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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.
Some
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
Plaintiff
building owner brought an action against an adjacent property
owner, its contractor and the contractor's insurer for property
damage allegedly sustained during construction on the adjacent
property. The plaintiff had insisted upon being named an
additional insured on the contractor's policy. The plaintiff
was shown an insurance certificate listing it as an additional
insured, but no additional insured endorsement was issued.
The contractor's insurer argued it had no duty to provide
coverage to plaintiff. Plaintiff contended he was covered
as an additional insured. The court held that even though
plaintiff and his building were not specifically named as
additional insureds by endorsement to the contractor's policy,
the policy contained a provision known as an "automatic
additional insured's endorsement." This endorsement
provides automatic coverage to a party for whom the contractor
is performing services and when it is agreed in writing
that such party shall be added as an additional insured
to contractor's policy, whether or not such an endorsement
is issued. Because plaintiff fell within this category and
because the claim fell within the relevant policy coverage
provisions, plaintiff's motion for partial summary judgment
for coverage and indemnity was granted.
Modell
v. J.E. Levine Builder Inc.; Supreme Court, New York
County; Judge Omansky; January 2, 2001.
Contractor's Failure to Give Notice of Delay Claim Is
Excused When Owner Promises to Address Claims at End of
Job
In
an action for delay damages, the court found that an issue
of fact existed as to whether the defendant county hindered
plaintiff contractor from giving a timely notice of claim
for damages by refusing to address such claims until completion
of the contract. The court found that the owner hindered
contractor's notices based on oral indications that delay
claims would not be addressed until the end of the project,
a typical occurrence on a construction project. [Note: This
argument is not always successful. For example, City of
New York contracts typically include a no-waiver clause
that prevents such oral indications from constituting grounds
for waiving notice requirements.]
Eldor
Contracting Corp. v. County of Nassau; Supreme Court,
Nassau County; Judge Ort; December 19, 2000.
Another Contractor's Delay Claim Fails Because of Insufficient
Notice and Record Submission
Plaintiff
contracted to do electrical work on a construction project
for defendants City of New York and the New York City Transit
Authority. In its breach of contract action, contractor
alleged that it was delayed in completing the project for
six months due to defendants' fault. Plaintiff sought damages
caused by the delay. Defendants moved for summary judgment
on the ground that plaintiff failed to comply with a standard
City of New York contractual provision requiring contemporaneous
notice of the nature of the damage and an itemized statement
of damages (Article 43). The court found that Article 43
applied to plaintiff's delay damage claim and in the process
ruled that sending 11 letters and payroll records to defendants
did not comply with Article 43. The first statement by contractor
setting forth its damages came 21 months after substantial
completion. Because plaintiff failed to raise a triable
issue of fact, the delay claims were dismissed. [Note: This
case distinguishes Gemma Constr. Co. v. City of New York,
668 N.Y.S.2d 195, a 1998 decision by the 1st Dept. This
is a sure case for appeal to that same court.]
Heckler
Electric Co. v. City of New York, 715 N.Y.S.2d 619;
Supreme Court, New York County; Judge Friedman; October
25, 2000.
Insurance Broker Sued for Failing to Procure Insurance
as Promised
In
a personal injury action, the court declined to dismiss
for failure to state a claim a third-party action against
an insurance broker. The court held that under third-party
beneficiary contract theory, the insurance broker could
be held liable for failure to obtain liability insurance
for the defendant contractor as required by the construction
contract with plaintiff bank. The court relied upon a "promise"
by the broker to the contractor to obtain the coverage without
explanation as to how the "promise" was articulated.
Lin
v. Asia Bank; Supreme Court, New York County; Judge
Schoenfeld; September 28, 2000.
Liquidating Agreement Held Not Capable of Changing Terms
of Subcontract to Create Liability Where None Existed
An
action arising out of restoration of Grand Central Station
was commenced by the prime contractor. Contractor claimed
that the defendant project developer and, through it, defendant
Metropolitan Transportation Authority had breached a covenant
to cooperate with the contractor and an electrical subcontractor,
causing delay damages. Contractor's contracts with subcontractors
provided that it would not be liable for any added costs
caused by delays occasioned by the developer. Without the
developer's consent, plaintiff entered into a liquidation
agreement with the subcontractor agreeing to be liable for
delay costs in the amount recovered against the developer
or the MTA. Liquidation agreements are enforced to permit
subcontractors' claims to be passed on to owners. Such agreements
might provide privity, the court stated, but they do not
vary the terms of subcontracts. Such an agreement cannot
exist when the prime contractor is not liable for the subcontractor's
claims. Furthermore, defendants had not consented to the
agreement. Thus, the court ruled, the claim was deficient
and should be dismissed.
Bovis
Lend Lease LMB Inc. v. GCT Venture, Inc.; Supreme Court,
New York County; Index No. 105398/2000; Judge Ramos; January
4, 2001.
