NEW YORK REPORT: CM, General Contractor Distinguished; Owner Faces Suit by Trade Contractor


March 8, 2004

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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 trade contractor entered into a contract with a construction manager to perform concrete work on a nursing home. The contract identified the construction manager, the trade contractor and the owner. The trade contractor sued the owner for monies due under the contract. The owner moved to dismiss on grounds that the contract was between the trade contractor and the CM. The motion was granted by the trial court.

The Appellate Division, Second Department reversed, holding that the lower court “erred in finding that a designation as a construction manager is the same as a general contractor. A general contractor and a construction manager are separate and distinct titles with different responsibilities and different relationships to the parties to a construction project [citations omitted].” Because the contract between the trade contractor and the CM designated the CM as construction manager for the owner and not as a general contractor, the owner failed to establish that the contractor’s suit against it should be dismissed.

R&A Construction Corp. v. Queens Boulevard Extended Care Facility Corp., 736 N.Y.S.2d 423 (2nd Dept. 2002).

Damages Limited for Failure to Obtain Additional Insured Endorsement

A contractor was not entitled to indemnification from a subcontractor for the 30 percent share of liability imposed on the contractor by a personal injury judgment even though the sub failed to name the prime as an additional insured as required by the subcontract. Rather, “the proper measure of the contractor’s recovery from the subcontractor would be the full cost of insurance to the contractor, including, to the extent pertinent, the premiums it paid for its own insurance, any out-of-pocket costs that may have been incurred incidental to the policy, and any increase in its future insurance premiums resulting from the present liability claim. (Inchaustegui v. 666 5th Avenue Limited Partnership, 96 NY2d 111; Trokie v. York Preparatory School, __ AD2d __, 726 NYS2d 37).”

Sheppard v. Blitman/Atlas Bldg. Corp., 734 N.Y.S.2d 1 (1st Dept. 2001).

Time Extension, Answer Do Not Waive Right to Arbitrate

Subcontractor commenced an action for breach of contract against contractor and others. The contract provided for arbitration of any claim or dispute under the contract. Contractor sought an extension of time to respond to the complaint. It then filed an answer containing affirmative defenses and counterclaims, including a defense that it had a right to arbitrate the disputes.

Contractor then moved to stay the proceedings and compel arbitration. The subcontractor contended that contractor had waived its right to arbitrate when it participated in the proceedings by filing an answer to the complaint. The trial court agreed and denied the motion.

The Appellate Division reversed. It held that waiver of the right to arbitrate requires a finding that a party engaged in litigation to such an extent as to manifest a preference clearly inconsistent with its later claim that the parties were obligated to resolve their disputes by arbitration. Contractor’s request for a time extension and answer were insufficient to establish such a manifestation, particularly when the answer itself asserted the right to arbitrate.

Les Constructions Beauce-Atlas, Inc. v. Tocci Building Corp. of New York, Inc., 742 N.Y.S.2d 356 (2nd Dept. 2002).

Arbitration Stayed Pending Architect’s Approval, as Required by Contract

Contractor on a shopping mall project began an arbitration proceeding for the balance allegedly due under the contract. Owner, contending that the project had not been finally completed, petitioned for a stay of the arbitration on grounds that the architect’s approval, a contractual condition precedent to arbitration, had not been obtained. Contractor argued that its claim did not need to be submitted to the architect because the work had been substantially completed. The court, finding that the architect’s involvement in the project had not been concluded, stayed arbitration and ordered submission of respondent’s claim to the architect.

Francis Lewis Realty, LLC v. HP Builders, Inc.; Supreme Court, New York County; Index No. 108966/2002, Justice York; June 13, 2002.

Party Cannot Be Shut Out of Participating in Arbitration Proceeding for Failure to Pay Fees

Parties to a construction contract entered into arbitration proceedings under the Construction Industry Arbitration Rules and Mediation Procedures of the American Arbitration Association. The arbitrators’ compensation was $7,250 a day. The case administrator advised the parties that the panel had the power to suspend the arbitration if the respondent contractor did not pay its share of the arbitration fees. The contractor contended that its inability to pay the fees was due to financial difficulties rather than an intentional refusal to arbitrate.

