.
The U.S. District Court found that the surety had standing to bring the contractor's claims for economic loss created by negligent design and administration of the project by the architects, given that the architect had been hired by the owner to review bids, administer the project and oversee work on the project and that the architect was not the owner's agent.
The architects were held to have an awareness that their negligent design would be used by the contractor to achieve the "common goal" of construction of a college. The contractor was clearly known to the architect. The court found that there was "linking conduct" through which the architect designed the plans and specifications, sought bids, answered questions, reviewed such bids, administered the project, inspected the work, oversaw the actual construction, communicated with the contractor, reviewed and approved shop drawings, all of which was evidence that reliance by the contractor on the architects' services was within the contemplation of the parties. Travelers Casualty and Surety Co. v. Dormitory Authority of the State of New York, 2005 WL 1177715 (S.D.N.Y. 2005).
Near Privity Found in Relationship between Construction Manager, Architect and Engineer Separately Engaged by Owner
The Supreme Court, Nassau County has denied a summary judgment motion by architect and engineering associates who were third party defendants in an action between a plaintiff construction manager and defendant school district. The court rejected the design professionals' arguments that there was neither contractual privity nor a relationship functionally resembling privity.
The construction manager commenced a third party action against the architect and engineering associates claiming that the construction manager was a third party beneficiary of both the architect-school district contract and engineer-school district contract and that it was in "near privity" with both the architects and engineers.
The court held that the construction manager was not a third party beneficiary because the contracts expressly negated the creation or conferral of such third-party beneficiary rights.
However, the court applied the test set down by the New York Court of Appeals in Ossining Union Free School District v. Anderson LaRocca Anderson, supra, for determining a near-privity relationship. The court determined that both the architects and engineers had agreed to provide design and engineering calculations; both parties knew that their calculations would be utilized for the "particular purpose" of performing the construction work; and both parties knew that the construction manager relied upon the calculations to perform its duties as construction manager on the project.
Moreover, the consultants' agreements required them to communicate, cooperate and coordinate their efforts in performing the project, which adequately established (1) the requisite link between the consultants and the construction manager and (2) the consultants' understanding and knowledge that the construction manager would be relying on their plans, specifications and drawings in performing its contractual duties.
Accordingly, the court denied the architects' and engineers' motions to dismiss for lack of privity. Park East Construction Corp. v. East Meadow Union Free School District, 13 Misc.3d 1210(A) (2006).
Design and Construction Professionals Not Liable to Utility that Operated Substation Under 7 World Trade Center
Consolidated Edison Co. operated a substation under 7 World Trade Center, which collapsed as a result of the attacks on the Twin Towers. The U.S. District Court for the Southern District of New York has held that design and construction professionals, which had constructed 7 World Trade Center, did not owe a duty of care to the utility company, given their lack of relationship with the utility company. Further, the court held that the design and construction professionals could not be liable to the utility company under theories of implied warranty or strict products liability given that the construction defendants provided only "design services" and were not negligent in manufacturing structural systems at Seven World Trade Center.
In examining the duty of care of design professionals, the court referred to the privity test in outlined by the New York Court of Appeals in Ossining Union Free School District v. Anderson LaRocca Anderson, supra, under which a plaintiff has the burden of proving that "the functional equivalent of privity of contract arose between themselves and [defendant] as a result of [the defendant's] actions."
The court held that the plaintiffs had failed to establish that (1) the work done by defendants was for a specific purpose relating to the utility company; (2) the utility company was specially intended as a beneficiary of the construction defendants' work; or (3) the utility company specifically relied on the defendants' work.
The court further noted that New York has a stated policy of restricting the duty of care owed by design professionals to those in privity with them to those enjoying a particular special relationship when only property damage and not personal injury is alleged.
The court also held that the construction defendants who built the Center owe a duty of care only to a party in privity or the functional equivalent of privity in cases of property damage. The court held that the utility company was in a position to know its own risk of loss and to insure accordingly as opposed to seeking recovery from the construction professionals.
The court rejected the utility's product liability claims that the design and construction professionals were involved in the manufacture of products installed at 7 World Trade Center given that the transaction was "predominately service-oriented" and not a "predominately goods" contract under which the Uniform Commercial Code would apply. In re September 11 Property Damage and Business Loss Litigation, Aegis Insurance Services, Inc. v. Port Authority of New York and New Jersey, 2006 WL 62019 (S.D.N.Y. 2006).
Owner's Reasonable Interpretation of Ambiguous Contract Provision Will Stand if Contractor Fails to Seek Clarification
The Appellate Division, First Department has held that a contractor's failure to seek clarification of an ambiguous provision in a contract with a city housing authority before submitting its bid meant that it would be held to the authority's reasonable interpretation of the term.
The contract between an electrical contractor and the New York City Housing Authority required the authority to purchase and furnish a radio system while the specifications required installation of the system. The contractor claimed that it was not responsible for purchasing the radio system because there was a latent ambiguity. The Court rejected this argument because the contractor failed to seek clarification before submitting its bid. Its failure meant the contractor would be held to the authority's reasonable interpretation of the term.
Further, the contractor's claim for costs of grounding a generator was denied. The specifications required compliance with national and city electrical codes, and grounding was required to comply with such codes. J.H. Electric of New York, Inc. v. New York City Housing Authority, 5 A.D.3d 191, 773 N.Y.S.2d 391 (2004).
