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NEW YORK REPORT: Unsigned Agreement to Arbitrate Enforced by N.Y.'s Highest Court
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November 19, 2007
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By Richard P. Dyer
Thelen Reid Brown Raysman & Steiner LLP
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.
An architectural firm succeeded in enforcing an agreement to arbitrate against its client even though the written agreement containing the arbitration clause was not signed by the client.
The client property owner sued the architectural firm for breach of contract and architectural malpractice in the renovation of a church and school. The architect had provided the owner with a standard American Institute of Architect's agreement containing a clause providing that all claims and disputes arising out of or relating to the agreement be decided by arbitration. However, the owner did not sign the agreement. The architectural firm moved to compel arbitration and to permanently stay the court proceedings. The Supreme Court granted the motion, and the Appellate Division affirmed.
The Court of Appeals also affirmed, permanently staying the proceedings and directing arbitration in accordance with CPLR 7501, which confers jurisdiction on the courts to enforce written arbitration agreements.
Well-established New York case law requires that there be evidence establishing the parties' clear, explicit and unequivocal agreement to arbitrate before arbitration can be compelled. The Court of Appeals held there is no requirement that the writing be signed so long as there is other proof that the parties actually agreed on it. Here, the parties operated under the terms of the agreement, and the owner alleged that the architects had breached the agreement, thereby acknowledging and relying on the very agreement that contained the arbitration clause it sought to disclaim.
God's Battalion of Prayer Pentecostal Church, Inc. v. Miele Associates, LLP, 6 N.Y.3d 371, 812 N.Y.S.2d 435 (2006).
Court Order Required to Discharge Lien If Release Bond Was Issued by Surety Not Authorized to Do Business in New York
A subcontractor was able to reinstate a mechanic's lien that had been discharged by a County Clerk after issuance of a lien release bond by a surety not authorized to do business in New York. In addition, the 10-day period for a mechanic's lien claimant to object to the release bond surety was held not to apply when the surety was not authorized to do business in New York.
The subcontractor sued to foreclose on a mechanic's lien, alleging that the general contractor failed to pay for work performed on a hotel renovation project in Manhattan. The New York County Clerk discharged the lien when the general contractor filed a release bond. Months later, the subcontractor moved to reinstate the lien after discovering that the surety was not authorized to do business in New York as is required by Lien Law §19(4)(a).
The Appellate Division held that the County Clerk had erroneously discharged the lien. A court order is required to discharge a lien if the release bond surety is not authorized to do business in New York. The court also held that the County Clerk's erroneous discharge of the lien based on a false certification by the surety that it was authorized to do business in New York did not deprive the court of jurisdiction to reinstate the lien. The court held itself obligated to correct the error.
Because the bond was issued by an unauthorized surety, the court rejected defendants' argument that the subcontractor had failed to object to the surety within the 10-day period provided by Lien Law §19(4)(a).
Sanco Mechanical, Inc. v. DKS General Contractors and Construction Managers, Inc., 34 A.D.3d 271, 824 N.Y.S.2d 69 (1st Dept. 2006).
Costs of Defending Third-Party Action Held Recoverable Under Broad Indemnity Clause
Rockland County prevailed on its third-party claim against a contractor for the cost of defending a lawsuit. The plaintiff employee sued for personal injuries suffered while cleaning a county-owned building. Relying on the broad wording of the indemnity clause in the contract between the county and the contractor, the county sought its defense costs from the contractor.
The Supreme Court severed the county's third-party action against the contractor from the action brought by the plaintiff employee against his employer and the county. A jury determined that the county was not liable to the employee for his injuries. However, the trial court held that the outcome had no impact on interpretation of the indemnity clause in the contract between the county and the contractor.
The indemnity clause provided that "[t]he Contractor agrees to defend, indemnify and hold harmless County. from and against all claims, actions and suits and will defend the County. at its own cost and no cost to the County, in any suit, action or claim, including appeals, for personal injury to, or death of any person, or loss or damage to property arising out of, or resulting from, the activities or omissions of Contractor."
The Supreme Court held that the clause imposed no preconditions on the contractor's obligations, not even a finding of negligence by the county. Therefore, the contractor was obligated to pay the county's defense costs.
Lopez v. County of Rockland, 14 Misc.3d 897, 828 N.Y.S.2d 796 (Supreme Court Rockland County 2007).
Court Rejects Sub's Reliance on Change Order Estimates to Prove Damages
A subcontractor's claim for compensation that relied solely on the subcontractor's cost estimates as proof of damages was rejected. The Appellant Division held that the subcontractor had failed to demonstrate that it was not possible to segregate actual costs incurred for claimed extra work in construction of a new bus depot. The court ordered a new trial of the damage claims.
As a result of design changes contemplated by both the prime contract and subcontract, it was necessary for the subcontractor to perform extra work, which was billed in accordance with the terms of the subcontract. The contractor paid some change order proposals and did not pay others. Ultimately, the subcontractor was terminated.
At trial, the subcontractor submitted no actual cost evidence. It relied entirely on its cost estimates.
