Author: Gregory J. Spaun

In previous columns, we have written about contracts where the parties have reduced the applicable statute of limitations from the generally applicable six years to as little as six months. The issue with such contracts is that they are often written so that the limitations period runs before the claim accrues—which will result in a court invalidating the provision entirely. However, not every construction contract has such a provision. As can be seen from the recent case of Eurotech Construction Corp. v Skanska USA Building Inc., even where there is not a shortened limitations period in the contract, it is equally crucial to determine when the claim actually accrues so that the statute of limitations can be properly applied.

Background

In March of 2011, Eurotech Construction signed a subcontract with Skanska USA Building where Eurotech was to be a subcontractor on one of Skanska’s New York City School Construction Authority projects. On June 20, 2013, Eurotech sent its “98%” substantial completion invoice to Skanska for payment, indicating that 98 percent of the work had been completed. Despite having submitted its “98% invoice”, Eurotech performed the following work after the submission of that invoice: repairs to auditorium ceilings; changing and raising soffits; changing and raising framing; changing metal panels and waterproofing; changing and fixing hundreds of doors; installing louvers and door stops; installing aluminum sills; removing ceilings to permit cable installation; and patching sheetrock ceilings, all totaling 1,039 hours’ worth of effort.

Issues arose during the project, and Eurotech ultimately sued Skanska to recover nearly $6 million for amounts it claimed were owing. Importantly, Eurotech commenced its lawsuit on July 21, 2019. Skanska moved to dismiss the lawsuit, arguing that Eurotech submitted its 98% invoice on June 20, 2013, and as the lawsuit was commenced more than six years later, it was time barred. In opposition, Eurotech noted that it performed more than just incidental work after the submission of the 98% invoice, and that substantial completion only occurred on the completion of that substantive work.

Decision

While both sides agreed that a claim for the breach of a construction contract accrues upon substantial completion of the construction, the parties fought over whether such substantial completion had been achieved before, or after, July 21, 2013: the earliest date on which the claim would not have been time barred. The court denied the motion to dismiss, holding that the well settled law on the subject does not reference the measure of substantial completion by any percentage of completion. Rather, the test announced by the Court of Appeals, and again applied here, holds that the statute of limitations begins to run “on the completion of the project even though incidental matters related to the project remained open”. The court further distinguished the controlling case on the issue, noting that the “incidental matters” referenced there were only a minor punchlist—not over 1,000 hours of actual physical work.  In light of this actual physical work continuing well after July 21, 2013, the court held that the claim was timely.

Comment

In negotiating construction contracts, especially between owners and general contractors, the definition of substantial completion is often hotly contested. Owners frequently try to delay a substantial completion payment by requiring the contractor to jump through a number of hoops, some involving outside parties such as the local building department. Having the parties agree upon the definition of substantial completion up from, in the contract, eliminates many of these issues. However, even without a definition of substantial completion in the contract here, the court dismissed the general contractor’s form over substance argument, and held that regardless of the denomination of Eurotech’s invoice as a “98%” or “substantial completion” invoice, the applicable test relates to the actual work performed, and left to be performed, at the project. Clearly, here, the 1,039 hours put in by Eurotech could not be credibly characterized as “minor punchlist” or “incidental matters”.

There will undoubtedly be a case in the near future where the work put in after the statute of limitations date does not measure up to Eurotech’s effort, and the call will be much closer than the one faced by the Eurotech court. Of course, if the lawsuit had been brought much earlier, then this issue would have been avoided in the first place. Accordingly, it is important to consult with construction counsel to determine when your claims accrue, and when you should commence a lawsuit to protect your rights.

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

In today’s day and age, administrative determinations can be just as troublesome to a contractor’s business as criminal prosecutions or lawsuits. While these quasi-judicial proceedings may have the look and feel of court proceedings, contractors must be aware that different rules apply to these proceedings—and appeals from these proceedings.

In Matter of Sahara Construction Corp. v New York City Office of Administrative Trials and Hearings, a court used a doctrine requiring the exhaustion of administrative remedies to deny what it described as a potentially meritorious constitutional challenge to a requirement that a contractor pay restitution in full before pursuing an administrative appeal.

