Author: Thomas H. Welby

Sections 200, 240(1), and 241(6) of New York’s Labor Law are commonly referred to as New York’s “Scaffold Law”. The Scaffold Law was enacted back in 1885, long before the advent of the Worker’s Compensation statutes or regulatory schemes designed to enforce worker safety (such as OSHA and its state analogues). New York is the last state with such a law on its books, and it is widely credited with driving up construction and insurance costs. Further, in viewing the results of the repeal of Illinois’ Scaffold Law back in 1995, it is not universally accepted that the law actually achieves its stated goal of promoting worker safety. However, until it is modified to include a comparative negligence standard (that accounts for any failures of the worker to follow directions or otherwise work correctly), it is accepted that any time a worker falls from a height or is hurt as a result of a violation of the Industrial Code, the employer has no defense to the claim. Accordingly, high payouts by insurance companies (and high premiums for insurance policies) are a reluctantly accepted cost of engaging in construction in New York.

While workers are insulated from the consequences of their own negligence by virtue of the absolute liability imposed by the Labor Law, an appellate court, in Lauria v Lippolis Construction, Inc., reminds us that the benefits afforded by the Scaffold Law only apply to workers on the site, and not third parties.

Background

Prior to May of 2016, Lippolis Construction engaged to construct two homes on Avenue C in the Village of North Port Washington. In May of 2016, Lippolis excavated for the foundations of both homes, and on May 16, 2016, it was commencing to construct the forms for the footings. Before it poured concrete for the foundation, Lippolis requested that the Village inspect the excavation and forms for the footings to make sure that everything would comply with the local building code. The Village sent Building Inspector Fred Lauria to the site to perform the inspection. This was not Lauria’s first visit to the site. Unfortunately, during this particular visit, Lauria tripped and fell, suffering a torn ACL and other associated injuries. Accordingly, Lauria commenced a personal injury lawsuit against Lippolis, alleging that Lippolis was negligent and also violated the applicable provisions of the Scaffold Law.

After discovery, Lippolis moved for summary judgment dismissing the lawsuit. In support of the dismissal of the Labor Law claims, Lippolis noted that it was not disputed that he was only an employee of the Village, and was not an employee of Lippolis or any other contractor on the site. As to the negligence claim, Lippolis argued that the excavation was open and obvious, and was not inherently dangerous; accordingly, Lippolis was not negligent in maintaining the site as it did. In opposition, Lauria claimed that as an “inspector”, he is entitled to recovery under the Labor Law. Lauria also argued that there were questions as to whether the excavation constituted a hazard which needed to be resolved at trial.

Decision

The motion court granted Lippolis’ motion to the extent that it dismissed the Labor Law claims. In doing so, the court found that as Lauria was not an employee, he was not entitled to the protections set forth in the Labor Law. However, as to the negligence claim, the court found that there was an issue of fact which precluded summary judgment. Lauria appealed, seeking to revive the Labor Law claims (with their strict liability standard). However, the appellate court affirmed, citing well settled case law that “the plaintiff was not within the class of persons subject to the protections of the Labor Law”.

Comment

At first blush, one would believe that the plaintiff would have been relieved that he was able to stave off summary judgment dismissing his negligence claim and, therefore, have his proverbial day in court. However, the Scaffold Law is particularly onerous because of its imposition of absolute liability—which does not permit the consideration of whether the plaintiff also had any fault for his injuries, or how much effort the contractor put into safety, or otherwise preventing the accident in the first place. Where strict liability is imposed, it is not a question of whether the plaintiff will get paid, only how much. Accordingly, one can understand why the fight over this standard is fought so vigorously. In the meantime, this decision reminds contractors that while common law negligence provides an incentive to provide for the safety of all of those on the worksite, the most onerous requirements are reserved for the protection of workers.

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. 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 (but not lengthen) the period within which to start a lawsuit (the contractual 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. However, this is a very fact intensive determination, and the same shortened period may be upheld in one instance, while in the next instance the exact same time period may be deemed unreasonable by a different judge. In the recent case of Cashman Dredging and Marine Contracting Co., LLC v City of New York, a court upheld a period as short as six months.

Background

In May of 2016, Cashman Dredging and Marine Contracting Co. entered into a contract with the City of New York for the dredging of portions of Flushing Bay in Queens. The contract contained a provision that any lawsuit relating to the project must be brought within six months of the date of substantial completion.

Once started, the project quickly encountered problems. These problems were determined to stem from the design’s failure to account for certain low tide conditions, which resulted in slope failures. While the City investigated the issue, all work was put on hold, and delays ensued. Work ultimately resumed and on October 22, 2020, the project was determined to be substantially complete.

As a result of the delays, Cashman asserted a delay claim seeking $808,013 in damages, which it set forth in its verified statement of damages on May 5, 2021. Although some negotiations were had on the delay claim, no formal determination was ever made, and no resolution was reached. In order to collect on this claim, on August 31, 2022, Cashman commenced its lawsuit. The City moved to dismiss, arguing that the claim was untimely as it had not been brought within the six month contractual limitations period. Cashman opposed, arguing that its delay claim had not accrued because no determination had been made (which it argued was, itself, a breach of the contract), and therefore its claim was timely. Cashman also cross-moved to assert a claim to compel the City to make a formal determination on its delay claim.

