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NEW YORK REPORT: Recovery for Purely Economic Loss Based on Negligence Denied
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December 11, 2006
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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 LLP
Multiple business owners brought an action against a neighboring building owner and a waterproofing company to recover damages for loss of business income. Plaintiffs alleged that the waterproofing company's employees released an acidic compound while cleaning the façade of the owner's building, causing the street to be closed during the remainder of the day. Plaintiffs alleged negligence and public and private nuisance. All of the plaintiffs sought to recover compensatory and exemplary damages for loss of business and profits for the time the street was closed, and two plaintiffs also sought recovery for property damage.
The trial court held that liability for negligence extends only to plaintiffs who suffer personal injury or property damage and not to those who suffer only economic loss. Purely economic claims for negligence are barred no matter how close plaintiff's property is located to the defendant's property. Although defendants' violation of the New York City Administrative Code could be evidence of negligence, the bar on recovery of purely economic losses still applied.
As to plaintiffs' public nuisance claim, the court held that although "unlawful obstruction of a public street" is actionable as a public nuisance, plaintiffs failed to show that they had suffered a "special injury," one special in kind, not merely degree, beyond that of the community at large. Therefore, plaintiffs' claims were barred.
Similarly, plaintiffs' private nuisance claim failed because plaintiffs failed to show that defendants' conduct was either: (1) intentional and unreasonable; (2) amounted to negligence; or (3) amounted to absolute liability for abnormally dangerous conditions. Plaintiffs offered no evidence that defendants' conduct was intentional, were barred from recovering for negligence for purely economic damages and could not maintain a claim for absolute liability without alleging property damage. Moreover, plaintiffs' claims for private nuisance failed because "more than a relatively few persons" were affected by the closing of the street. Therefore, even those plaintiffs alleging property damage could not recover for economic loss under a private nuisance claim.
All of plaintiffs' claims failed except for two plaintiffs claiming property damage, in addition to economic loss, on negligence grounds. A&L Gift Shop v. ASA Waterproofing Corp.; Supreme Court, New York County, Justice Cahn; Index No. 100405/2002; December 8, 2005.
Non-Party Arbitration Depositions Allowed Under Federal Arbitration Act
Waksal and ImClone sought arbitration in order to resolve disputes concerning employment and separation agreements between them. The arbitration panel issued subpoenas for out-of-state, non-party depositions, and Waksal successfully moved in the New York County Supreme Court for issuance of commissions to conduct the out-of-state depositions.
Waksal then proceeded to state courts in the states where the non-parties resided and successfully petitioned for deposition subpoenas, subsequently serving these subpoenas upon the non-parties. The non-parties unsuccessfully sought to vacate the commissions and quash the subpoenas in the New York Supreme Court.
In granting Waksal's motion to compel the non-party depositions, the Supreme Court reasoned that because the agreements were negotiated in New York and contained a New York choice of law provision, New York Civil Practice Law and Rules, Article 75 applied rather than the Federal Arbitration Act. Therefore, the court held that when the arbitration panel determined that it was appropriate to conduct non-party depositions, its decision must be respected.
On appeal, the Appellate Division, First Department affirmed but found that the FAA rather than New York law governed the agreements because the agreements affected interstate commerce. The appellate division held that when there is a showing of "special need or hardship," such as when the information sought is otherwise unavailable, non-party depositions do not offend the FAA. The appellate division acknowledged that there is substantial federal court authority to the contrary. The appellate division also held that it was unnecessary for Waksal to expressly state that such information was otherwise unavailable or that exceptional circumstances, special need or hardship existed. This was so even though the non-parties were located beyond the territorial reach of the court's subpoena power. ImClone Systems, Inc. v. Waksal, 22 A.D.3d 387, 802 N.Y.S.2d 653 (2005).
Arbitrators' Subpoenas to Non-Parties Outside the Jurisdiction Where the Arbitration Is Conducted Held Not Enforceable
A dispute between a shipper and a vessel owner under a ship charter contract was being arbitrated in New York. At issue was a contaminated shipment. A nautical commission to the commercial court in Belgium, where the shipment was delivered, had concluded that petitioner, a vendor retained to provide facilities and services to the vessel owner in Houston, where the cargo was loaded, most likely was responsible for the contamination.