Background

In April of 2009, Sahara Construction Corp. entered into a contract with a homeowner for an extensive renovation of a residential property in Queens. The plans for the project were approved by Department of Buildings, and construction proceeded. However, as work progressed, the homeowner noticed defects and deviations from the approved plans and, by September of 2014, Sahara had abandoned the project. The homeowner had lodged a complaint with Department of Consumer Affairs, which issued a summons to Sahara for deviating from and disregarding the approved plans. After a hearing before the Office of Administrative Trials and Hearings (“OATH”), the charges against Sahara were sustained, and the hearing officer both imposed a $5,000 civil penalty, and directed Sahara to pay restitution of approximately $230,000.

Sahara attempted to take an appeal of the hearing officer’s determination within the OATH office. However, OATH’s rules require that any party taking an appeal must pay the penalty and restitution levied by the hearing officer. OATH granted Sahara’s request for a financial hardship waiver of this requirement, but pursuant to OATH’s rules the waiver only applied to the $5,000 civil penalty, and did nothing to relieve Saraha of the obligation to pay the restitution before taking the appeal. Notwithstanding, Sahara attempted to take the appeal, but the OATH rejected it because it did not conform with OATH’s requirements to pay the levied restitution prior to taking the appeal.

Sahara commenced an administrative review (Article 78) proceeding in court to challenge the OATH’s determination. OATH responded to the petition by arguing that Sahara failed to exhaust its administrative remedies, which is a precondition to mounting an Article 78 proceeding.

Decision

The motion court denied the petition, finding that Sahara failed to properly take its appeal within the OATH office by failing to “provide[] proof of payment in full of any fines, penalties or restitution imposed by the decision”. Sahara appealed to the appellate court, arguing that it sufficiently satisfied the preconditions to appeal, and that the restitution order constituted a constitutionally excessive fine.

The appellate court upheld the denial of Sahara’s petition, finding that Sahara had, in fact, not exhausted its administrative remedies because it failed to pay the directed restitution as a condition of taking the appeal. The appellate court also declined to reach the issue of whether the restitution constituted a constitutionally excessive fine because that issue was not raised to the administrative agency, which it held should have been given the opportunity to develop the factual record for judicial review.

The appellate court also took the rare step of noting that although the issue was not raised, it was bothered, as a matter of constitutional law, by the fact that the OATH’s rules did not provide for a financial hardship waiver for the restitution payment before taking the appeal. Thus, the appellate court reasoned, the OATH could impermissibly insulate itself from effective appellate review by setting a high restitution, thus limiting appeals to only those with financial means—regardless of the merits of the appeal. (However, as this issue was not fully briefed, the appellate court did not reach it and left the lower court’s decision undisturbed.)

Comment

While an administrative hearing can very much resemble a trial, be assured that a different set of rules apply. For instance, in a conventional court proceeding, you have a near unfettered right of appeal. However, in an administrative context, before undertaking any sort of appeal to a court—where the higher “arbitrary and capricious” standard, rather than the conventional “preponderance of the evidence” standard, applies—you are required to exhaust every possible step before the administrative agency.

It was rather clear from the decision that this appellate court was sympathetic to the constitutional argument that the OATH rules requiring payment of the restitution as a precondition to taking the appeal constituted an impermissible barrier to further review. Unfortunately for this contractor, because this issue was not properly raised, the contractor was left to pay nearly a quarter of a million dollars without the possibility of further review. This emphasizes that contractors in such situations need to consult with counsel experienced in appearing before, and taking appeals from, administrative agencies.

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

Construction contracts, like other contracts, are meant to define the relationship between the parties to the contract. In that regard, the parties are generally free to negotiate the terms of that contract. It is only where the contractual language at issue is contrary to statute, against public policy, or is unreasonable, will a court decline to enforce the contract, as negotiated between the parties.

While parties are generally free to negotiate to shorten the contract’s statute of limitations from the otherwise applicable six years, where the contract’s shortened limitations period effectively nullifies the claim before it arises it will be found to be unreasonable. An appellate court reinforced this principle of law again in Greystone Building & Development Corp. v Makro General Contractors, Inc.

Background

In December of 2010, Makro General Contractors entered into a construction contract with the New York City Transit Authority for various construction work. The following month, Makro entered into a subcontract with Greystone Building & Development for a portion of this work. The contract contained a provision requiring that “any claim or action by [Greystone] against [Makro] must be commenced within (1) year after substantial completion of this Subcontract, and in no event after final payment to [Greystone]”.

Greystone substantially completed its work by September 30, 2013, and the entire project was completed by August 30, 2014, with the NYCTA issuing its certificate of substantial completion on October 28, 2014. Greystone commenced a lawsuit against Makro on December 10, 2015, seeking to recover monies owed under a disputed change order, as well as its retainage.

