Author: Gregory J. Spaun

One of the most ubiquitous documents in construction is the partial waiver and release of lien, which is invariably a condition precedent to a contractor or subcontractor receiving its progress payment. While the most common question contractors have is whether signing the document before receiving payment actually waives the contractor’s right to receive that payment (it doesn’t), these documents can be a trap for the unwary because they will operate to waive claims for monies that are not specifically recited as being excepted from the partial waiver and release of lien (such as unpaid change order claims, delay claims, etc.). An appellate court, in the recent case of Pizzarotti, LLC v X-Treme Concrete Inc., reminded us of this state of affairs when it dismissed a contractor’s counterclaim for delay damages based on its execution of such monthly waivers.

Background

In September of 2015, Pizzarotti entered into an agreement to perform construction services for a residential construction project on West 27^th Street in Manhattan. Pizzarotti subsequently entered into a subcontract with X-Treme Concrete for X-Treme to perform the concrete scope of work at the project. Of course, as part and parcel of the payment process, X-Treme signed partial waivers and releases of lien monthly, each one of which provided, in capital letters, that X-Treme “AGREES THAT THIS WAIVER OF LIEN AND RELEASE IS NEITHER A RECEIPT FOR PAYMENT NOR A CONDITION PRECEDENT TO PAYMENT, BUT A KNOWING AND WILLFUL ACKNOWLEDGEMENT THAT SUBCONTRACTOR HAS BEEN FULLY PAID . . . THROUGH THE ABOVE-REFERENCED DATE.”

Within months, disputes arose on both sides, with Pizzarotti alleging that X-Treme failed to remit payments to its subcontractors and suppliers, and X-Treme alleging that Pizzarotti failed to pay it promptly, and had delayed the job. Ultimately, X-Treme ceased working on the project (with X-Treme alleging that Pizzarotti improperly terminated it, and with Pizzarotti alleging that X-Treme abandoned the job), and X-Treme filed a mechanic’s lien against the project (as did several other of X-Treme’s subcontractors). Pizzarotti sued X-Treme for breaching the contract, alleging that it was going to incur excess completion costs as a result. X-Treme filed several counterclaims, each one of which alleged that X-Treme incurred significant damages as a result of Pizzaroti’s delays arising from its failure to provide complete project drawings, and that Pizzarotti improperly terminated X-Treme as a pretense to cover for its own delays, and in an effort to avoid liability for such actions.

After discovery, Pizzarotti moved for summary judgment dismissing X-Treme’s counterclaims, arguing that the partial releases and waivers of lien executed by X-Treme in exchange for monthly progress payments (eight, in total) barred its delay claim, which—unlike the recitation of unpaid retainage—was not excepted from the otherwise general release language. In opposition, X-Treme argued that the releases were only meant to document payments received to date (receipts, in essence), and not to release any unresolved change orders or delay claims.

Decision

The motion court dismissed X-Treme’s counterclaims, briefly citing the partial waiver and release of lien documents—and holding that X-Treme failed in its burden to demonstrate that the releases did not apply to its claim, or otherwise establish any equitable basis to vitiate their effect. The appellate court affirmed, citing the capitalized language of the partial waiver and release of lien in which X-Treme specifically acknowledged that the document was not a mere receipt but, rather, operated to release any claims not specifically preserved, including its delay claim (which existed prior to the execution of the latest release documents). The appellate court also noted the existence of a no-damages-for-delay provision of the contract, and found that as the incomplete drawings were specifically mentioned in the parties’ contract, they were contemplated and, therefore, not subject to one of the exceptions to the enforceability of such a clause.

Comment

Clearly, contractors are in the construction business to make money. However, this case should caution contractors that they should not simply sign any document put in front of them to get some money flowing in their direction. Setting aside, for the moment, that X-Treme’s delay claim was also barred by specific contractual language, the partial waiver and release of lien documents here serve as clear evidence that simply signing required documents for the sake of getting some money flowing can result in the foreclosure of other claims which may (or, here, may not) have merit. Accordingly, contractors would be well advised to consult with experienced construction counsel as to how to best preserve their right to collect on all of their claims, and not just the ones that will result in an immediate payment. Have your attorney review the partial release and waiver of lien document at the time of the very first requisition—not 8 months into the job, when the damage has already been done.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Construction projects are often expensive undertakings, with the expense increasing with the duration of the project. For that reason, owners and upstream contractors do whatever they can to stave off delays. One way they can stave off such delays is to include a provision requiring downstream contractors involved in a change order dispute to continue working pending the resolution of the dispute. An appellate court, in the recent case of McCarthy Concrete, Inc. v Banton Construction Co., reminded us that the violation of this type of provision constitutes an independent breach of the contract, and supports the imposition of liability the same as a breach of any other substantive provision of the contract.