The case administrator advised the panel of the failure to pay fees. The panel ruled that the contractor had defaulted and directed that proceedings continue with evidence to be presented only by the petitioner owner. The proceedings continued, and the respondent contractor did not appear for the last two days of them. The arbitrators entered an award for the owner, which sought to confirm the award. The court granted a new proceeding before a new arbitration panel, holding, among other things, that the contractor had been denied a fundamentally fair hearing. The court held that although the arbitrators could suspend or terminate the entire proceeding, they could not continue the proceeding only for the paying party.

Matter of Coty, Inc. v. Anchor Construction Inc.; Supreme Court, Bronx County; Index No. 601499-02; Justice Yates; January 8, 2003.

Liquidated Damages Clause Interpreted Against Owner

A contract for construction of a multimillion-dollar cogeneration facility provided for liquidated damages if the contractor failed to meet capacity performance guarantees or turnover dates. Another clause provided that delay liquidated damages were to be offset by any revenues actually received from the sale of electric and thermal energy during delay periods. A dispute arose when the owner argued that “revenue” meant net revenue calculated on a daily basis. The contractor contended that “revenue” meant gross revenue. The court held that because the term revenue was not more specifically defined, “revenue” meant gross revenue. The court ordered that gross revenues for the period from the contractual turnover date to the actual turnover date be credited against liquidated damages.

Brooklyn Navy Yard Cogeneration Partners, LP v. PMNC; Supreme Court, Kings County; Index No. 5966/97; Justice Kramer; December 16, 2002.

No-Damages-for-Delay Clause Enforced; No Evidence to Support Exceptions

A completion contractor hired by the surety for a defaulted contractor sued the surety for the cost of additional work and delays. Contractor alleged misrepresentations and relied in part on the doctrine that a no-damages-for-delay clause can be avoided when the other party’s actions are grossly negligent or willful. The court held that contractor had no evidence to establish either exception. The delays were caused by the owner, not the surety, and it would be speculative to assume that the surety deliberately had misled plaintiff when negotiating the completion contract. Thus, the no-damages-for-delay clause was enforced.

The contractor’s claims for payment for additional materials to complete the contract also were rejected. The court found that the contractor had participated in drafting the completion contract, did not have materials lists included in the contract and had inspected the worksite before signing the contract. The completion contract specifically excluded additional payment for materials. However, the court found a limited issue of fact as to claims for additional work for which no change orders existed but had been requested by the contractor. Partial summary judgment was granted for defendant surety.

Gemma Development Co. v. Fidelity & Deposit Co. of Maryland; Supreme Court, New York County; Index No. 112147/2000; Justice Freedman; September 11, 2002.

On appeal, the trial court decision was affirmed except all claims for damages for extra work in excess of $24,520 were dismissed.

Gemma Development Co. v. Fidelity & Deposit Co. of Maryland, 1 A.D.3d 152, 767 N.Y.S. 2d 413 (1st Dept. 2003).

Late Notice and No-Damage-for-Delay Clause Bar Delay Claim

A contractor sought leave to file a late notice of claim against a school district for delay damages arising from a school project involving additions, renovations and site work. The court ruled that the contractor had failed to make the necessary showing that the school district had knowledge of the claim. The construction manager for the school district confirmed that the contractor never had submitted a written application for a time extension, a written notice of claim or a five-day notification of delay, as required by contract.

The court rejected contractor’s arguments that the school district had waived the notice requirements when it issued drafts of change orders, which provided for a 196-day time extension, because the change orders never were signed and no extension was granted. The court further recognized that the school district would be prejudiced by the late notice of claim because it had neither budgeted nor allocated any additional funds for the project; granting leave would delay the opening of one of the school district’s projects; and key personnel from the school district and the construction manager no longer were available to investigate, thus depriving the school district of the ability to timely investigate the claim. The court also held that the contractor’s claim was barred by a no-damages-for-delay clause in the contract.

Matter of Fratello Construction Corp. v. Garden City Union Free School District; Supreme Court, Nassau County; Index No. 03402/2002; Justice Austin; September 6, 2002.

Contract Requirement for Written Authorization of Extra Work Can Be Waived

A building owner leased the building to the School Construction Authority, which assigned the lease to the Board of Education. The owner was required to remodel the building so it could be used as an elementary school. Owner sued for the cost of extra work orally requested by representatives of the Board of Education. The board sought summary judgment, noting the lease provided it could be modified only by a writing signed by both parties.