After discovery, Greystone moved for summary judgment on its complaint, and Makro cross-moved for summary judgment dismissing the complaint. On the cross motion, Makro argued that Greystone’s claims were time barred under the contract’s shortened limitations period. Makro claimed that under that shortened limitations period, Greystone’s claims had to have been brought no later than September 14, 2014, one year after substantial completion of its work, and that by not commencing the lawsuit until 2015, Greystone was barred from seeking recovery. In response, Greystone noted that the grand majority of the money sought was related to a change order that was open well into 2015. Accordingly, under the contract, before that change order was settled with the owner, Makro had no claim to that money and, therefore, could not have started the lawsuit any earlier.

Decision

The trial court granted Makro’s motion to dismiss. Although the trial court made note of the negotiations between Makro and the owner relating to the open change order, it held that “nothing prevented [Greystone] from commencing an action or seeking an extension of the one year limitation * * * there was nothing contained in the subcontract, or occurred as a part of the negotiations, that inhibited [Greystone] from pursuing its rights under the subcontract”.

Greystone appealed, and the appellate court reversed, reinstating Greystone’s lawsuit. While acknowledging that Greystone’s work was complete in September of 2013, the appellate court found that the contract provided that Greystone was not entitled to payment until Makro was paid, and that could not occur until the negotiations with the NYCTA concluded in September of 2015. Accordingly, the appellate court held that the contractual limitation period at issue was not reasonable, citing to well settled case law that “A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim”.

Comment

On its face, Makro’s motion to dismiss looked like it would be a winner, based only on the contract language. But as is so often the case, it ain’t necessarily so. These legal issues require some thinking outside of the box.

Normally, you have six years to sue for breach of a contract. Parties to construction contracts frequently shorten this period. However, Greystone is a reminder that the limitations period cannot be so short that it runs before the claim actually accrues. Accordingly, contractors would be well advised to consult with construction counsel in drafting and reviewing contracts so that they can be sure that their shortened limitations period passes the reasonableness test, and does not run before the claim accrues; in other words, so that you get the limitations period you intended in the first place.

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

One month ago, when this column last appeared, not much was known about the progress of the COVID-19 virus. The “curve” was peaking (although we did not know it at the time), and it was not known how long New York’s “pause” would last. Since then, although schools have been closed for the remainder of the year, we are at a point where the pause will be lifting, and construction will be in the vanguard. However, with most job sites idled for the last several weeks, we now have to think about how to proceed again once those sites open, and how to begin to recover from the effects of the shutdown. This column will address two concerns relating to the resumption of work (and the continuation of work on “essential” job sites that never shut down).

TEMPERATURE TESTING OF EMPLOYEES

While much is still unknown about the COVID-19 virus, “social distancing” has demonstrated effectiveness in slowing the transmission of the disease. Accordingly, when job sites reopen, social distancing protocols must be maintained. The purpose of this social distancing is to reduce the chance of catching the virus from potentially infected individuals. Another way of reducing this chance is to prevent potentially infected people from entering the job site. As one of the early symptoms of COVID-19 is a fever, one way to weed out potentially infected people is to conduct temperature tests as a condition of admission. However, is this permissible for an employer? Clearly, in attempting to prevent one problem, one does not need to create another.

The U.S. Equal Employment Opportunity Commission, the agency charged with the principal enforcement of the Americans with Disabilities Act, has recently provided guidance on the issue of whether employers may administer temperature tests to their employees. As a medical test, temperature testing may be administered to employees if it is “job related and consistent with business necessity”. Since employees with the COVID-19 virus pose a direct threat to non-infected employees, the EEOC guidance provides that employers may test their employees for fever as a condition of returning to work. However, the tests must be administered in a uniform manner (which, for purposes of avoiding any allegations of discriminatory testing, should be interpreted as testing of all employees). Further, the tests must be carried out in a way that insures accuracy and reliability. This can be done through backup testing of any feverish employees with a second thermometer, and a “positive” test be deemed to have taken place only when both tests indicate fever. Finally, because of the Health Insurance Portability and Accountability Act (“HIPAA”), which provides for confidentiality of health information, employers should be careful not to share the results of any of this testing with anyone other than the affected employee. Of course, employers must keep in mind that fever is only one indicia of the COVID-19 virus, and that a non-feverish employee may nevertheless be infected with COVID-19.