The arbitrators in New York issued a subpoena to the petitioner in Houston for production of documents in Houston. Petitioner refused to comply, and the shipper filed a motion to compel in the U.S. District Court for the Southern District of New York. Petitioner argued that the court did not have personal jurisdiction over it because it had no contacts with New York. The District Court disagreed and ordered compliance.
On appeal, the U.S. Court of Appeal for the Second Circuit reversed. The court noted that §7 of the Federal Arbitration Act requires an arbitrator's summons to "be served in the same manner as subpoenas to appear and testify before the Court" and that enforcement of subpoenas shall be by the District Court for the district in which the arbitrators are sitting. Service of federal court subpoenas is governed by Federal Rules of Civil Procedure Rule 45, which permits service of subpoenas within the district or out of the district if within 100 miles of the place of the "deposition, hearing, trial, production or inspection" or as permitted by state law applicable at the place of the deposition. The court noted, however, that Rule 45 does permit service "at any other place" when a U.S. statute so provides.
Here, the subpoena was issued in Houston for a production in Houston, presumably within 100 miles of the place of service. Under Rule 45, that subpoena would be enforceable by the U.S. District Court in Houston. The FAA, however, requires arbitrator's subpoenas to be enforced by the District Court where the arbitrator was venued. The court, therefore, held that the District Court in New York was without jurisdiction to enforce the subpoena.
Respondents contended that because the subpoenas could be issued under FAA §7, they must be enforceable by the U.S. District Court in New York. The Second Circuit disagreed because the federal courts do not have nationwide jurisdiction unless authorized by federal statute, and the court found that the FAA does not authorize such nationwide jurisdiction. The District Court was in error in assuming nationwide jurisdiction on the grounds that the FAA did not expressly prohibit it.
Respondents contended that the court's holding would result in a properly issued subpoena under the FAA being rendered unenforceable and that the circumstances required a compromise as a U.S. District Court in Illinois had done. The Second Circuit declined, concluding that Congress knew how to authorize nationwide jurisdiction when it wanted to and that there was no "textual basis" in the FAA for such a compromise. The court noted that the parties chose an arbitration venue in New York, which had no connection with the activities in question, rather than Texas, where Petitioner would have been subject to a subpoena and its enforcement by a Texas court. The court finally noted that because it did not have personal jurisdiction over petitioner, it did not have to address whether FAA §7 permits the subpoena of non-parties for documents only. Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2nd Cir. 2006).
Notice of Mechanic's Lien Discharged as Untimely Under Lien Law §10
Property owners sought to discharge a notice of a mechanic's lien filed by a plumbing subcontractor against the owners' single family home. The owners argued that the subcontractor's notice of lien was not filed within the time required by Lien Law §9, which is within four months after work was last performed on the owner's home.
The subcontractor argued that Lien Law §10 permitted filing of a notice of lien within four months after completion of the contract for the work, which in this case was not until the town plumbing inspector signed off on the job as the contract required. The subcontractor produced evidence that the inspector's approval was given on April 1, 2003, and argued that the subcontractor's August 4, 2003, lien filing, though three days late, should remain of record.
The subcontractor failed to produce a copy of contracts between it and the general contractor or between the general contractor and the homeowners establishing that contract completion would not occur until the plumbing inspector's approval.
The court held that producing either of these contracts was part of the subcontractor's burden in proving the validity of the notice of lien. Because the subcontractor failed to make this showing, the last day of performance was established by a letter from the general contractor to the owners showing the last day the subcontractor worked on the owners' property was February 28, 2003. This made the subcontractor's lien filing on August 4, 2003, untimely. Therefore, subcontractor's lien was vacated and canceled as untimely under Lien Law §10. In re Radovsky, 6 Misc.3d 1018(A), 800 N.Y.S.2d 355 (Table) (2004).
Challenge to Mechanic's Lien by Shareholders in Cooperative Denied
Shareholders in a cooperative apartment building moved by order to show cause to discharge a mechanic's lien filed by an electrical contractor. The shareholders argued that their apartment was a single-family dwelling and that the lien was, therefore, invalid under Lien Law §10, which requires filing of a mechanic's lien within four months of final performance of work on a single-family dwelling.