Background

In the early 2010s, Amtrak undertook to expand its Empire Corridor trackage between its Albany-Rensselaer and Schenectady train stations by adding a fourth track. In April of 2014, Amtrak hired Middlesex Corp. as its general contractor which, in turn, retained Banton Construction Company to perform a specified scope of work in connection with the project. In October of 2014, Banton hired McCarthy Concrete to complete the concrete work for the platform extensions. This work included the structural concrete for the pile caps and inspection pits, and the concrete overlay for the platforms. The lump sum subcontract had certain enumerated exclusions, including concrete pumping and tactile work, and included unit pricing for the actual quantity of concrete used. As to claimed changes, the subcontract also contained a provision requiring McCarthy to “immediately perform the work as changed without delay”, and “pending resolution of any claim, dispute or other controversy, nothing shall excuse McCarthy from proceeding with prosecution of the work”.

In the summer of 2015, Amtrak ordered a suspension of the project, and Banton directed McCarthy to demobilize. Banton and McCarthy worked to resolve some then-outstanding payment issues, which ultimately resulted in a lawsuit in Connecticut. That lawsuit was settled with the understanding that Banton would pay certain of McCarthy’s claims, and McCarthy would return to work when Amtrak lifted the suspension. As a part of the resumption of work, Amtrak changed the plans which, as far as McCarthy was concerned, included the use of concrete pumping and the installation of tactile warning strips. Banton requested proposals for the changed work from McCarthy, and the proposals ultimately provided by McCarthy were not acceptable to Banton. In September of 2016, Banton directed McCarthy to return to work, stating that it was “willing to fund the alleged added costs for concrete pumping and added reinforcing, under a reservation of rights”. Banton also warned McCarthy that if it did not return to work, it would terminate McCarthy and retain a completion contractor. Ultimately, McCarthy never returned to the job, citing the lack of assurances of payment for the new work. Banton followed through on the termination and the hiring of a replacement contractor.

McCarthy sued Banton for some unpaid rebar left at the site, and to recover its unpaid retainage. Importantly, McCarthy also sued for its lost profits; the money it claimed it would have made but for the allegedly improper termination of its contract. Banton asserted a counterclaim, alleging that McCarthy breached the subcontract by failing to return to the job on account of the payment dispute, in violation of the subcontract’s work directive provision. The matter was tried to a judge, who decided in favor of McCarthy on its principal claim. The trial court awarded McCarthy a judgment in the total amount of $92,582.98, which was the value of the unpaid rebar, the retainage, and $28,500 in lost profits. Banton appealed, arguing that McCarthy’s breach of the contract by failing to return to the site, where the contract language required continued performance despite the existence of a payment dispute, excused it from having to pay McCarthy (or, at a bare minimum, was an offset against McCarthy’s claim).

Decision

While the trial court gave short shrift to the “continue working” provision, the appellate court found that the breach of this provision required reversal. The appellate court specifically noted that as “plaintiff had agreed, pursuant to the subcontract, to continue the work while pursing dispute resolution, its failure to perform the work amounted to a breach of the subcontract. Thus, we disagree with Supreme Court that Banton breached the contract based upon terminating the subcontract when plaintiff refused to perform absent an express agreement as to costs for the increased work. * * * Rather, we find that plaintiff breached the subcontract by refusing to perform the work as it was required to do under the subcontract and, as such, grant Banton’s counterclaim for breach of contract.” In doing so, the appellate court held that Banton was entitled to an affirmative recovery of $61,986.22 from McCarthy, which was Banton’s $106,068.22 cost to retain the replacement contractor, minus only the $44,081.93 in retainage owed to McCarthy; the appellate court held that McCarthy was not entitled to lost profits since it, not Banton, breached the contract (and also held that McCarthy had previously released the claim for the rebar).