DOCUMENTING YOUR COVID-19 RELATED IMPACTS

Even though New York is officially reopening its economy, starting with the construction industry, the economy will not simply resume as if nothing has happened. While some projects which were deemed essential continued, and while others will resume as soon as they can, others, due to lack of funding or other reasons, will either be put into mothballs for the time being, or simply cancelled altogether. However, even for those that have been working on those essential projects, there is not a contractor out there that has not suffered some sort of impact as a result of COVID-19. Accordingly, it is important that contractors be prepared to recognize, and document, their COVID-19 related impacts—and be able to differentiate these impacts from other, non-COVID related impacts.

The first thing that a contractor must keep in mind in assessing one’s impacts is that the law imposes a duty to mitigate one’s damages. While certain impacts related to COVID-19 are unavoidable, particularly where your job was shut down, where a contractor can minimize the impacts they must do so or they will not be permitted recovery. These impacts may, aside from the obvious one of having the “non-essential” job site shut down, include delays of deliveries of materials, supplies and goods necessary for the job, additional time required to unload those items, the lack of workers due to illness or being home with dependents, delays in obtaining permits and in scheduling municipal inspections, the inability to hold proper meetings, the challenges imposed by social distancing requirements (particularly on vertical conveyances such as lifts and hoists), site workflow constraints and work area limitations, more regular cleaning requirements, the need for additional tools to minimize sharing, longer and additional workdays to accommodate staggered shiftwork and minimize labor on the site, and the need for additional supervision for that increased time, amongst others.

In assessing the damages suffered, the contractor must, of course, look to the terms of the contract to see what damages can be recovered (if any, for the contract may only provide for an extension of time for certain types of delays, including those for force majeure type of events such as epidemics/pandemics). Additionally, as we mentioned in last month’s column, contractors must provide notice of the delay and the impacts they are suffering in accordance with the contract. Provided that has been done, the contractor should, first and foremost, determine the project’s actual progress and costs at the time of the disruption. Once that baseline is established, useful strategies would include considering the disruptions to suppliers and subcontractors to determine possible escalation costs, dedicating resources to document and manage the impacts, and creating separate COVID-19 related cost codes so that they can be easily distinguished from general job costs. Contractors can base their analyses on project specific comparison studies, which can be performed based on comparable work by the contractor or, where that is not possible, comparing work between different contractors, comparable or work between different projects. Contractors can also rely on the total/modified cost method, where the loss is determined by simply subtracting the bid cost from the actual cost. However, contractors should be cautious in using this method because it assumes a cause-and-effect relationship between the damages and the claimed impacts, as well as that the work was reasonably estimated, that the actual costs are similarly reasonable, and that the contractor is not responsible for the additional costs.

Clearly, the job of classifying and documenting the impacts that contractors face as a result of COVID-19 is not an easy one. Once the contractor determines its direct costs (such as increased labor, materials, equipment, and subcontractor costs) and its indirect costs (such as increased project management staff, field office, site maintenance, cleaning and home office overhead costs), the retention of appropriate legal counsel and scheduling experts would be helpful in assisting it in best presenting its claim for the maximum chance of recovery.

Comment

Undoubtedly, the COVID-19 pandemic will add time and cost to virtually every construction project. Who bears the burden of that additional time and cost, as between owners, general contractors, suppliers and others, may be debated and litigated for some time to come. It is important to reiterate from last month’s column that a contractor who is faced with an impact resulting from COVID-19 would be well advised to, first and foremost, give notice of the delay and the condition which led to the delay, as well as any other information required by the particular contract—particularly now that New York’s economy will be opening up shortly and those additional impacts will be incurred. The requirements for how New York will open up its economy seems to be changing on a daily basis, and contractors would be well advised to be prepared by doing your paperwork now.

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

Typically, this column reports on recent decisions of our courts, in an effort to summarize recent developments in the law or, just as often, situations in which tried and true principles of law are applied to everyday situations in the construction industry. However, these times are far from typical, and deviating from this format to provide timely information is clearly warranted.

FORCE MAJEURE

Force majeure is a French term meaning “superior force”. In the law, it is defined as an event or effect that can be neither anticipated nor controlled; an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. Essentially, it’s a legal excuse for not doing something you’re otherwise under a contractual obligation to do. If properly triggered, the contractor would be entitled to an extension of time until the force majeure event passes. Often such events are termed an “Act of God.”

