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Author: Andreas M. Koudellou

Dealing with Goliath? Proactiveness is your “Stone and Sling”

Written by Andreas M. Koudellou on . Posted in Publications.

As a General Contractor grows within the construction industry, and it takes on ever larger projects, two things simultaneously grow: (1) the GC’s prospective profits on a successful project, and (2) the GC’s prospective losses when forced to cover extended general conditions, labor and material costs, amongst other items. Moreover, owners and construction managers on large projects generally have much more bargaining power than a growing GC, and often lean on the contractor to accept a slanted one-sided contract that exacerbates the GC’s risk.

This is most obvious in the world of public works, where City and/or State agencies solicit bids on Projects and require the winning bidder – who most likely tightened their margins to win the bid – to enter into a non-negotiable contracts drafted solely by the agency. In my experience, amongst the most heavy-handed agencies is the New York City Housing Authority (“NYCHA”), who for decades have employed what some term COFEDs (Contractor Forfeiture Enhancement Devices) in their standard contracts. The most notable COFEDs utilized by NYCHA in its contracts are the following:

  1. A provision requiring the filing of a Notice of Claim within twenty (20) days of a claim being “ascertainable” in connection with ALL extra work performed on the project or requests for additional time;
  2. A provision stating that NYCHA cannot be deemed to have waived any provisions of the contract; and
  3. A provision stating that NYCHA is not subject to the legal principle of Estoppel, which precludes a party from asserting something contrary to what is implied by their previous actions or statements.

In other words, if a GC fails to file a Notice of Claim the moment its claim is “ascertainable” (i.e. quantifiable in some vague sense), whether or not the given change order was rejected, the GC loses its right to compensation – irrespective of whether NYCHA directed the GC to perform the work before a change order was formally issued, or even where there is a course of conduct between NYCHA and the GC where the agency did not require a Notice of Claim in connection with previous extra work or time extension requests on the same project. If a contractor is a single day late, they lose their claim.

In this context, NYCHA is a Goliath capable of bullying contractors. NYCHA can pick and choose which change orders will require accompanying Notices of Claim, and the contractor generally cannot use NYCHA’s own inconsistent actions/statements against the agency in court. This has been borne out in the courts for decades, where dozens (if not hundreds) of contractors have had their claims dismissed due to their “failure” to file a timely Notice of Claim – despite NYCHA routinely failing promptly reject a given change order, or NYCHA failing to enforce (i.e. waiving) the Notice of Claim requirement for certain change orders and then invoking it when faced with litigation. The courts routinely determine that NYCHA’s prior actions do not constitute waiver, and that NYCHA cannot be estopped on account of such actions, due to the aforementioned COFEDs.

A recent decision by the Appellate Division, First Department highlights the inherent risks NYCHA’s COFEDs pose to contractors. In AWL Industries, Inc. v. NYCHA, AWL accomplished something that few litigants have been capable of – that is, AWL survived NYCHA’s motion to dismiss its breach of contract claims due to purportedly unfulfilled Notice of Claim requirements (nearly all such cases are dismissed at the Lower Court). In its opposition to the motion, AWL wisely cited to the contract specifications’ language stating that a contractor may initiate “a claim” by submitting a potential change order, and highlighted the fact that it submitted its subject change order using NYCHA’s own prospective change order form.

In its decision rejecting NYCHA’s motion, the Lower Court notably referenced that AWL “provided…written notice of [AWL’s] intention to make a claim by filing a Potential Change Order form through [NYCHA’s] E-Builder System and that…the Potential Change Order did not become a claim until defendant approved or disapproved the Potential Change Order.” Despite the sound reasoning set forth by the Lower Court, the appellate court reversed the decision. In doing so, the appellate court relayed the same script it has used for decades, holding that AWL’s breach of contract claim “should have been dismissed…because [AWL] failed to comply with strict notice of claim provisions in its contract with defendant”.

This is not to say that you should avoid NYCHA projects all together, as they can be plentiful and quite fruitful under normal circumstances. But we all know that few if any projects go perfectly, and change orders for additional compensation and/or time are regular occurrences.

Notwithstanding the horrible track record of trying to fight NYCHA’s COFEDs in court, GCs are not left weaponless when dealing with this Goliath. Contractors can – and frankly should – lobby the state legislature for a statute providing that claims against NYCHA do not accrue (thereby triggering Notice of Claim requirements) until a claim/change order is formally rejected – as they did for the NYC School Construction Authority when they enacted Public Authorities Law §1744. This would make the date a Notice of Claim is due abundantly clear, eliminating a major pitfall in working on NYCHA projects. However, lobbying the assembly and governor is a long and expensive process, which has the unfortunate requirement of dealing with the political process.