Comment

This case is a reminder that those who live in glass houses should not throw stones; or, in the context of a breach of contract lawsuit, that the plaintiff must not first be in breach of contract itself. While, often, the withholding of work is the only leverage that an unpaid contractor has to ensure full payment, in the face of a prior agreement to continue working notwithstanding the existence of such a payment dispute, the tactic has been analogized to hostage taking—including by the appellate court here, noting that “Plaintiff’s refusal to perform the changed work without an express agreement as to increased costs had the effect of holding Banton hostage in that the work”. Accordingly, contractors would be well advised to consult with experienced construction counsel to determine what remedies they truly have, and what actions will only grasp defeat from the jaws of victory.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

This column has often reminded those in the construction industry that the statutory remedy of a mechanic’s lien is a powerful tool that enables unpaid contractors, subcontractors, and suppliers to seek payment directly from property owners who may be strangers to the contractual relationship from which the payment obligation arises. Because of the power of this tool, there are also protections in the Lien Law for owners, such as the insulation from being made to pay for the same improvement twice (which is why it is necessary for a plaintiff in a lien foreclosure action to establish the pool of monies available to pay lien claimants [the “lien fund”]). A similar protection is that a property owner who has not yet been served with the mechanic’s lien cannot be held liable for making payments in good faith to other contractors before that owner receives notice of the lien. The converse of this protection is that an owner who has been served with a mechanic’s lien cannot use subsequent payments to deplete the lien fund, and will not have the “good faith payment” defense available upon the foreclosure of the lien. However, in the recent case of Crisafulli Bros. Plumbing & Heating Contractors, Inc. v Pirri Builders, LLC, when an inventive subcontractor sought to transform that defense into an affirmative claim in a lawsuit, an appellate court held that the legislature never intended to create yet another type of claim other than the lien foreclosure claim, and it rebuffed the attempt to invent the new one.

Background

In early 2017, Pearl Enterprises entered into a contract with Pirri Builders to serve as the general contractor for a renovation project in Albany. In March of 2017, Pirri entered into a subcontract with Crisafulli Brothers Plumbing and Heating Contractors for the HVAC and plumbing scopes of work. Crisafulli claimed that it performed its work without objection (but without payment), and as a result was owed a total of $164,708.19. Crisafulli filed two mechanic’s liens, one in October of 2018, and the other in January of 2019. After being served with these liens, Pearl made two payments, totaling $227,502.00, to Pirri—not Crisafulli.

Crisafulli sued both Pearl and Pirri. As against Pearl, it not only sued to foreclose the mechanic’s lien, but it also asserted a cause of action for “payment over mechanic’s lien”, based on Pearl’s two post-lien payments to Pirri. Pearl moved to dismiss the “payment over lien” claim, arguing that it did not exist under New York law.

Decision

The motion court dismissed the “payment over lien” claim, and the appellate court affirmed. In doing so, the court reviewed the plain language of the statute and found that, at best, it provided a safe harbor provision against liability for payments made before the property owner had notice of the mechanic’s lien, and not a separate claim. Under such a reading, the “payment over lien” theory could only be a contractor’s defense against an owner’s attempt to use the safe harbor provision to reduce the lien fund.

Comment

The mechanic’s lien provided for under the Lien Law is a powerful tool. However, as a remedy that was not available at common law, it is read strictly so as to not give greater rights than the legislature intended. Accordingly, because the legislature did not clearly provide for the additional claim for the “payment over lien”, the court properly declined to create the claim by judicial fiat.

As a practical matter, Crisafulli had already started a lien foreclosure action, which, upon the facts presented, appears sufficient to enforce Crisafulli’s rights to payment. The safe harbor provision of the lien law—which Pearl was well outside—already exposed Pearl for making the subject payments after having had knowledge of Crisafulli’s lien. While it is understandable for a contractor to want to bring every weapon to bear in order to collect monies owed, in an attempt to create a claim that did not exist, the only thing that this subcontractor did was to buy itself motion practice, and an expensive trip to the Appellate Division.

P.S.- If you are served with a lien, think twice before writing out any checks. Protect yourself.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

It is not unusual of that an owner, or an upstream contractor, encounters financial difficulties during a project which jeopardize—or completely stop—the contractor’s payments. However, in today’s modern world, the owner may be but a cog in a larger wheel, with ramifications suffered by others who are somehow related to, or set to benefit from, the construction (such as lenders, parent entities, and others). In such instances, in order to salvage the benefits of the construction, those related to the owner may agree to pay the contractor to finish its work in place of the owner, or even pay the contractor for the previous, unpaid work. An appellate court, in the recent case of Villnave Construction Services, Inc. v Crossgates Mall General Company Newco, LLC, reminds us that such agreements must generally be in writing, and that the exceptions to that general rule are narrow.