Force majeure, unlike many concepts in the law, is not a common law concept but, rather, a creation of contract. So, in order to invoke the concept for relief, the operative language needs to be written into the contract from which you are seeking relief. Further, under the Court of Appeals’ holding in Kel Kim Corp. v. Cent. Markets, Inc. (70 NY2d 900 [1987]), the event which would trigger the clause has to be listed in the contract. Essentially, at the time you draft the contract, you must anticipate the unknown.

When a party seeks relief under a force majeure clause, the burden of proof is on the party seeking relief. When dealing with a global pandemic where there are governmental mandates shutting down construction sites, that burden is easy to meet—provided that the required language is in the contract. However, beware that when reviewing your contract for the provision, the relevant language may not be called a force majeure clause. Rather the language is often found in the delay provision. So, once you’ve found the clause, the first thing you must ascertain is whether the clause is narrow, or broad.

An example of a broad force majeure clause (found in a delay provision of a contract) is contained in the AIA A201 General Conditions (both the 2007 and 2017 versions), which provides that:

If the Contractor is delayed at any time in the commencement or progress of the Work by…unusual delay and deliveries, unavoidable casualties or causes beyond the Contractor’s control…or by other causes that the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine.

By using broad terms such as those highlighted above, an event such as the current COVID-19 pandemic would be considered to be included, yet one would not have had to specifically foresee this specific event. Further, this language avoids the danger of trying to create a comprehensive list, which nevertheless misses something. Typically, narrow force majeure clauses take this approach, or only list a few events that someone thinks are likely to happen. One such example of a narrow clause is found in the NYS Office of General Services standard form, which provides that “Force majeure includes … actions of the elements, floods, or other similar causes beyond the control of the Contractor”. While no clause will reference COVID-19, this clause doesn’t even mention epidemics, generally. A clause such as this would prove of little value in today’s crisis.

OTHER RELEVANT PROVISIONS

Unlike force majeure provisions, which provide only for an extension of time for performance, delay provisions may also provide for financial relief. Further, even if there is a no-damage-for-delay clause in the contract, an event like COVID-19 may fall into the “uncontemplated delay” exception to such clauses crafted by the Court of Appeals in Corinno Civetta v City of NY (67 NY2d 297 [1986]). Affecting the analysis is whether COVID-19 is the direct cause of the delay (because a governmental directive shut down the jobsite) or an indirect cause (the jobsite is still open, but you are being proactive in reducing your workforce so your employees can “social distance”). The less responsibility that you had for the delay, the more likely that you can build a case for monetary relief.

Similar clauses that could provide monetary relief are price escalation clauses, which could permit recovery for increased costs suffered after a delay of some time. Likewise, a suspension clause, which permits the owner to “pause” the project, can provide the contractor relief in the form of reimbursement for demobilization/remobilization costs. Further, these provisions often give the contractor a “relief valve” in the form of a provision permitting the contractor to terminate in the event that the “pause” exceeds a certain amount of time. A related clause, a termination for convenience by the owner, could also offer the contractor certain termination costs if the owner exercises its rights.

Finally, in the event that none of the foregoing clauses are in your construction contract, a contractor may be able to avail itself of the common law doctrine of impossibility of performance. The impossibility doctrine excuses performance if either the subject matter of the contract is destroyed or, as may be relevant here, the means of performance make performance objectively impossible. Examples of the second situation would be where a crucial supplier of custom goods has gone out of business as the result of an extended COVID-19 closure of its business. Importantly, in order to avail oneself of this doctrine, performance must neither be possible, nor commercially practicable; increased difficulty in performing, alone, is not sufficient.

NOTICE PROVISIONS

Typically, the prerequisite for any relief under a contract is to notify the owner. In the context of a contract for a private project, while adherence to contractual requirements is required, contractual requirements can be altered by the parties’ general course of conduct. However, with a contract for a public works project, adherence to notice provisions is a strict condition precedent, and a failure to give notice in the manner set forth in the contract will result in a forfeiture of the claim. Further, what constitutes notice under a contract, and what constitutes the event triggering the requirement to give notice, varies from contract to contract, and from agency to agency. For instance, the AIA form requires notice to be given within 21 days of the event giving rise to the claim, while the DASNY standard form contract provides that notice be given within 15 days of the commencement of the delay, and the New York City School Construction Authority’s standard form provides that notice must be given within 2 business days of the commencement of the delay.