No-Damage-for-Delay Clause Bars Claims for Delay Due
to Gaps Between Phases, Changes in Testing and Defective
Plans
In
an action by a contractor for damages for performance delays
allegedly caused by the City of New York, the city argued
that the work was to have been done in two 180-day phases,
that there was to be a pause between the phases and that
the entire project did not have to be completed within 360
consecutive days. After reviewing all relevant contract
provisions, the court agreed. The court rejected plaintiff's
argument for a 360-consecutive-day deadline premised on
the resident engineer's work schedule, noting the contract
provided that such schedules were not "guaranteed to
be complete." Contractor then argued that the gap between
phases of 26 weeks was beyond what was intended and thus
was compensable. However, the contract included a no-damages-for-delay
clause, and the court found that plaintiff had failed to
present admissible evidence establishing that the delays
had not been contemplated or were the result of bad faith
or gross negligence. Even if the city had revised its testing
procedures, which contractor claimed had delayed some of
the work, the delay would not be compensable in view of
the no-damages-for-delay clause, the contract provisions
providing for two phases and delays caused by other contractors,
including labor actions that were not uncontemplated. Significantly,
the court also noted that delays resulting from defective
plans have been held to be contemplated on a municipal construction
contract. Summary judgment was granted to the city.
TJD
Construction Co. v. City of New York; Supreme Court,
New York County; Index No. 411358/1995; Judge Ramos; February
28, 2001.
Requirement for Signed Change Orders Permits Subcontractor
to Refuse to Proceed With Work
The
court ruled that a subcontract was unambiguous and would
be enforced in accordance with its terms. The subcontract
provided that without a valid change order, there was no
contractual right to payment for additional work. The court
determined that the subcontractor properly stopped work
when it completed the base contract scope because the contractor
had failed to issue a change order for additional work.
The court thus found the subcontractor's termination by
the contractor to be improper and granted summary judgment
to the subcontractor.
Midwest
Soil Remediation v. Site Remediation Services Corp.;
Supreme Court, Monroe County; Index No. 7748/99; Judge Stander;
August 30, 2000.
Waiver of Consequential Damages Precludes Recovery of
Delay Damages
The
prime contractor on a sewage plant project that was sued
by the public owner for cost overruns resulting from construction
delays sought, by way of a claim-over, to pass these damages
on to General Electric, which supplied equipment. The contractor
sent GE a purchase order to which GE responded with certain
"clarifications and exceptions," including a reference
to "GE's Warranty as per GE's Terms and Conditions."
These conditions contained a broad waiver of consequential
damages, including "claims of customers of the Customer
for such [consequential] damages." Because of the contractor's
silence as to the counterproposed terms, the court determined
the contractor acquiesced and accepted them. The court further
determined that the broad waiver clause barred the claim-over
because it sought consequential damages for delay to the
customer of the contractor.
Eldor
Contracting Corp. v. County of Nassau, 708 N.Y.S.2d
447 (2nd Dept. 2000).
School Authority Estopped from Asserting that Claim Was
Untimely When Its Actions Mislead Claimant
In
an unusual outcome for a late claim on a public project,
the Appellate Division has estopped the School Construction
Authority from relying on a late claim defense when its
representatives' actions "lulled the plaintiff into
sleeping on its rights to its detriment." While acknowledging
that estoppel generally is not applicable to municipalities
acting in a governmental capacity, a public entity will
be prevented from asserting timeliness as in a defense because
of its improper conduct that leads a contractor to change
its position. Here, during the period when the claim should
have been submitted, the Authority's project manager provided
forms for payment, advised on how to complete them, advised
that they had been approved, requested additional documentation
and additional copies, and was told that the payment request
was sent to defendant and would be treated fairly. Such
actions were enough to estop defendant from denying the
claim because of its late submission.
Conquest
Cleaning Corp. v. New York City School Construction Authority,
719 N.Y.S.2d 689 (2nd Dept. 2001).
Payments by Contractor to Owner's Construction Manager
Are Not Grounds for Dismissal of Contract Action
In
reversing a trial court decision [previously reported here],
the Appellate Division reinstated a contract balance claim
when, on the bare allegations of the complaint, it did not
appear that bribes, which were demanded by the owner's construction
manager and thus likely were extortion payments, were central
to or a dominant part of the contractor's whole course of
conduct. The contractor, however, could not recover the
bribes from the owner because they were not within the scope
of the construction manager's authority and were not ratified
by the owner.
M.
Farbman & Sons, Inc. v. Columbia University in the City
of New York, 720 N.Y.S.2d 787 (1st Dept. 2001).
Contractor's Action Against Engineer Fails
While
the contractor on an environmental remediation project was
pursuing an equitable adjustment claim against the public
owner for alleged unanticipated site conditions, the contractor
sued the project engineer for negligence, negligent misrepresentation
and tortious interference with contract arising out of the
engineer's recommendation to deny the contractor's claim.