The court denied the motion. It held New York law provides that contract provisions requiring written authorization for extra work can be waived, thereby rendering oral directives enforceable. The court held there were issues of fact as to whether the board requested extra work, thereby precluding summary judgment.

Tridee Associates, Inc. v. New York City School Construction Authority, 739 N.Y.S. 2d 179 (2nd Dept. 2002).

Clause Designating Federal Courts as Exclusive Forum Held Unenforceable

Plaintiff, a Delaware corporation, brought suit seeking indemnification for third-party asbestos exposure claims. Defendants sought dismissal based on a forum selection clause in plaintiff’s contract with one defendant. It designated federal courts in New York as the exclusive forum. Defendants argued that the clause also applied to plaintiff’s contract with another defendant, also a Delaware corporation. Plaintiff contended that because the second defendant was an indispensable party, enforcement of the clause would result in dismissal for lack of diversity jurisdiction.

The court noted that such a forum selection clause almost certainly would be unenforceable against the second defendant because diversity of citizenship did not exist and a federal court thus would lack jurisdiction. The court referred to authority holding that “forum selection clauses ‘are prima facie valid and enforceable unless shown by the resisting party to be unreasonable.’ ” The court found that enforcement under the circumstances present would require severance, two separate actions, duplication of resources and potentially inconsistent results. The court found the clause to be unreasonable under the circumstances and refused to enforce it.

Huttig Building Products, Inc. v. Rugby Group, Ltd.; Supreme Court, New York County; Index No. 601515/02; Justice Cahn; October 31, 2002.

Subcontract’s Broad Indemnity Clause Enforced Except to Extent of General Contractor’s Own Negligence

Two of subcontractor’s construction workers obtained an award for personal injuries that was apportioned between defendant contractor (20 percent) and the subcontractor as a third-party defendant (80 percent). In a post-trial motion, subcontractor sought to dismiss contractor’s claim for contractual indemnification. The subcontractor contended that the provision would indemnify the contractor for its own negligence in violation of New York’s anti-indemnity statute, General Obligations Law §5-322.1, and thus was unenforceable, even as to the subcontractor’s negligence.

The court noted that the contract clause “provides that ‘to the fullest extent permitted by law’ the subcontractor will indemnify the general contractor for all liabilities arising out of personal injuries sustained in connection with the subcontractor’s work ‘regardless of whether [the general contractor is] partially negligent… exclud[ing] only liability created by the [general contractor’s] sole and exclusive negligence.’ ”

The court concluded that the clause called for only partial, not full, indemnification of the general contractor for personal injuries partially caused by the general contractor’s negligence. Therefore, it was enforceable. The court’s interpretation was influenced by the phase limiting the clause’s application to circumstances permitted by law and excluding liability arising from the contractor’s sole negligence. The court reasoned that it could adopt an interpretation that would give the provision legal effect:

While the phrase calling for indemnification of the general contractor “regardless” of its partial negligence makes it reasonable to construe the exclusion for the general contractor’s sole negligence as applying only to situations where the general contractor is found solely at fault, not like here, where the general contractor was found partially at fault, it is just as reasonable to construe the “regardless” phrase as requiring indemnification even where the general contractor is partially negligent, but excluding that portion of the joint liability attributable to its negligence. As between these two reasonable constructions of the indemnification clause, we adopt the one that renders it legal and gives it effect.

Dutton v. Charles Pankow Builders, Ltd., 296 A.D. 2d 321, 745 N.Y.S.2d 520 (1st Dept. 2002); motion for leave to appeal denied, 760 N.Y.S.2d 102 (2003).

Joint Defense Privilege Recognized But Not Applied to Bickering Between Partners in Turnkey Project

On a turnkey power project, the construction/engineering consortium entered into a joint defense agreement to facilitate defense of claims by the project owner. On the eve of trial, the owner pressed earlier demands for production of documents withheld on the basis of the joint defense agreement.