The electrical contractor argued that the cooperative building was a multiple-family dwelling and that Lien Law §10 allowed the filing of mechanic's liens up to eight months after completion of work on such buildings.
The Supreme Court held that the cooperative building owner, 300 West 108th Street Owners Corp., had a lienable interest in the shareholders' apartment because it possessed the unquestioned real property interest in the entire building and all of its apartments. The shareholders' interest was not a direct interest in the fee of the underlying real property but rather ownership of shares of stock in the cooperative corporation and a proprietary lease of their premises from the cooperative corporation.
A mechanic's lien is enforceable against a cooperative building owner only when the building owner has affirmatively consented to the work authorized by the tenant-shareholder. No evidence was presented establishing that the cooperative building owner had consented to the electrical contractor's work.
The shareholders did have a lienable interest in their apartment because a leaseholder may be considered an owner under Lien Law §2 (3). However, the court found that it was unnecessary to determine whether the shareholders' apartment was a single-family dwelling under Lien Law §10 because the building owner, and not the shareholders, was named as the owner of shareholders' apartment space in the mechanic's lien and the lien was not filed against the shareholders' discrete ownership interest in their apartment as represented by their shares in the cooperative and the proprietary lease. Therefore, shareholders lacked standing to challenge the mechanic's lien, and their petition was denied. Newman v. Valmar Electric Co., 9 Misc.3d 450, 801 N.Y.S.2d 731 (2005).
Strict Procurement Lobbying Law Takes Effect
State Finance Law §§139-j and 139-k took effect on January 1, 2006. The law regulates the manner and reporting of lobbying efforts related to the procurement of government contracts.
The new law defines lobbying as nearly any attempt to influence procurement by state government agencies and local government agencies with populations of more than 50,000 within their boundaries, including industrial development agencies and public benefit corporations. School districts are not subject to the law.
In addition to registration and reporting requirements, the new law imposes strict limitations on "contacts" with a governmental entity while a procurement is pending, that is, during the so-called "Restricted Period." A "contact" is defined as "any oral, written or electronic communication with the Governmental Entity under circumstances where a reasonable person would infer that the communication was intended to influence the Governmental Procurement."
Once a governmental agency issues a written notice of a procurement, only the agency's designated representative may be contacted regarding the procurement. Violations result in a finding of non-responsibility to bid on the contract and possibly debarment from bidding on work for four years.
The new law does not render ineffective Executive Order 127. It requires entities seeking state work not required by law to be awarded to the low bidder to identify persons or organizations authorized to lobby contracting agencies on their behalf and indicate whether these persons have been found to be in violation of EO 127 within five years. Agencies covered by EO 127 are required to record information about persons contacting them in an attempt to influence procurement decisions and determine whether proposers are in compliance with EO 127. Click here for more information on EO 127.
Trustees of Union Benefit Plans Have Rights as Claimants Under Payment Bonds
Plaintiff trustees of union benefit funds and a union local sought to recover against a payment bond issued in connection with a union subcontractor's work. The subcontractor was principal on the payment bond, and plaintiffs had a contract with the subcontractor to furnish the labor on the projects. The defendant surety claimed that none of the plaintiffs were a "claimant" as defined under the bonds.
The court held that plaintiffs had standing to sue on the payment bond because the union's master labor agreement, to which the sub was a signatory, gave the trustees the right to collect subcontractor's required contributions to the benefit plans. Further, the trustees were "claimants" as defined in the payment bond, which restricted a "claimant" to those in direct privity with the subcontractor to furnish labor. Trustees were claimants because "claimant" includes both wages and union benefits as provided in the collective bargaining agreement with the subcontractor. Trustees of Plumbers and Steamfitters Local 21 Annuity Fund v. Hartford Fire Insurance Co., 10 Misc.3d 1059(A), 809 N.Y.S.2d 484 (Table) (2005).
Construction Manager Held Liable for Injury Under Labor Law §240 (1)
An employee of Jordan Construction Co. sued the company and Turner Construction Co., which was construction manager for a school district's capital improvement projects. The school district had contracted with Jordan to replace windows. During the project, the plaintiff fell 12 to 14 feet. The employee obtained summary judgment against his employer and Turner on his Labor Law §240 (1) action. The Court of Appeals affirmed both the trial court's and Appellate Division's determination that Turner, as construction manager, was a statutory agent of the school district for purposes of the Labor Law.