Comment

When faced with a situation where your jobsite is either shut down, or is facing reduced productivity, contactors would be well advised to, first and foremost, give notice of the delay and the condition which led to the delay, as well as any other information required by the particular contract. Because the events triggering the notice provisions, and the times for giving such notice, can vary greatly, contractors would be advised, to borrow a phrase, to “notify early, notify often”. Further, contractors should track their impacts, showing a causal connection between those impacts and the event of delay, and show the efforts you undertook to mitigate the impacts of the delay (such as trying alternate sources for materials, or alternate methods that may not be as affected by the event of delay). As always, good construction counsel can help you navigate these requirements so that you are in the best possible position after the crisis to recover your costs.

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

Construction contracts, like other contracts, are meant to define the relationship between the parties to the contract. With the exception of certain provisions which have been held to violate public policy (pay-if-paid, pre-emptive lien waivers, indemnification of a party for its own negligence, etc.), contracts will generally be enforced as written. The principle was once again underscored by an appellate court in the recent case of Redwing Construction Co., Inc. v Sexton, with regards to a notice of claim provision.

Background

In July of 2012, Martin Sexton retained Redwing Construction Co. to build a house on Upper Saranac Lake. The contract contained a provision requiring the service of a notice of claim of “any controversy or claim arising out of or related to the contract” as a precondition to the commencement of a lawsuit.

The house was finished a year later, and a payment dispute arose. In order to secure its payment, in August of 2013, Redwing filed a mechanic’s lien. Redwing then commenced a lawsuit asserting claims for breach of contract, unjust enrichment, and to foreclose its mechanic’s lien. Shortly thereafter, the house was destroyed by fire. Accordingly, when Sexton answered the complaint, he asserted a counterclaim against Redwing for negligence, alleging that Redwing’s negligent design and/or construction of the chimney caused the fire.

Once the parties served their respective answers, they each moved for summary judgment on their claims. Among the issues raised by the parties was the failure by Redwing and by the owner to comply with the contractual notice of claim requirement. The trial court granted both motions and dismissed both the contractor’s claim and the owner’s counterclaim, citing the parties’ failure to serve the notices of claim required by the contract prior to their assertion. Redwing appealed, but the owner did not.

Decision

On appeal, Redwing argued that because final payment had not been made, its obligation to serve a notice of claim never arose. The appellate court dismissed that argument, citing the contractual provision requiring the punchlist to be complete before the owner’s obligation to make that payment arose. As Redwing had communicated to the owner in a job closeout memorandum that it would perform no punchlist work until it received that payment¹, it was unable to rely on the lack of a final payment to relieve it of its obligation to have filed a notice of claim before having filed the lawsuit. The court also rejected Redwing’s argument that its job closeout memorandum served the “functional equivalent” of the contractual notice of claim because the closeout memorandum did not contain all of the information required by the contract, did not specifically state that it was a pre-suit notice of claim, as required, and was not served in the manner specified.

Comment

Redwing is a reminder that in most circumstances, contractual conditions precedent will be strictly enforced. Clearly, one of the parties was the primary author of the contract that contained the notice of claim provision, and yet both parties lost their claims based on the failure to comply with that condition. Instead of a shield against a surprise claim, the provision here was literally a sword—a double-edged one, at that—which doomed both claims. While there have been certain circumstances where slight variances from contractual notice of claim provisions are tolerated, one cannot count on those type of circumstances to salvage a clear failure to comply with such a requirement. Accordingly, contractors would be well advised to follow such contractual conditions precedent to the letter so that you are not in the position of having to later argue, like Redwing, that they don’t apply.

¹ Read your contract carefully before submitting any such memorandum. Better still, have your attorney read the contract and draft the closeout memorandum for you.

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

Mechanic’s liens, if available, can be useful tools for unpaid contractors, subcontractors and suppliers to get paid for their work. Like any tool, it is subject to abuse; such as by the filing of an unwarranted, or exaggerated, lien.  While there is a statutory remedy in those cases where the lien is shown to be willfully exaggerated, such remedy is only available where the lienor actually seeks to foreclose on the lien in court.

In our August 2019 article (https://www.wbgllp.com/single-publication.php?type=3&id=300), we explored the question of what a contractor-lienee, aggrieved by the filing of an allegedly exaggerated lien, can do where there is no lien foreclosure action. Based on the then-recent case of Centrifugal Associates Group LLC v Newell Contracting, Inc., we discussed how a court held that liability could not be extended for the claimed misuse of a mechanic’s lien to the principal of the subcontractor-lienor on a theory of defamation. On a motion for reargument (which asks the court to change its mind), that same court has now held that a claim for injurious falsehood may lie under those same circumstances.