So what is your best and most cost-effective course of action when dealing with NYCHA? The answer is to be proactive, and enlist the assistance of experienced construction counsel to perform “pre-litigation” services. That includes reviewing your NYCHA contract and charting a procedure for dealing with unanticipated issues – which can include a “job book” detailing each routine event on a project (a change order, a delay, an unforeseen condition, etc.) and providing the basic form document which should be submitted in such situation, complete with a caution as to when that document needs to be submitted. When brought into the fold early on, an experienced construction litigator can also review your proposed change orders and relevant circumstances, help you to determine when your claim will likely be deemed “ascertainable” by NYCHA and the courts, and assist in the preparation of a timely and sufficiently detailed Notice of Claim. In the event issues already arose on a given project, construction counsel can help stem the bleeding and minimize the losses to your bottom line. It may be hard to take on Goliath when a dispute arises but, like David, you can also prevail as the underdog.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487

Jack of All Trades Now Must be Master of All

Written by Andreas M. Koudellou on . Posted in Legal Alerts.

One of the great satisfactions as a construction attorney is assisting and witnessing a long-time client’s growth over the course of a years’ long relationship. In my career, I have had the pleasure of witnessing small subcontractors grow and take on larger projects. On occasion, those subcontractors “graduate” into general contractors, and begin taking on whole projects as their own lead.

Unfortunately, a recent decision from the Appellate Division Second Department may impact growing and established contractors alike; and may be particularly problematic for budding young general contractors. In Electrical Contracting Solutions Corp. v. Trump Village Section 4, Inc. (209 N.Y.S.3d 123 [2d Dept. 2024]), the Appellate Division overturned a favorable trial decision in favor of the contractor, where Electrical Contracting Solutions Corp. (“ECS”) was awarded a $450,000+ judgment against the Project Owner, Trump Village Section 4, Inc. (“Trump Village”).

The facts underlying ECS’s claims are simple. Trump Village needed substantial electrical work done on the housing development following extensive damage from Super Storm Sandy. ECS – an up-and-coming electrical contractor whose previous work was located outside of New York City – contracted with Brooklyn’s-own Trump Village and agreed to perform the electrical work. As ECS was just starting to take on work within New York City, it chose to use an older and more established company (“QNCC”) as its licensed Master Electrician subcontractor. Needless to say, this was not some ordinary contractor-subcontractor relationship, as ECS and QNCC shared common ownership, and the NYC Master Electrician’s License registered with QNCC was that of ECS’s own principal.

As projects tend to do, the Trump Village project began to incorporate extra and additional work, and ECS’s costs to perform grew exponentially. ECS claimed that Trump Village failed to pay all amounts due and owing for the work performed, sued Trump Village, and ultimately won at trial.

The interesting and concerning part of this story comes from the Second Department’s justification for overturning the trial court’s decision and judgment. The Appellate Division’s Second Department held that “since [ECS] was not licensed to perform electrical work in the City, it may not recover against [Trump Village] under breach of contract or [quasi-contract] theory.” The Court rejected ECS’s plea that the monetary recovery should not be denied on account of its utilizing a fully-licensed subcontractor, QNCC, to perform the work. Essentially, the Second Department is telling us that a trade-specific license, when required, must be held by the party contracting with the Project owner, irrespective of whether a license/qualified subcontractor performs the work.

This decision is devastating, as ECS did what all responsible contractors should aim to do; that is, hire and utilize personnel that possess the experience and credentials to perform the necessary work with the utmost professionalism, skills and care. That is why it was particularly surprising that the Court refused to consider the fact that ECS’s own principal, as Master Electrician for QNCC, oversaw the work on behalf of both the general contractor and subcontractor. Instead, the Court opted for as draconian a reading of the NYC Administrative Code as possible.

The operative question now is what we can make of this cautionary tale. Does this mean that a general contractor itself must possess all requisite licenses for each trade being performed on a given project, without relying on subcontractor’s licenses? It appears we may be going that way, though there is some older case law that allows a safe haven for larger projects. Instead, what we should take away from this decision is that all contractors must always be keenly aware of the licensing requirements of the jurisdiction they are working in, and make sure they are in full and unequivocal compliance.