The court first addressed whether a joint defense in a civil action in New York entitled the parties to invoke a joint defense privilege to protect documents from disclosure. The court relied on Aetna Casualty and Surety Co. v. Certain Underwriters at Lloyd’s London, 176 Misc.2d 605 (Supreme Court, New York County 1998), aff’d 263 A.D.2d 367 (1st Dept. 1999), which noted that New York cases had not clearly extended the common defense exception to civil cases but acknowledged that federal courts applying New York evidence rules had agreed that New York “probably” would do so. The court in the power plant case agreed and concluded that the defense was available to civil litigants.

The Aetna court had further noted that such a joint defense agreement cannot be used to create a privilege when one does not otherwise exist. Upon reviewing the requested documents in camera, the court in the power plant case characterized the materials as “a series of complaints made by one of the co-venturers against the work done by another.” It was clear, the court wrote, that the privilege was invoked to “shield this internecine battle from view and prevent it from coming to light in the course of the instant suit.”

The court viewed the documents as not created for the purpose of mounting a defense against the owner’s claims but for the purpose of analyzing the claims the parties had against each other. The court held that the joint defense privilege could be invoked to protect statements made for a common purpose involving defense of all concerned parties but not to facilitate an attack by one defendant against the other. The court concluded that the documents at issue did not meet the joint defense test and thus were not privileged. It directed that all of them be produced.

Brooklyn Navy Yard Cogeneration Partners, L.P. v. PMNC, 194 Misc.2d 331, 753 N.Y.S. 2d 343; Supreme Court, Kings County; Judge Kramer; December 16, 2002.

Contractors Can Bond Off Prevailing Wage Withholdings

The Appellate Division has held that contractors, upon application to a Supreme Court judge, can bond off a prevailing wage withholding order from the New York Department of Labor to a public owner. The court found that under Labor Law §220-b (2) (b) and General Municipal Law §107, a contractor may file a surety bond with the fiscal officer of a public owner and seek, upon notice to the Department of Labor, approval from the Supreme Court to release the funds.

Matter of Roundout Electric, Inc. v. Monroe Woodbury Central School District, 751 N.Y.S.2d 262 (2nd Dept. 2002).

Court Orders Production Under Lien Law of Verified Account Statement

Defendant contracted with the New York Department of Transportation to build a bridge. A subcontractor rented a crane, trucks and other equipment. The subcontractor issued a satisfaction of public improvement lien after it and the contractor agreed on a close-out. Plaintiff, which rented the equipment to the sub, moved for an order requiring the contractor to produce a verified statement of account containing information required by Lien Law §75 on grounds that plaintiff was a trust fund beneficiary under Article 3-A of the Lien Law. The contractor cross-moved for summary dismissal on grounds that it owed no more money to the rental company. Citing Lien Law §§71 (2) (a), (3) (b) and (4) and §76 (1), the court ordered production of the verified statement, even though there was no privity between plaintiff claimant and the contractor.

Vanguard Equipment Rentals, Inc. v. CAB Associates; Supreme Court, Queens County; Index No. 22504/00; Justice Price; November 4, 2002.

Periodic Releases Executed with Pay Applications Do Not Bar Claims for Unpaid Amounts

Subcontractor submitted 14 invoices that included affidavits of release of the contractor. The contractor made only partial payment. Subcontractor sought to recover the unpaid amounts. Contractor moved for summary judgment, contending that the releases barred the claims. The subcontractor countered that the releases never were intended to serve as a release for unpaid work.

The court agreed that the executed releases did not bar claims for additional payment when it was the contractor’s practice to condition payment on execution of releases. The court noted that the general contractor, by making payments to the subcontractor for work theoretically released by prior payments, acted inconsistently with its claim of a general release. The conditional nature of the releases and the conduct of the parties was sufficient to avoid the preclusive effect of the partial payment releases.

West End Interiors, Ltd. v. AIM Construction and Contracting Corp., 729 N.Y.S.2d 112 (1st Dept. 2001).

Court Recognizes CM’s Authority to Schedule Work, Requires Documentation of Extra Work

An electrical contractor sued for the contract balance due and for delay damages at a university building project. Its contract with a university required the electrical contractor to work under the direction of a construction manager and gave the CM exclusive control over scheduling. The contract required the electrical contractor to revise its schedules, increase its workforce and maintain the schedule set by the CM, even when disputes arose.