Background

Centrifugal Associates Group LLC, was hired by the Durst Organization to serve as the general contractor on a construction project on 26th Avenue in Queens. Centrifugal, in turn, hired Newell Contracting, Inc. as a subcontractor to perform certain mechanical work. Newell performed work under the contract and claimed that it wasn’t being paid. On September 17, 2018, Newell filed a mechanic’s lien against Durst’s property in the amount of $320,000, claiming that it was owed that amount by Centrifugal, as GC. Newell, however, never sought to foreclose the lien.  Centrifugal disputed the debt.

On November 26, 2018, Centrifugal commenced a lawsuit against Newell and its president, Krzysztof Bielak. Centrifugal’s claims against Newell were for the claimed breach of the subcontract, for which Centrifugal sought damages in excess of $8 million. As to Bielak, Centrifugal claimed that his statements made in the mechanic’s liens were false because no money was owed to Newell, and that Bielak caused the mechanic’s lien to be filed solely to cause harm to Centrifugal (and that the resulting harm was the removal of Centrifugal from Durst’s approved contractors list).

Both Newell and Bielak failed to answer the complaint, and Centrifugal sought a default judgment against both. Newell did not oppose the motion, but Bielak did—and also cross moved to dismiss the claims against him. The court granted Bielak’s cross motion, finding that New York recognizes certain privileged situations where a person can undertake what may otherwise be considered defamation with impunity, and that as a mechanic’s lien is pertinent to a lien foreclosure action, the privilege involving statements made in the course of a judicial proceeding precluded the claim. The plaintiff moved to reargue, contending that the court incorrectly characterized the claim as defamation, and that upon considering that the claim is actually one for injurious falsehood, the court should sustain the claim.

Decision

The trial court granted rearguement and, upon so granting, reversed itself and restored the plaintiff’s claim (which is not common). In doing so, the court noted that the elements for injurious falsehood were that statements were published with malice or reckless disregard for the truth, that the statements were false, and that the plaintiff suffered special damages as a result. As a result, the court held that the plaintiff made allegations to the effect that the amount of the lien was false, and that it was made in order to harm the plaintiff. (For purposes of the motion, the court had to accept these allegations as true.) As to the third element, damages, the court noted that the plaintiff had also alleged that it lost at least one customer, which constituted actual damages, but went on to hold that as a statement that “tends to injure another in his or her trade”, such damages may be presumed under the applicable case law, as a matter of law, without needing to be specifically alleged and proven.

Comment

It is generally recognized that the remedies against a lienor whose lien is exaggerated are limited outside of the foreclosure context. However, as the court tangentially referenced in its prior decision, and as it specifically holds now, those remedies are not nonexistent. While the two Centrifugal cases establish that a defamation claim is not available, and an injurious falsehood claim is, the remedies against such an exaggerated lien may also include claims for fraud, disparagement of title, interference with contract, interference with prospective business advantage, extortion, malicious prosecution and malicious abuse of process. This case simply reinforces the advice set forth in the previous article, that as there is other recourse available to the target of the improper mechanic’s lien—even if the lienor refrains from foreclosing—contractors should take away the importance of always being accurate and truthful when filing a mechanic’s lien.

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

In many situations, the utility of commencing a lawsuit against a business entity such as a corporation or a limited liability company is questionable—particularly where the target of the lawsuit has numerous other claims and lawsuits against it. The chief concern is whether the defendant is adequately capitalized to satisfy the claims of its creditors; i.e.: whether a resulting judgment will actually be collectible. Accordingly, many plaintiffs also name corporate principals in an attempt to reach through the corporation and into another pocket from which to collect. The burden in piercing a corporate veil is high because the whole purpose of a business entity is to shield its principals from individual liability. However, an appellate court, in the recent case of Belle Lighting, LLC v Artisan Construction Partners, LLC, reminds us that there are other ways that corporate principals can be reached personally, even without having to pierce the corporate veil.