Contractor Bound by Interchangeable References to 'Contract' and 'Agreement' Despite Differing Provisions
A construction company sued New York City for breach of contract and quantum meruit. The city argued that the suit was time-barred by a provision in the "agreement" limiting claims "based on the agreement." The construction company argued that its causes of action were based on a federally mandated "suspensions clause" located in an addendum to the contract and thus was not time-barred.
The Supreme Court rejected the contractor's contention given the interchangeable use of the terms "agreement" and "contract" in all the contractual documents and, therefore, applied the time bar.
The court rejected the ruling of the U.S. Court of Appeals for the Second Circuit interpreting the identical contract provision. Perini Corp. v. City of New York, 182 F.3d 901 (2d Cir. 1999). The Second Circuit Court ruled that to the extent the scope of the provision was ambiguous, it must be interpreted against the city. The Supreme Court concluded that the Second Circuit decision was not binding precedent on it.
The Supreme Court held that the construction company was bound by the city's reasonable interpretation of the term claimed to be ambiguous because the contractor was contractually required to seek pre-bid clarification of patent ambiguities. Delidakis Construction Co., Inc., v. City of New York, 9 Misc.3d 517, 802 N.Y.S.2d 316 (2005), aff'd 29 A.D.3d 403, 815 N.Y.S.2d 76 (2006).
Performance of Labor Under Lien Law Held to Include Superintendent Services but Not Other Construction Management Services
Lien Law §19 (6) permits the summary discharge of a mechanic's lien "where it appears from the face of the notice of lien that the claimant has no valid lien by reason of the character of labor or materials furnished and for which the lien is claimed.." The notice of lien need only include some labor that is lienable for the lien to be valid.
The petitioner owner argued that the lien filed by its construction manager did not include any lienable services because the construction manager did not perform construction supervision services and "merely observed and reported those observations."
The Supreme Court disagreed, holding that the construction manager undertook construction supervision services, observed performance and progress of the contractor and subcontractor, reported failures to follow sound construction practices or to comply with the plans, specifications or other contract documents, and advised the contractor to take corrective action.
The court held that such services amounted to supervision and overseeing, which were lienable, while the construction manager's work in soliciting bids, did not amount to lienable labor. Therefore, there was no facial defect in the lien and no grounds for its dismissal.
However, the owners were successful in obtaining an order for a further verified itemized statement. The court held that the "the bare specification of a certain sum for labor and another sum for material listed under a general description of the work provided will not suffice." Rather, the "statement should set forth the description, quantity and costs of various kinds of materials and the details as to the nature of labor, time spent hourly or other rate of the labor charges in order to enable the petitioner to check the claim." Given the inclusion of non-lienable labor, the notice did not allow the owners to check the claim because the statement did not itemize the type of labor or specific activity performed.
The court ordered that a further detailed statement be produced to allow the owners to check the claims. In re Potamkin Development Co. II LLC v. Greyhawk North America LLC; Supreme Court, New York County, Justice Cahn; Index No. 115394/05; March 9, 2006.
Architectural Services Included in Bar to Mandatory Arbitration
The Appellate Division, Second Department has affirmed that architectural services are included in General Business Law §399-c's prohibition against mandatory arbitration clauses in contracts for the sale or purchase of "consumer goods."
Plaintiffs had entered into a contract with an architectural firm for the design of a home and later sued, alleging architectural malpractice, breach of contract and engagement in deceptive trade practices. The architects moved to compel arbitration, relying on the arbitration clause in the American Institute of Architects contracts used for the project.
The Supreme Court denied the motion, and the Appellate Division affirmed. It held that the intent of General Business Law §399 precluded arbitration given the statute's definition of "consumer" as "a natural person residing in this state" and the statute's definition of "consumer goods" as "services purchased or paid for by a consumer, the intended use or benefit of which is intended for the personal, family or household purposes of such consumer." The court determined that the definition makes no distinction between professional and non-professional services. Ragucci v. Professional Construction Services, 25 A.D.3d 43, 803 N.Y.S.2d 139 (2005).
Bar to Mandatory Arbitration of Contracts for Consumer Goods Not Pre-Empted by Federal Arbitration Act if Services Do Not 'Involve or Affect Interstate Commerce'
The Supreme Court has held in a case of first impression that General Business Law §399-c, which prohibits mandatory arbitration of contracts for consumer goods, was not pre-empted by the Federal Arbitration Act because the contract did not involve or affect interstate commerce.
The plaintiff property owner sued the contractor that managed and directed renovations at two locations in New York City. The contractor argued that General Business Law §399-c did not apply because its Web site included both Florida and New York phone numbers.
The Supreme Court noted that there was no reported New York case law on the issue and relied on the U.S. Supreme Court's decision in Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995), which held that the FAA pre-empts state law only if the transaction "involves" or "affects" interstate commerce.
The court also relied on Matter of Diamond Waterproofing Systems v. 55 Liberty Owners Corp., supra, which provided guidance on the factors to be used in determining whether a project "affected interstate commerce."
The court held that the mere inclusion of two telephone numbers on the contractor's Web site was not sufficient to trigger pre-emption by the FAA of General Business Law §399-c's prohibition of mandatory arbitration of contract disputes involving consumer goods. Baronoff v. Kean Development Co., Inc., 12 Misc.3d 627, 818 N.Y.S.2d 421 (2006).
If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form.
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.
©2007 Thelen Reid Brown Raysman & Steiner LLP
|
| | |