Delays and disputes over their cause ensued. An agreement was made providing milestones for completion of the electrical work, milestone payments and reductions in retention. Further disputes ensued. The CM demanded performance and an increase in workforce and then declared the electrical contractor to be in default. The contractor countered that its work was substantially complete and that it had been delayed by mismanagement, scheduling conflicts and others causes.

The university moved for motion summary judgment. The court held that whether the contractor had substantially completed its work was an issue of fact that a jury must decide, precluding summary judgment.

But, in a footnote, the court addressed the contractor’s contention that it had not agreed to the revised milestone dates and that its contract had not been properly modified. The court rejected this argument, citing the CM’s contractual authority to schedule the project. The court also ruled that the contractor’s claims for extra work were properly dismissed because it failed to comply with contractual requirements for written extra work statements, countersigned by the CM for each day extra work was performed. Because such documentation was a condition to payment, the university was entitled to summary dismissal of those claims.

F. Garofalo Electric Co., Inc. v. New York University, 754 N.Y.S.2d 227 (1st Dept. 2002).

Contractor May Not Recover Part of Bond Premium Despite Premature Contract Termination

Plaintiff was awarded a $2.5 million construction contract and paid defendant surety $45,520 for required payment and performance bonds. The project was terminated when it was only 13 percent complete. Plaintiff sought return of a pro rata amount of the bond premium from its surety on theories of unjust enrichment and breach of implied contract. The contractor argued that once the project was terminated, there was no further risk under the bonds. The surety moved for summary judgment. The court found that the contractor received what it had bargained for: performance bonds for the full contract price, which put defendant at risk for that amount and without which plaintiff would not have been awarded the contract. Plaintiff failed to demonstrate entitlement to a refund for project termination before completion.

Bullard-Lindsay Contracting Co., Inc., v. Universal Bonding Insurance Co.; Supreme Court, New York County; Index No. 122066/00; Justice Schoenfeld; January 2, 2002; aff’d, 303 A.D.2d 317, 755 N.Y.S. 2d 844 (1st Dept. 2003).

Surety Bound Because No Notice of Default Was Required Under Old Bond Form

Contrary to a surety’s contention, a performance bond obligee was not required to notify the surety when the principal defaulted under a subcontract. The performance bond did not expressly require a notice of default as a condition precedent to legal action on it. Also, by incorporating the subcontract by reference into the performance bond, the surety agreed to be bound by the subcontract’s arbitration clause and by any determination of the arbitrator. Walter Concrete Construction Corp. v. Lederle Laboratories, 734 N.Y.S.2d 80 (2nd Dept. 2001).

The Court of Appeals affirmed regarding no requirement of notice. It noted that the bond at issue was a 50-year old AIA A311 Bond, not the more current A312 version, which does have a notice of default requirement. The Court of Appeals did not address application of the contract’s arbitration clause to the surety.

Walter Concrete Construction Corp. v. Lederle Laboratories, 99 N.Y.2d 603, 758 N.Y.S.2d 260 (2003).

Contractor’s Claims Against Architect, Engineer for Contract Breach, Negligence and Fraud Denied

Contractor brought action against project architect and engineer for breach of contract, negligent misrepresentation and fraud after a wall collapsed during renovation of abandoned buildings. The court held that the contractor was not a third party beneficiary of the owner’s agreement with the architect or the architect’s agreement with the engineer. The owner-architect agreement provided that it was for the sole benefit of the parties. It was of no help to the contractor that the design professionals knew the successful bidder would rely upon their designs.

The negligence claims were held to be time-barred by the three-year statute of limitations for malpractice claims in Civil Practice Law and Rules §214 (6). The court determined that the limitations period began to run when the contractor submitted its bid, which was the date when it would have relied on the designs, or, at the latest, at the time of award of the contract.

The fraud claim was rejected because there could be no reasonable reliance on alleged misrepresentations when the contractor was obligated to prepare its own shoring and bracing plans, to examine design documents before bidding and seek clarifications, and to examine the job site.

A.H.A. General Construction, Inc. v. Edelman Partnership, 737 N.Y.S.2d 85 (1st Dept. 2002).

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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.





©2004 Thelen Reid Brown Raysman & Steiner LLP