The Court of Appeals noted that the school district had entered into a contract agreeing that Turner would serve as construction manager for capital improvement projects for several schools. There was no general contractor engaged by the school district. The construction manager functioned as the "eyes, ears, and voice of the district." Turner's broad supervisory responsibility was both that of a coordinator and overall supervisor. Turner was contractually required to direct contractors to cease work that constituted unsafe work practices or hazardous conditions. Further, Turner was contractually obliged to monitor site and trade contractors. The Court of Appeals noted that Turner was not the "typical construction manager." One of Turner's employees acknowledged that "[i]f there was something improper that was being done on the job site, we were able to stop it, yes." She further admitted that Turner had the authority to control activities at the site, and her duties as superintendent included being in charge of safety at the work site.
Accordingly, the Court of Appeals held that Turner had a duty to make sure that workers on site were furnished with proper safety gear, given (1) the specific contractual terms creating agency; (2) the absence of a general contractor; (3) the construction manager's duty to oversee the construction site and the trade contractors; and (4) the acknowledgment by a representative of Turner that it had the authority to control activities at the work site and to stop any unsafe work practices. There was a strong dissent by Judge Smith, which was joined by Judges Rosenblatt and Read. Walls v. Turner Construction Co., 4 N.Y.3d 861, 831 N.E.2d 408, 798 N.Y.S.2d 351 (2005).
Court of Appeals Enforces Foreign Judgment for Economic Loss Resulting from Tortious Act
A South Korean buyer of ice cream from a California ice cream supplier sought to enforce the default judgment buyer had obtained in South Korea for the buyer's economic loss resulting from receiving ice cream contaminated with listeria monocytogenes.
The buyer moved for entry under the Uniform Foreign Country Money-Judgments Recognition Act, Civil Practice Law and Rules Article 53, which was enacted in 1970 to "promote the efficient enforcement of New York judgments abroad by assuring foreign jurisdictions that their judgments would receive streamlined enforcement in New York."
The seller contended that (1) the South Korean judgment was not conclusive and could not be recognized or enforced by a New York Court and (2) the sales agreement and South Korean court file demonstrated that the South Korean court did not have personal jurisdiction over the U.S. defendant.
The Supreme Court dismissed the purchaser's action on the grounds that there was no cognizable basis for asserting personal jurisdiction over the supplier. The Appellate Division, First Department affirmed. The Court of Appeals overturned the Appellate Division.
The Court of Appeals reasoned that historically New York courts have accorded recognition to foreign country judgments under the doctrine of comity absent some showing of fraud in the procurement of the foreign country judgment or violation of some strong public policy of the State of New York.
To invoke the public policy argument, the court wrote, the foreign judgment must be "inherently vicious, wicked or immoral, and shocking to the prevailing moral sense." The court reviewed Article 53 and noted that it allows foreign court judgments to be recognized if the foreign court has personal jurisdiction over the debtor or when New York's long-arm statute is used as a parallel to assess the propriety of the foreign court's exercise of jurisdiction. Here, the court held that long-arm jurisdiction is established despite the out-of-state (outside South Korea) tortious act, which caused injury within South Korea although it involved an economic loss that is not recoverable in tort under New York law.
The court held that establishing long-arm jurisdiction turned on whether the Korean buyer could sufficiently allege that the California supplier had committed a "tortious act" outside South Korea that caused injury within South Korea.
The seller contended that the claim was a simple breach of contract and not a tortious act and thus Article 53 did not apply.
The court determined that for purposes of establishing long-arm jurisdiction, a tortious act should be considered broadly to encompass one causing economic injury. The court held that even though New York does not recognize economic loss arising from a tortious act, such recovery is not repugnant to New York's public policy nor offensive to its notions of fairness. New York's law in this regard actually was immaterial to the court. To refuse to recognize the foreign judgment under these circumstances because of New York's law, the court concluded, would undermine the principles of comity by interfering with judicial or legislative acts of foreign states. Sung Hwan Co., Ltd. v. Rite Aid Corp., 7 N.Y.3d 78, 850 N.E.2d 647, 817 N.Y.S.2d 600 (2006).
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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.
©2006 Thelen LLP
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