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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
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 LLP
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