Background

In 2016, Belle Lighting entered into a contract with Artisan Construction Partners for Belle to provide lighting and electrical supplies to Artisan in connection with several construction projects, including one located at 1411 Broadway in Manhattan. Belle provided the required materials, but was never paid by Artisan. After Artisan ceased operations, Belle discovered that Artisan’s principal, James Galvin, had forged lien waivers from Artisan’s subcontractors and suppliers, including Belle, in order to get paid by the project’s owner. Based on that, Belle not only sued Artisan on the breach of contract claim, but also sued Galvin, personally, to pierce the corporate veil and hold him liable for Artisan’s obligations, and also for the fraud based on the forgery. Galvin was ultimately convicted and sentenced to 1½ to 4½ years in prison for the forgery. Unfortunately, the forging of lien waivers and other documents is not unheard of in our industry.

After discovery, Belle moved for summary judgment on its complaint, including its claim to pierce the corporate veil. Artisan and Galvin opposed, simply claiming that there were questions of fact which needed to be sorted out by a jury.

Decision

The trial court granted Belle’s motion from the bench and, on appeal, an appellate court affirmed. In affirming the grant of summary judgment to Belle, the appellate court noted that although Belle failed to satisfy the requirements to pierce Artisan’s corporate veil, Galvin could nonetheless be held liable to Belle based on his commission of a tort (here, the fraud of forgery), even though his participation in the fraud was for the corporation’s benefit. Accordingly, judgment was entered against both the insolvent corporation and its principal.

Comment

While the appellate court once again referenced the high burden required to pierce a corporate veil—here, even the act of forgery and a resulting criminal conviction was not sufficient—it is important to remember that there is more than one way to skin a proverbial cat. One must look to the specific behavior of the corporate principal to determine whether that behavior is merely the action of a businessperson (even a bad one), or whether it rises to the level of independently tortious conduct. If the latter is the case, then one can sue the principal on the tort and need not go through the rigorous exercise of attempting to hold him or her liable on the pierced-through contract claim. 

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

The construction industry often suffers its worst public image because of those few contractors who prey on the least sophisticated clientele: private home owners. In order to stave off some of what is portrayed as “preying on unsuspecting grandmothers”, many counties—particularly in the downstate region—require a “home improvement” contractor or construction manger to have a license. In order to put teeth into these regulations, courts will not permit contractors without such a license to maintain a lawsuit (on any theory) to recover for that work.

Often left open, however, is the question of what happens when an unlicensed contractor is not retained directly by the homeowner but, rather, a licensed general contractor. In the recent case of Forman Construction, Inc. v P.D.F. Construction, this question was answered to the disappointment of those contractors, and the court denied a recovery for the unlicensed subcontractor—despite that the general contractor was, in fact, licensed. 

Background

At some point prior to 2008, Pier and Debra D’Alessandro desired to have certain work performed on a property owned by them. The D’Alessandros undertook the work through P.D.F. Construction, a general contractor owned by Pier that had its home improvement contractor’s license. P.D.F. entered into a subcontract with the plaintiff, Forman Construction, for Forman to perform a portion of the required work. Forman, unlike P.D.F., did not have a home improvement contractor’s license. Subsequently, a payment dispute arose between P.D.F and Forman, and Forman commenced a lawsuit against P.D.F. and the D’Alessandros to recover the monies which it claimed were due to it.

Decision

After discovery, the defendants moved for summary judgment dismissing Forman’s complaint. In support of the motion, the defendants argued that Forman did not have a home improvement contractor’s license and, therefore, had forfeited its right to recover under any legal theory. In opposition to the motion, Forman argued that it did not need to be licensed since it did not contract with the homeowners but, rather, P.D.F., a licensed general contractor.

The motion court granted the motion dismissing Forman’s complaint, and the appellate court affirmed. In doing so, the appellate court cited to case law discussing the protective purpose of the licensing statutes, and held that the logic applies not only to the contractor who directly enters into the contract with the homeowner, but also all other contractors who perform work on such a residential property. It must also be noted that although the case did not turn on the relationship between the D’Alessandros and P.D.F., the appellate court made note of that relationship and found that the defendants also established that Forman entered into the contract with a party who actually resided on the property upon which the work was performed.

Comment

While the appellate court’s reference to the D’Alessandros’ residence on the property upon which Forman performed its work may seem to blunt its warning effect, that court’s citation to numerous cases discussing the protective purposes behind the licensing statutes should highlight the danger. Contractors or construction managers who work on residential property—in any capacity, and not just as a general or prime contractor to the owner—without a home improvement license (or, if in a licensed trade, without the appropriate trade license)—forfeit their right to recover for their work, under any legal theory, including foreclosing a mechanic’s lien asserted against the property. Accordingly, contractors would be well advised to research whether a license is required for the work they are about to undertake (and, if so, make sure to have such a license).

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