As always, contractor’s best defense against being left holding the bag in the event of a payment dispute is what I like to call “pre-litigation”. Engaging with an experienced construction attorney at the outset of a project – or, better yet, before executing a contract – will allow your attorney to review the contract documents in the context of relevant licensing requirements, and better equip you to avoid potential non-payment traps. With an attorney’s guidance early on regarding your contract and applicable State and local laws, rules and regulations, you will be in better position to do what you do best. That is, perform your work without having to worry about whether you are/will be in compliance with pertinent licensing requirements.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487

Woes in Different Area Codes – Enforceability of Pay-If-Paid Provisions

Written by Andreas M. Koudellou on . Posted in Legal Alerts.

Welby, Brady & Greenblatt LLP represents contractors working throughout the Northeast United States; from the New York, New Jersey and Connecticut tristate area, to Pennsylvania, Massachusetts and beyond. Nonetheless, our clients’ “bread and butter” expectedly revolves around projects in the states of New York and New Jersey. If you were to create a composite WBG client, they would likely be a successful contractor with multiple projects in both states, operating as either General Contractor or Subcontractor depending on the size of the project.

In light of the prevalence of our clients’ involvement in New York/New Jersey, we keep a close eye on any legal developments that affect the construction industry in one or both states. A recent decision by New Jersey’s Appellate Division concerning a subcontractor’s right to payment has created a chasm in how contracts will be enforced in New Jersey when juxtaposed to statutory and caselaw authority in New York, and dual-state contractors must beware when signing on to New Jersey Projects.

On a daily basis, our firm drafts and/or negotiates contracts on behalf of prospective subcontractors. Quite often, the upstream general contractor attempts to include a “Pay-if-Paid” provision in the subcontract, which essentially transfers the risk of a project owner’s non-payment from the general contractor to the subcontractor by making the owner’s payment a condition precedent to the subcontractor’s entitlement to compensation for services rendered. This is quite easy to deal with when negotiating a subcontract in New York; under New York’s General Obligation Law §5-322.1, Pay-if-Paid provisions are unenforceable as contrary to public policy due to their infringement on lien rights, even if agreed to by both parties. As such, in New York these contract clauses revert to simple timing mechanisms for payment as opposed to their intended purpose of restricting the general contractor’s ultimate obligation to pay the subcontractor.

In contrast, the New Jersey courts are taking a diametrically different approach to Pay-if-Paid contract clauses. In JPC Merger Sub, LLC v. Tricon Enterprises (286 A.3d 1186 [2022]), the Appellate Division held that a Pay-if-Paid provision is fully enforceable so long as the parties’ contract specified a clear and unambiguous intent and agreement by the parties to shift the risk of non-payment by the project owner.

Tricon Enterprises (“Tricon”) was hired by the County of Union (“Owner”) to serve as general contractor on a large public improvement project. Tricon then hired JPC Merger Sub, LLC (“JPC”) as a subcontractor/vendor for the furnishing of materials on the project. The JPC-Tricon subcontract (the “Subcontract”) included an ironclad Pay-if-Paid provision:

“Vendor understands and agrees that Tricon’s obligation to make any payment to Vendor is subject to, and shall not exist unless and until, Tricon’s receipt of payment on account of Vendor’s work from the Owner…, the occurrence and satisfaction of which shall be a condition precedent to Tricon’s duty to remit payment.”

During the course of the project, JPC furnished structural steel beams for installation on the project, which were subsequently not accepted by Owner and never installed on the project. Due to the non-use of the materials, Owner did not pay Tricon for the beams, and Tricon in turn refused to pay JPC pursuant to the Subcontract’s Pay-if-Paid clause.

In its decision, New Jersey’s Appellate Division specifically referenced the fact that – unlike New York – the State does not have a statute or published caselaw governing the enforceability of such contract provisions. Moreover, the Court’s decision specifically stated that the prohibition against the use of Pay-if-Paid provisions as conditions precedent in construction contracts should come from the legislature rather than the courts, and that absent statutory authority such provisions are “neither unfair, unconscionable, nor against public policy” so long as the contract on its face contains clear and unequivocal language that unambiguously sets forth the parties intentions when the contract was executed.