The court ruled that the contractor's claims regarding site
conditions failed to state a cause of action because the
contractor assumed the risk of site conditions under the
bid documents and because the affidavits in support of contractor's
motion did not assert that the bid documents were inaccurate
or that there was insufficient time to investigate. The
court also held that the negligence claims were barred by
the three-year statute of limitations. No basis for a misrepresentation
claim based on a relationship "close to privity"
arose because while plaintiff was a "potential bidder,"
plaintiff was not a party known to rely on defendant's reports
but merely was in an indeterminate class of persons, which
was not sufficient to support a claim based on a relationship
close to privity. Finally, the court ruled that denial of
the contractor's claims was based on its failure to give
notice and not based on any of defendant's recommendations.
IT
Corporation v. Ecology and Environmental Engineering, P.C.,
713 N.Y.S.2d 633 (4th Dept. 2000).
Public Authorities Law Applied to Require Notice to
Authority as a Condition to Enforcing Mechanic's Lien
In
another decision involving the statutory notice of claim
requirements under Public Authorities Law §1744, the
School Construction Authority was successful in defeating
claims by a contractor, its subrogating surety and its factor.
The dispute arose out of a series of construction contracts
on which the SCA refused payment and sought recoupment of
all prior payments because of a bid-rigging scheme. The
contractor's surety also sought recovery of amounts due
under the contracts as subrogee of the contractor's subcontractors,
which the surety had paid. The court determined, however,
that the contractor had filed only unverified notices
of claim during the three-month time period for filing such
claims under the Public Authorities Law §1744 (1),
the surety filed its notice of claim years late and the
factor had filed none. Noting that holding unverified notices
of claim by the contractor to be noncompliant with the statute
was a harsh rule, the court felt "bound by established
law and precedent." Further troubling was the court's
response to the surety's argument that because it had filed
a mechanic's lien (as subrogee to paid subcontractors who
filed liens) within the time required under the Lien Law,
the three-month notice of claim rule under the Public Authorities
Law did not apply. The court, however, disagreed, finding
no inconsistency between the two statutes and finding that
there was nothing in the Lien Law stating that other notice
requirements do not apply to lienors. The court also rebuffed
the surety's claims that filing its complaint and its counsel's
letters to SCA's counsel complied with the notice requirement.
As to the bid-rigging scheme, while there was strong evidence
of the scheme, credibility issues precluded granting the
SCA's motion for summary judgment.
Extech
Industries, Inc. v. New York City School Construction Authority;
Supreme Court, New York County; Index No. 122063/93; Judge
Bransten; October 19, 2000.
Performing Parent Company Cannot Recover for Work Performed
on Dissolved Subsidiary's Behalf
The
prime contractor on a public bridge project subcontracted
with a Bridge Technologies, Inc. for installation of two
patented bridge structures. The subcontractor was, for an
unstated reason, dissolved, and the subcontract was completed
by its parent company, Bridge Technologies, Ltd. The prime
contractor, however, was not notified. After a dispute over
payments, another entity, Bridge Technologies, LLC, filed
a mechanic's lien that was bonded by the prime contractor.
The prime filed suit against all of the Bridge companies
and others for breach of contract and dismissal of the lien.
Bridge counterclaimed and sought to correct the caption
and the lien to cure a technical defect in the name of the
lienor. The court denied relief to Bridge, finding that
Bridge Technologies, LLC was not a subcontractor and not
a proper assignee of the subcontract. Because it was not
a subcontractor, it could not file a public improvement
lien and could not collect from the prime. In a separate
consolidated action, Bridge Technologies Ltd. sought recovery
from the prime and its surety. The court similarly found
that it could not recover under the subcontract because
it was not the proper party and could not recover in quantum
meruit because of the existence of a written agreement.
The court refused to disregard the corporate distinctions
between the different companies and would not presume the
existence of a merger. The claims against the bonds also
failed because the parent did not furnish labor or materials
pursuant to a subcontract with the prime or pursuant to
a subcontract with its subsidiary. Thus, it had no statutory
payment bond rights.
A.
Servidone, Inc. v. Bridge Technologies, LLC, 721 N.Y.S.2d
406 (3rd Dept. 2001).
Legislation Notes: Pending Bills Affecting the New York
Construction Industry
A03497:
Would establish a statute of repose by setting a time
limit within which tort claims for personal injury or property
damage could be brought against design professionals and
construction contractors at 10 years after completion of
the improvement.
A00093:
Would amend the Highway Law and Public Authorities Law to
establish a five-year pilot program allowing design-build
contracts to be awarded for highway improvement projects.
A07030:
Would declare that design-build contracts entered into by
entities not licensed to practice architecture or engineering
are against public policy UNLESS the licensed architect
or engineer who is to perform the design services is identified
in such contract and such licensee is not an officer or
an employee of the contracting party and the practice of
such licensee is independent of the contracting party's
business.
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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.
©2001 Thelen Reid Brown Raysman & Steiner LLP
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