The Appellate Division ordered a new trial to determine the amount of damages sustained by the subcontractor as a result of extra work. The court held it was improper for the subcontractor to rely on its change order estimates. The court held that costs associated with the extra work should be segregable from those for performing the base scope of work. The subcontractor failed to demonstrate any justifiable reason for not establishing its damages by using actual costs, the court ruled.
Metropolitan Steel Industries, Inc. v. Perini Corp., 36 A.D.3d 568, 828 N.Y.S.2d 395 (1st Dept. 2007).
Attorney Affidavit of Trust Sufficient to Satisfy Lien Law §76
As part of an action to enforce and foreclose on a mechanic's lien, the lien claimant moved to compel a verified statement pursuant to Lien Law §76. The claimant was a roofing contractor seeking payment for work completed on the home of defendants. They had counterclaimed for breach of contract, alleging poor performance resulting in significant property damage and repair work by a second contractor.
New York Lien Law §76 provides for a verified statement of payments and expenditures to ensure that all parties are paid from project funds. Defendant's attorney stated in an affidavit that sufficient funds had been placed in an attorney trust account disbursable only by court order. The trial court found that the affidavit was an acceptable verified statement. Pronti v. Belletti; Supreme Court, Chemung County; Justice O'Shea; June 9, 2006.
The Appellate Division affirmed, holding that the affidavit was "more than sufficient to satisfy both the spirit and intent of the Lien Law." Citing the broad discretionary power of a Supreme Court to manage discovery, the appellate court refused other "duplicative or irrelevant requests" for such information.
Pronti v. Belletti, 37 A.D. 3d 966, 829 N.Y.S.2d 753 (3rd Dept. 2007).
Affirmative Consent by Owner Required to Enforce Lien for Services Provided to Commercial Tenant
A contractor that provided specialized refrigeration equipment and relocated sprinkler heads for a commercial tenant sued the property owner to foreclose on a mechanic's lien.
After a nonjury trial, the court found for the contractor. Vardon, Inc. v. Suga Development, LLC; Supreme Court, Rockland County; Justice Sherwood; April 25, 2005.
The Appellate Division reversed, relying on the rule that courts may validate liens against property owners only when the owners affirmatively consent to the work or equipment directly to the contractor.
The Appellate Division held that the facts established only that the owner approved or acquiesced in the overall improvements and not to the specific equipment and work in question. The court found that the record did not demonstrate the necessary affirmative consent to allow a lien against a commercial landlord.
Vardon, Inc. v. Suga Development, LLC, 36 A.D. 3d 897, 829 N.Y.S.2d 585 (2nd Dept. 2007).
Common Law Claims for Prevailing Wage Violations Preempted by Labor Law §220
Unpaid workers seeking damages sued to recover on payment bonds issued pursuant to Finance Law §137. Instead of bringing a claim pursuant to Labor Law §§220 or 220-g, the workers brought a common law claim for breach of contract. In addition, they sought certification as a class for underpayment of wages.
Both defendants, the employer and its surety, moved for summary judgment against the claims for failure to exhaust administrative remedies under Labor Law §§220 and 220-g. Those statutes require a claimant to submit to an administrative proceeding before filing suit.
The Appellate Division affirmed the trial court's determination that the common law breach of contract claims actually constituted claims under Labor Law §§220 and 220-g and, therefore, were subject to statutory requirements for administrative proceedings. Otherwise, the court held, common law claims could be used to circumvent administrative remedies.
The dismissal was limited to class claims pre-empted by Labor Law §220 or 220-g. Certification was granted for the remaining common law claim for underpayment of wages.
Brandy v. Canea Mare Contracting, Inc., 34 A.D.3d 512, 825 N.Y.S.2d 230 (2nd Dept. 2006).
Negligent Misrepresentation Claim Dismissed for Lack of Privity or Relationship Approaching Privity
In connection with a large construction project, defendant management company hired co-defendant architecture firm to provide advice and coordination services throughout the project. Together, defendants hired a construction company. Plaintiff issued a performance bond on behalf of the construction company.
The construction company defaulted after a large portion of the project had been completed. However, some of the work was defective and required correction. Defendants prepared a log detailing the work needing correction as well as the work remaining to be completed. Using this log, plaintiff negotiated a takeover agreement with the management company and finished nearly all of the remaining work.
Plaintiff filed numerous claims to recoup additional costs allegedly caused by defendant's misrepresentations about the corrective work and uncompleted work remaining at the time of the takeover agreement. Both defendants moved to dismiss.
The management company moved to dismiss or stay the eight claims against it for failure to complete mandatory contractual dispute resolution procedures. Plaintiff alleged that all conditions precedent to suit were satisfied or excused, which was sufficient to defeat a motion to dismiss under Rule 9(c) of the Federal Rules of Civil Procedure. The U.S. District Court declined to grant a stay. The trial court highlighted the defendant's failure to demonstrate that the plaintiff had failed to complete any required dispute resolution proceedings.