Background

In 2016, defendant Albany MIB+K, LLC leased a space at the Crossgates Mall with the intention to operate a franchise of Waxy’s Modern Irish Bar and Kitchen. In March of 2017, defendant Waxy O’Connor’s Management Company, the franchisor and representative of the Waxy’s brand, worked with MIB+K to negotiate a construction agreement with defendant Trinity Building and Construction Management Corp., for the construction, and to ensure that the buildout would be consistent with other Waxy’s locations.
After construction commenced, MIB+K began to fall behind on payments. In order to have the construction continue, Waxy O’Connor’s Management Co., and defendants Ashok Patel, Amisha II, LLC, and Jasmine Hotel Management (the group of which were all somehow related to Waxy O’Connor’s), and defendant Crossgates Mall Devco, LLC (the Mall), promised to pay Trinity if Trinity would continue the construction. Shortly thereafter, when MIB+K filed a bankruptcy petition, Trinity’s principal reached out to the Waxy’s Group and the Mall to ascertain their intentions. The Waxy’s Group and the Mall responded by orally committing to pay Trinity for its continued performance, so long as Trinity would not suspend its work under the contract (as was its contractual right) based on MIB+K’s failure to pay. Based on these oral promises, Trinity continued to perform under the contract. However, Trinity only received a partial payment from one of the Waxy’s Group.
Ultimately, when MIB+K’s lease was terminated based on the non-payment of rent, one of Trinity’s unpaid subcontractors filed, and sued to foreclose, a mechanic’s lien. Trinity cross-claimed against the Waxy’s Group and the Mall to recover on the oral promises of payment, specifically asserting claims for unjust enrichment, promissory estoppel, and breach of the guarantee. The Waxy’s Group and Mall defendants moved to dismiss, arguing that the unjust enrichment claim failed in light of the express written contract between Trinity and MIB+K, and that the alleged guarantee promises were not enforceable as they were not in writing.

Decision

First, as to the unjust enrichment claim (and as this column has repeatedly noted), under controlling case law, such claims generally fail in the presence of an enforceable written contract covering the subject of the unjust enrichment claim. However, because of MIB+K’s bankruptcy filing, the enforceability of that contract was called into legal question (since the bankruptcy court has the authority to discharge the contract). Accordingly, the court held that the unjust enrichment claim could be asserted as an alternate to what may be an unenforceable, discharged contract.
Turning to the oral promises, the court also correctly noted (as this column similarly noted in our October, 2020 issue) that generally, such promises have to be in writing in order to be enforceable. However, here, unlike in the case referenced in the previous column, Trinity alleged that it entered into an agreement to not only perform under the old contract with MIB+K, but it also agreed to refrain from terminating its contract with MIB+K—even though it had the legal right to do so. This delay in terminating its performance under the contract benefitted the Waxy’s Group and Mall defendants by permitting them time to avoid their own personal obligations under the defaulted MIB+K lease. Given these allegations of new consideration—separate and apart from those obligations that Trinity was already under—and the new benefits to be realized by the promisors, the narrow exception to the Statute of Frauds (a law requiring certain agreements to be in writing) could apply, and the claim was permitted to proceed to discovery on this issue.

Comment

It is always comforting for a contractor, when faced with financial difficulties of an owner or an upstream contractor, to find solace in another’s promise to pay. However, such oral promises are generally unenforceable unless they fit into a narrow exception. Accordingly, the gold standard, of course, is to get such promises in writing. Failing that, you should consult with experienced construction counsel so that you can take actions, similar to those referenced by the court here, which will permit you to allege, and ultimately show, that the promise to pay is supported by new, additional consideration (such as not exercising a right you would otherwise have exercised under the contract), and the new promise benefits the promisors directly in some way. Essentially, you are making a new contract, so be prepared to treat (and document) it as such. After all, and as we have often cautioned: if it ain’t in writing, it didn’t happen!

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

While this column often deals with issues relating to the construction industry, it is sometimes overlooked that construction contractors are, more generally, employers, just like those outside the construction industry. Those generally applicable rules, however, can be just as easy to run afoul as those which are uniquely applicable to the construction industry. In the recent case of Shevlin v Wonder Works Construction & Development Corp., a Court reminds us that New York’s generally applicable whistleblower protection statute (Labor Law §740) is also applicable to construction contractors.

Background

Prior to 2013, Wonder Works Construction Corp. entered into a contract with 421 Kent Development, LLC for Wonder Works to be the construction manager for a construction project at 421 Kent Avenue in Brooklyn. The contract between Wonder Works and 421 Kent provided that “[421 Kent] reserves the right to direct the removal of any of [Wonder Works’] staff for cause (at [421 Kent’s] sole discretion) including Key Personnel, and [Wonder Works] shall promptly replace such individuals with competent substitutes acceptable to [421 Kent]”. 

In 2013, Scott Shevlin was hired by Wonder Works to be a site superintendent at the 421 Kent Avenue project. At the commencement of the project, the 421 Kent Avenue site was surrounded by a fence around three sides, which had been left by the previous owner. The site was divided by a private street, which was guarded by rolling gates that were supposed to have been closed when not in use. The New York City Department of Buildings required that Wonder Works both build an interior fence on the fourth side of the site, and keep the rolling gates closed when not in use, in order to safeguard the site as a condition of lifting a previous stop-work order. If the gates were left open, the public would use the private street as a shortcut between two local thoroughfares.