The New Jersey decision is clearly problematic for subcontractors. In fact, the decision wholly changes how we approach contract negotiations for New Jersey projects. Rather than advise the clients of the provision’s true impacts and recommend its removal due to potential delays in payment (which is the approach in New York contracts), we now tell clients that the Pay-if-Paid clause in a New Jersey contract must be removed unless the client desperately wants to work on a specific project and is willing to eat the risk of non-payment. And make no mistake, the risk is substantial; if the receivable is large enough and the subcontractor is left holding the bag, their profit margin may be erased in the best case, and company-crippling losses may be sustained in the worst case.

This cautionary tale neatly illustrates the importance of retaining counsel before negotiating and executing a contract for a New Jersey project, and allowing your legal team to fight against a general contractor’s inclusion of a Pay-if-Paid provision before non-payment issues ever have a chance to arise. As discussed above, a subcontractor can do everything right on a given project and still have no legal recourse when making a justified claim for payment. As is always the case, a contractor’s best litigation defense remains “pre-litigation”; if you have any questions regarding what you are ultimately agreeing to, it is always wise to have skilled construction counsel review your contract before signing.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487

Court’s Decision Cautions of Narrow Exception to Prohibition on Pay-If-Paid

Written by Andreas M. Koudellou on . Posted in Attorneys' Column.

As a general contractor or subcontractor working on a project, your executed contract (including all annexes and attachments) is as close as you get to a metaphorical “holy text”. The contract is your opus, constitution and guiding light, which you will rely upon to properly perform on the project and receive due compensation for that performance. As such, it is crucial that you review and interpret your construction contract with extreme precision. It is a well-established legal principle that a contract should be construed in a way that gives full meaning and effect to all of its provisions. Keeping with the “holy text” theme, all contractors should employ a hyper-literal interpretation of their agreements, rather than a more practical interpretation, as a court will in all instances hold that the language controls. As discussed below, this lesson was recently highlighted in the Appellate Division, First Department’s decision in Bank of America, N.A. v ASD Gem Realty LLC.

In ASD Gem Realty, the owner of a commercial property in Manhattan’s Diamond District (“Owner”) hired a general contractor (“Contractor”) to perform construction and renovation work at the premises. The Contractor solicited proposals for the fabrication and installation of partitions, and ultimately selected and contracted with a subcontractor (“Subcontractor”) for the work. The parties understood that the Contractor would be operating as Owner’s agent, and in fact included the following language in the subcontract:

“Subcontractor understands that Contractor is acting as an agent for the Owner, and agrees to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract.”

Nonetheless, the subcontract contained only two signature lines, for the Contractor and the Subcontractor respectively. The Contractor signed in its own capacity, with no reference whatsoever to its role as Owner’s agent.

The Project eventually ran into major issues, resulting in a mortgage foreclosure and sale of the property, with all proceeds going to the foreclosing bank. The Contractor and the Subcontractor each had substantial liens on the property which were wiped out by the bank’s interest. As expected, the Subcontractor turned to the Contractor for compensation, and ultimately sued for breach of contract. In its defense, the Contractor argued that it was merely Owner’s agent (as reflected in the provision provided above), and that the Subcontractor could only seek damages from Owner. The Court acknowledged that the parties recognized the Contractor as Owner’s agent, but focused squarely on who the actual parties to the subcontract were.

The Court reasoned that an agent for a disclosed principal (i.e. Owner) can in fact be held personally liable for breach of contract where there is evidence that the agent intended to render itself liable under the contract. In the Court’s view, the Contractor did just that by signing the subcontract in its own capacity, thereby transforming the payment provision into an unenforceable “pay-if-paid” provision. Unfortunately for the Contractor (and fortunately for the Subcontractor), this resulted in a grant of summary judgment on the breach of contract claim.

The Court’s decision highlights the narrow exception to the blanket prohibition against pay-if-paid: had the Contractor explicitly signed the subcontract as Owner’s agent, the above-provision would have likely shielded it from liability. This cautionary tale neatly illustrates the importance of reviewing every bit of your contract with a fine-toothed comb. The Contractor appeared to have done everything right in terms of including agency language in the subcontract, only to be undone by a single (albeit crucial) detail. The Subcontractor, on the other hand, while ostensibly agreeing to the agency (and the effective inclusion of a “pay-if-paid” clause by virtue of that agency), benefitted from the mis-signing of the subcontract by the Contractor.

A contractor’s best litigation defense remains “pre-litigation”; if you have any questions regarding what you are ultimately agreeing to, it is always wise to have skilled construction counsel review your contract before signing. After all, it is easier for an attorney—and cheaper for a contractor—for the attorney to keep them out of trouble, rather than getting them out of trouble.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487