The defendant architecture firm moved to dismiss the three claims against it on grounds that: (1) its contract contained a "no-assignment" clause; (2) the surety warranted in the takeover agreement that it was familiar with the work remaining; and (3) the plaintiff was not in privity with the architect.
The court rejected the first two arguments. However, it held for the defendant on the third ground and dismissed the negligent misrepresentation claim against the architecture firm. The firm still faced a breach of contract claim.
The court found the "no-assignment" clause was irrelevant because the plaintiff surety became subrogated to the rights of the construction company by law and subrogation is not an assignment in violation of the clause. The court upheld the right of subrogation because the surety acted pursuant to its responsibilities under the performance bond and not as a volunteer.
The surety's claim, assumed to be true for purposes of a motion to dismiss, alleged that the surety relied on the log prepared by defendants in negotiating the takeover agreement. The court held that allegation of a warranty required denial of defendant's motion to dismiss.
In dismissing the negligent misrepresentation claim, the court found that surety lacked a sufficiently close relationship with the architecture firm. They had no contract with each other. And, the management company did not retain the architecture firm for the "end and aim" of making representations to the surety. Therefore, plaintiff lacked the privity or a relationship approaching that of privity necessary to support a claim of negligent misrepresentation.
American Manufacturers Mutual Insurance Co. v. Payton Lane Nursing Home, Inc., 2007 U.S. Dist. LEXIS 15160 (E.D.N.Y. 2007).
Exhaustion of Lien Law Remedies as Pre-Condition to Common Law Contract Claim Held Enforceable
A contractor brought suit seeking both delay damages and enforcement of its mechanic's lien. Its contract provided that claims disputing the "Contract Price for the Project" could be brought only after completion of all mechanic's lien enforcement actions under New York laws. The trial court dismissed the claim for delay damages as premature, and the Appellate Division unanimously upheld the dismissal. The appellate court found that the clause did not amount to an indefinite suspension of the right to enforce a mechanic's lien and was enforceable. The appellate court also noted that the claim for delay damages would be barred by the no-damages-for-delay clause in the contract.
Inter Metal Fabricator Inc. v. HRH Construction LLC, 41 A.D.3d 210, 838 N.Y.S.2d 515 (1st Dept. 2007).
Notice Period Under Private Payment Bond for Multiple Invoices Runs from Final Delivery of Materials When Parties Have Open Account
The supplier of construction hardware and materials made a claim on a private payment bond for 78 deliveries made pursuant to an open account. The defendant surety unsuccessfully argued that the supplier had failed to comply with the bond's requirement that the supplier give notice of its claims within 90 days of each separate delivery.
The Appellate Division referred to Finance Law §137 in determining when a supplier of goods must give notice of a claim under a payment bond. The Court of Appeals previously had held that the time to give a notice of claim under a statutory payment bond on a public project is measured from the final delivery of materials for which the claim is made rather than from the date of each separate delivery of materials. Specialty Products and Insulation Co. v. St. Paul Fire and Marine Insurance Co., 99 N.Y.2d 459, 758 N.Y.S.2d 255 (2003).
The Appellate Division held that the timeliness of a claim on a private works payment bond, although not governed by the Finance Law, also is measured by the final delivery of materials for which the claim is made.
The Appellate Division found that requiring an individual notice of claim for each delivery when the parties were operating under an open account would be an "extraordinary onerous burden," requiring separate notice no matter the volume of or the amount owed for each delivery. The court referred to the Court of Appeals' rationale that "fixing a final liability date for general contractors was secondary to the protection of laborers and materials suppliers."
Triboro Hardware and Supply Corp. v. Federal Insurance Co., 841 N.Y.S.2d 600 (2nd Dept. 2007).
Subsequent Conduct of Parties May Preclude Full Enforcement of Waiver
An electrical contractor sued an owner for additional costs allegedly caused by the owner's breaches of contract, delays, interference, disruptions, and provision of inadequate plans and specifications. The Appellate Division affirmed denial of the owner's motion for summary judgment and held that material issues of fact existed as to what payments were intended to be affected by partial waivers of liens signed by the electrical contractor and in particular as to the parties' course of conduct.
The lien waivers signed by the electrical contractor expressly provided for partial payments upon execution of the waiver. However, the waiver form also purported to acknowledge that no further payments were owed.
The owner's conduct in subsequently paying the contractor for work theoretically released by prior waivers was inconsistent with owner's argument that the waivers operated as general releases. The record indicated that the owner, after making an initial payment on a certain part of the contractor's work and receiving an executed waiver of lien to date with respect to the payment, made subsequent payments for the same part of the work.
The Appellate Division concluded that because the contract between the parties and the terms of the waiver expressly provided for partial payment upon execution of the waiver, the waiver should be construed as merely a receipt for monies referenced in the waiver. When a waiver form purports to acknowledge that no further payments are owed but the parties' conduct indicates otherwise, the instrument will not be construed as a general release, the court held.
E-J Electric Installation Co. v. Brooklyn Historical Society, 43 A.D.3d 642, 841 N.Y.S.2d 294 (1st Dept. 2007).
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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 212-603-6533 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
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