A problem arose with the site’s neighbor, who preferred to leave the rolling gates open for his own convenience. As DOB continued to warn Wonder Works about leaving the gates open, Shevlin would close them. Both Wonder Works’ vice president and 421 Kent Development’s site representative would tell Shevlin he should leave the gates well enough alone, and that they did not care about whether the gates were open or closed. This indifference was communicated to Shevlin several more times prior to his termination, and Shevlin, pursuant to both DOB’s and his immediate supervisor’s instructions, would insist on keeping the gates closed. 

In January of 2014, Wonder Works received a letter from 421 Kent Development’s site representative directing Wonder Works to replace Shevlin with “alternative competent personnel for cause”, claiming that “Shevlin has demonstrated a lack of fiduciary responsibility and a retaliatory approach in dealing with daily issues”. In response, Wonder Works terminated Shevlin’s employment. In subsequent correspondence between Shevlin and another Wonder Works principal, Shevlin was advised that the termination was the owner’s decision, and that Shevlin did nothing wrong.

Shevlin commenced a lawsuit under New York’s Whistleblower Protection Statute, Section 740 of the Labor Law, against both Wonder Works and 421 Kent Development, alleging that he was terminated for insisting on keeping the gates closed, even though it caused consternation with the neighbor. Wonder Works and 421 Kent Development both claimed that the termination had nothing to do with the rolling gates issue. Wonder Works also claimed that in light of its contract with 421 Kent Development, it was required to terminate Shevlin and had no discretion in the matter; 421 Kent Development also claimed that it could not be held liable because it was not Shevlin’s employer.

Decision

A non-jury trial was held on Shevlin’s claim, and the court credited the testimony that there were no complaints about Shevlin’s employment other than his insistence on keeping the gates closed, and discredited the testimony that his firing was unrelated to the access issue. In order to find a violation of the version of Section 740 in effect at the time, the court also had to find that there was, in fact a violation of a statute, code, etc. The court found such a violation of Section 3307.3.4 of the Building Code, which requires that openings in fences, sidewalk sheds, barriers, and railings be closed at all times except during actual loading and unloading operations, and the court linked Shevlin’s termination to his insistence on keeping these gates closed. (The current version of the statute only requires that the employee have a reasonable belief about the violation of a statute, code, etc., not that the violation actually exist). 

The court found that Wonder Works’ defense of just following the contract was unconvincing, holding that while the contract did give 421 Kent Development the right to remove Wonder Works’ employees “for cause”, as determined to exist in the sole determination of 421 Kent Development, it could not require Wonder Works to violate applicable law in doing so. As to 421 Kent Development, even though it was the root cause of Shevlin’s termination, it was not liable because the statute was specifically made applicable to employers, and 421 Kent Development was not Shevlin’s employer. Based on these findings, the court dismissed the case against 421 Kent Development, and it directed Wonder Works to pay Shevlin $227,000 in back pay, plus his attorney’s fees.

Comment

In dealing with contractual provisions between parties, this column has routinely cautioned that obligations should be made consistent both upstream and downstream (e.g.: if a GC’s contract with the owner requires arbitration, the GC should require arbitration of its subcontractors). As the Shevlin court reminds us, those obligations must also be consistent with state law, including generally applicable employment law. As Wonder Works learned here, the defense of “just following the contract” was not sufficient to save it from a significant lost wages claim—plus potentially over $50,000 in attorney’s fees.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

References to consequential damages are often found in construction contracts, without appropriate appreciation as to what, exactly, those damages are. These references are most often found in mutual waivers of such damages; but the question is begged as to what, exactly, is being waived. In the recent case of Lam Platt Street Hotel LLC v Golden Pearl Construction LLC, an appellate court reminds us that waivers of consequential damages are strictly enforced. Accordingly, contractors would be well advised to appreciate the full import of such clauses.

Background

In 2011, Lam Platt Street Hotel LLC entered into an agreement to construct a hotel near the South Street Seaport, and Golden Pearl Construction was retained as the general contractor. The form of contract was an AIA A101/201 combination, which contained a time of the essence clause requiring completion before Super Bowl XLVII, which was held in February of 2014 in (as much as the “New York” football teams eschew the name) nearby East Rutherford, New Jersey. The contract also contained provisions governing termination for cause, which required certification by the project’s architect that the general contractor was in default (and which would also permit Lam Platt to suspend its obligation to make further payments to Golden Pearl until the completion of the project), and for convenience (which required that Lam Platt pay Golden Pearl for all work completed through the termination date). Finally, the contract contained a mutual waiver of consequential damages, which expressly included “rental expenses, loss of use, income, profit, revenue, financing, business and reputation”. 

During construction, disputes arose between Lam Platt and Golden Pearl over extra work and payments, and Golden Pearl’s alleged failure to properly staff the project. In December of 2014, Lam Platt and Golden Pearl ostensibly resolved their differences, and the project’s time and price were increased. Unfortunately, this agreement was not the last word on these subjects, and the relationship broke down. In June of 2015, Lam Platt terminated Golden Pearl’s contract, without specifying whether the termination was for cause or for convenience, but also without any certification by the architect. Because there was no architect’s certification, Golden Pearl rejected any claim that the termination was for cause. (Ultimately, the architect refused to certify that the termination was for cause, citing its own contract and claiming that it had no such responsibility to do so.) Golden Pearl subsequently filed a mechanic’s lien against the property, claiming that it was owed nearly $3.2 million.

In February of 2017, Lam Platt sued Golden Pearl for breach of contract, seeking, amongst other damages, delay costs and the profits it would have realized if the project had been completed in time for the Super Bowl. Golden Pearl moved to dismiss this claim, arguing that the damages that Lam Platt sought were specifically barred by the waiver of consequential damages contained in the contract. 

Decision

The motion court granted Golden Pearl’s motion, and the appellate court affirmed. In doing so, both courts cited to well settled case law that an agreement between the parties to allocate the risk of loss via a waiver of consequential damages must be enforced as written.

Comment

As the courts here noted, a waiver of consequential damages is, essentially, an agreement as to how the risk of a breach is to be allocated. To best understand that risk, one must understand what “consequential damages” really are: damages which flow indirectly from the breach (as a consequence of that breach), rather than those which are caused directly by the breach. Unfortunately, this language is not often clear to attorneys, and is frequently the subject of endless argument and court ruling. The best way to illustrate the difference is by example: direct damages often include the cost to repair defective work, the cost to complete incomplete work, the payment owed under the contract, the loss of value of a project as a result of improper work, and the profit the contractor would have received if it had been permitted to complete the job and not improperly terminated; consequential damages, on the other hand, often include lost profits from the intended use of the project, lost rents, or lost profits on jobs not taken because the contractor was tied up on the disputed project (to be contrasted from lost profits on the revenues not realized because of an improper termination, which are considered direct damages), extended overhead and delay costs, increased financing costs, and even lost bonding capacity. Because these items can vary widely—and are often difficult to prove—parties frequently include a liquidated damages provision, as an estimate of damages, along with the waiver of consequential damages. To better understand what would be included and excluded from recovery on any particular project under the applicable contract, contractors would be well advised to consult with experienced construction counsel so that they can fully understand how they are allocating the risks of a breach of the contract they are about to enter.

Parenthetically, it must also be noted that a significant issue in Lam Platt was whether the termination was one for cause or convenience. Crucially, under the contract at issue, no termination could be made for cause without the actions of a third-party to the contract—here, the architect—certifying that the general contractor was in default. The architect declined to issue any such certification because his own contract did not require him to do so. This dichotomy shows the importance of harmonizing all upstream, downstream, and parallel contracts for the consistency of obligations, and making sure that if one contract provides that a third-party is to act as a condition precedent to any action by the contracting party, that such third-party is actually under his or her own obligation to do so.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby. 

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

It is well known that in business, including the construction business, the applicable contract governs the relationship between the parties. As the subject of negotiation, its specific terms should be familiar to all parties. Unfortunately, during the bustle of the project, some contractual provisions, including notice provisions and right to cure provisions, fall by the wayside. While, the majority of the time, these missed provisions end up being inconsequential (because the parties make their way past the issues and deal with them at the end of the job), an appellate court, in East Empire Construction, Inc. v Borough Construction Group LLC, reminds us of the importance of complying with these provisions so that any subsequent actions, such as a termination, will be valid.

Background

In 2015, Borough Construction Group, a general contractor, entered into a subcontract with East Empire Construction whereby East Empire was to perform the steel scope of work for the construction of a building in Columbus Circle in Manhattan. The relevant contract, which was an AIA A401/201 form of contract, contained a provision permitting Borough to undertake to correct East Empire’s defective work if East Empire failed to do so itself within five days of receiving notice of such defective work. Another provision of the contract required Borough to provide East Empire with a 10 day period within which to cure any defect as a condition precedent to termination.
In May of 2016, Borough sent East Empire a notice of termination, stating that the subcontract would be terminated three days from the date of the letter, claiming that East Empire was in default by “failing to provide sufficient manpower [] [and] failing to meet the schedule, safety regulations and qualified workmanship” for the project. The parties discussed these issues and, after negotiations, Borough withdrew its termination letter. One week later, Borough sent East Empire an identical notice of termination, and subsequently retained a new steel contractor to complete East Empire’s scope of work.
In November of 2016, East Empire sued Borough for breach of contract, alleging that Borough breached the contract by improperly terminating East Empire’s subcontract, and seeking the monies for which it had invoiced up until the termination. Borough denied the allegations in the complaint, and asserted East Empire’s claimed breaches of the subcontract as a defense to payment. East Empire moved for summary judgment in its favor on its breach of contract claim, and dismissing Borough’s affirmative defense, on the grounds that Borough denied it of its contractual opportunity to cure the claimed defects. In opposition, Borough argued that East Empire’s acts of default were persistent and incurable. 

Decision

The motion court granted East Empire’s motion, and found that by failing to give East Empire the opportunity to cure provided for in the subcontract, Borough’s second attempt at termination was improper and, itself, constituted a breach of that contract. The appellate court affirmed, addressing not only the clear lack of the contractually required cure period, but also the limited exceptions to this requirement. The appellate court discussed that while such a notice to cure need not be given where: the terminated party repudiates its performance; the terminated party abandons the project; the breach is impossible to cure; or the breach is so substantial that it undermines the entire contractual relationship such that it cannot be cured, the exceptions are of very limited scope, and none applied here. In doing so, the appellate court cited well settled law in holding that the defaults complained of, mere faulty steelwork and failing to meet the schedule, was “the very situation to which the cure provision was intended to apply”. 

Comment

Notice and opportunity to cure provisions, like other contractual provisions, must—absent extraordinary circumstances—be strictly complied with. Typically, arguments that extraordinary circumstances apply are made not when there are such extraordinary circumstances, but when the notice and cure provisions are overlooked (or, in a haste to remove a contractor from a project, simply not complied with). East Empire highlights how a subcontractor in default was able to completely turn the tables on the general contractor and not only avoid the consequences of its own default (being backcharged for the excess cost incurred by the general contractor to complete its work), but also have an affirmative recovery and get paid for its (claimed defective) work. While the reflexive statement to a contractor in default is to “get off of my jobsite”, contractors would be well advised to review their contracts to see if there are notice and cure provisions, and strictly comply with them. Surely, the offense at having the contractor around for an extra few days while he tries to remedy a default is not as grievous as having to not only forego a backcharge for excess completion costs, but also actually writing that contractor a check for work you believe is defective. If you have any questions as to whether such an exception applies, experienced construction counsel can help.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

In this column, we have often addressed delay claims—typically in the context of when, if ever, a contractor can assert such a claim in the face of a no-damages-for-delay clause. However, the recent case of Dworkin Construction Corp. v Consolidated Edison Co. of NY, an appellate court reminds us that fundamentally, delay claims are creatures of contract and, therefore, a contract between both the proponent and the target of the delay claim is absolutely necessary to proceed.

Background

Dworkin Construction Corp. was retained by Lush Cosmetics, a makeup retailer and lessee of a property on East 14th Street in Manhattan, to renovate a commercial space and build out a store that would suit Lush’s particular needs. Lush’s needs included the installation of an additional electrical shunt to supply more power for the store. As a part and parcel of this scope of work, Dworkin applied to Con Ed for required approvals, to which Con Ed responded very slowly, resulting in a delay of the completion of the project. As a result of this delay, Dworkin incurred $82,805 in damages—and lost Lush’s business.

Dworkin sued Con Ed for negligence and breach of contract to recover the out of pocket expenses, as well as the claimed $1,068,405 in lost profits resulting from its loss of Lush’s business. In its complaint, it alleged that Con Ed was negligent by failing to exercise reasonable care in the processing of Dworkin’s application. Dworkin, alternatively, alleged that it entered into a contract with Con Ed for Con Ed to reasonably and diligently process its application for the service upgrade, and that Con Ed breached the contract by failing to do so. Con Ed moved to dismiss the lawsuit.

Decision

The motion court granted Con Ed’s motion, holding that even if Con Ed took an extraordinarily long time to process the application, Dworkin could not assert such a claim in the absence of a contract. Dworkin appealed, and the appellate court affirmed. As to the negligence claim, the appellate court held that in addition to Con Ed not having any common-law duty to Dworkin, the negligence claim failed because it sought only economic damages—which, under well settled case law, are limited to breach of contract claims. As to that breach of contract claim, the appellate court found that even though Con Ed provided invoices and a “service determination” listing Dworkin as the customer, Dworkin was not doing the work for its own service but, rather, that of its customer, Lush, for which it was acting as agent. Further, and specifically as to Con Ed, the appellate court also referenced its tariff (its operating authority granted by the Public Service Commission), under which Con Ed has the obligation to provide utility services to all customers equally, and held that Con Ed does not have the legal authority to enter into any agreement which guarantees service within a particular time frame.

Comment

Dealing with utilities can be as frustrating, and bureaucratic, as dealing with government agencies themselves. On top of this, the frustration of delays (and their financial impact on a project) only adds to the madness—particularly when they are not caused through any fault of the contractor (or the subcontractors working under it). However, because the damages relating to a delay are purely economic, courts require an existing contractual relationship between the parties which deals with the issue—which is usually either in the form of setting deadlines with a time of the essence clause (thus putting parties on notice that there could be the assessment of damages if that crucial date passes), or a liquidated damages clause which specifies damages to be awarded in the case of a delay, or a no-damages-for-delay clause. In the absence of such a contractual relationship, courts will not award such damages.

Of course, contractors should be diligent in keeping up with developments on the project—and trying to keep the project moving where it appears that one aspect has stalled. Contractors would also be well advised that where the work will necessarily involve third-parties who can influence the project without liability themselves, they should ask their counsel about what other contractual protections may be available, such as the right to extensions of time, or other exculpations from liability for delay upon the happening of certain events.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

In this column, we often remind our readers that a mechanic’s lien is a powerful tool for an unpaid contractor to obtain payment. For that reason, the target of the lien, either the property owner or the affected upstream contractor(s), often wants (or needs) to see the lien removed just as quickly as it was asserted. Section 19 of the Lien Law provides such persons and entities with the ability to have liens quickly discharged, but only if they are defective on their face. In the recent case of Pizzarotti, LLC v Gravity Construction Corp., a court reminded us that a defect on the face of the lien is one that is evident by looking only to the face of the lien, and without reference to any documents other than the lien itself.

Background

Pizzarotti was the construction manager for the construction of a residential building in Manhattan. Pizzarotti retained Gravity Construction as its masonry subcontractor. In June of 2019, Gravity submitted its final application for payment to Pizzarotti. Not having received its claimed payment, in November of 2020, Gravity filed several mechanic’s liens, seeking a total of $830,652.83. In these mechanic’s liens, Gravity alleged that its last date of work was April 27, 2020, which was within the statutory eight-month window in which to file the liens.

Within days of the filing of the mechanic’s liens, Pizzarotti commenced a proceeding, pursuant to Section 19 of the Lien Law, to have Gravity’s liens discharged as defective. In support of its petition, Pizzarotti not only noted that Gravity’s final application for payment was dated in June of 2019 (and, thus, the liens filed in November of 2020 would be untimely), but that pursuant to Governor Cuomo’s Executive Order 202, it was impossible for Gravity—or anyone else—to have been on site on April 27, 2020. Pizzarotti argued that Gravity’s listing of this date in its mechanic’s liens was simply a manufactured attempt to avoid the liens being dismissed as untimely.

Decision

The court denied Pizzarotti’s petition, finding that there was nothing invalid on the face of the liens because November 17, 2020, the date on which the liens were filed, was within eight months of April 27, 2020, the date listed in the liens as the last date of work. Following well settled appellate case law, the court held that to the extent that Pizzarotti disputed the facts set forth in the liens—rather than what was printed on their face—it would have to do so at trial, and the summary remedy was unavailable.

Comment

A mechanic’s lien is a powerful tool for a contractor to obtain payment, since it not only puts the world on notice that there is a claim against the property, but it often requires general and other upstream contractors whose subcontractors file such liens to go to the expense of having those liens discharged on pain of being in breach of their own contracts. Accordingly, it is natural that a contractor with a documentary defense to the claim would want the liens removed immediately. Usually, the most expeditious way to do this is to bond off the lien (and pay the associated premium). While the Pizzarotti court reminded us that the summary proceeding under Section 19 is limited to situations where the lien is defective on its face, there are other provisions in the Lien Law—such as the demand to foreclose, which, if not responded to, itself constitutes grounds for the expeditious discharge of a lien—which allow such issues to be determined more rapidly than in a typical lawsuit. In that regard, owners and general and other upstream contractors would be advised to consult with experienced construction counsel when a mechanic’s lien is filed against a property to determine whether it can be removed more quickly than the seeming geologic speed at which your average lawsuit progresses.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100