Decision

The motion court granted the City’s motion and dismissed Cashman’s claims (and denied its cross motion relating to a formal determination on the delay claim). In doing so, the court cited the six-month limitations period under the contract and found that the lawsuit, commenced nearly two years after substantial completion, was well outside of that limitations period. As to the argument that the claim had not yet accrued, the court noted that the delay claim, itself, was not articulated until after the six-month limitations period had expired. However, even following that logic to its conclusion, the court noted that the contract provided that City had only 60 days after the submission of the final statement of damages to act on the claim, so the proposed claim to compel any determination would, itself, have been time barred under that applicable statute of limitations.

Comment

This column often notes that the construction contract is the single most important document defining the relationship between the parties in our industry. Here, the court reminds us that parties are free to agree to shorten the time within which to start a lawsuit arising out of the contract. (Sometimes a party may do this unwittingly.) There is an exception to this freedom that the limitations period cannot be so short that it runs before the claim actually accrues. However, absent such circumstances, parties would be advised that where they have agreed to a shortened limitations period, they must exercise extra diligence to do everything they need to do to preserve and prosecute their claims within that shortened period. Consulting with construction counsel in drafting and reviewing contracts so that you can be sure that any shortened limitations period passes the reasonableness test (and does not run before the claim accrues), and how to best timely assert any claims within that shortened period, could be very helpful. Please also study your contract at the beginning of the job—not at the end.

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. 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 (but not lengthen) the period within which to start a lawsuit (the contractual 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. However, this is a very fact intensive determination, and the same shortened period may be upheld in one instance, while in the next instance the exact same time period may be deemed unreasonable by a different judge. In the recent case of Cashman Dredging and Marine Contracting Co., LLC v City of New York, a court upheld a period as short as six months.

Background

In May of 2016, Cashman Dredging and Marine Contracting Co. entered into a contract with the City of New York for the dredging of portions of Flushing Bay in Queens. The contract contained a provision that any lawsuit relating to the project must be brought within six months of the date of substantial completion.

Once started, the project quickly encountered problems. These problems were determined to stem from the design’s failure to account for certain low tide conditions, which resulted in slope failures. While the City investigated the issue, all work was put on hold, and delays ensued. Work ultimately resumed and on October 22, 2020, the project was determined to be substantially complete.

As a result of the delays, Cashman asserted a delay claim seeking $808,013 in damages, which it set forth in its verified statement of damages on May 5, 2021. Although some negotiations were had on the delay claim, no formal determination was ever made, and no resolution was reached. In order to collect on this claim, on August 31, 2022, Cashman commenced its lawsuit. The City moved to dismiss, arguing that the claim was untimely as it had not been brought within the six month contractual limitations period. Cashman opposed, arguing that its delay claim had not accrued because no determination had been made (which it argued was, itself, a breach of the contract), and therefore its claim was timely. Cashman also cross-moved to assert a claim to compel the City to make a formal determination on its delay claim.

Decision

The motion court granted the City’s motion and dismissed Cashman’s claims (and denied its cross motion relating to a formal determination on the delay claim). In doing so, the court cited the six-month limitations period under the contract and found that the lawsuit, commenced nearly two years after substantial completion, was well outside of that limitations period. As to the argument that the claim had not yet accrued, the court noted that the delay claim, itself, was not articulated until after the six-month limitations period had expired. However, even following that logic to its conclusion, the court noted that the contract provided that City had only 60 days after the submission of the final statement of damages to act on the claim, so the proposed claim to compel any determination would, itself, have been time barred under that applicable statute of limitations.

Comment

This column often notes that the construction contract is the single most important document defining the relationship between the parties in our industry. Here, the court reminds us that parties are free to agree to shorten the time within which to start a lawsuit arising out of the contract. (Sometimes a party may do this unwittingly.) There is an exception to this freedom that the limitations period cannot be so short that it runs before the claim actually accrues. However, absent such circumstances, parties would be advised that where they have agreed to a shortened limitations period, they must exercise extra diligence to do everything they need to do to preserve and prosecute their claims within that shortened period. Consulting with construction counsel in drafting and reviewing contracts so that you can be sure that any shortened limitations period passes the reasonableness test (and does not run before the claim accrues), and how to best timely assert any claims within that shortened period, could be very helpful. Please also study your contract at the beginning of the job—not at the end.

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

As anyone in the construction industry knows, subcontracting is as widespread in the industry as hammers and nails. Given this state of affairs, it is important that contracts between an owner and general contractor, and the general contractor and subcontractor (and lower tier subcontractors) be harmonized to the greatest extent possible. Nothing is more dangerous from a contractual standpoint than failing to properly flow all obligations and liabilities down, and flow all responsibilities up. A failure to do so can leave one of the intermediate contractors “holding the bag” as far as being liable for a downstream contractor’s failure, without any recourse against that contractor for such failure. A common way to address this issue is to incorporate the upstream contract by reference, often requiring that “subcontractors and suppliers of any tier will be subject to all terms and conditions of this Contract and the Prime Contract”. However, as an appellate court recently reminded us in the case of Amerisure Insurance Company v Selective Insurance Group, even in the face of such language, not every provision will automatically flow down to a lower tier subcontractor.

Background

In August of 2015, a group of three owners retained Eilerson Development Corp. to serve as the general contractor on a project to construct a movie theater in Buffalo. One month later, Eilerson subcontracted its masonry scope of work to C&D Laface Construction. Both contracts required Eilerson and C&D to obtain insurance policies. Eilerson’s contract with the owners required Eilerson to include the owners as additional insureds on its insurance policy, insuring against claims caused by Eilerson’s negligent acts or omissions. C&D’s contract, on the other hand, only contained a provision requiring C&D to name Eilerson as an additional insured on its policy—not the owners. The C&D subcontract, however, contained a general incorporation by reference provision obligating C&D to the owners to the same extent as Eilerson was obligated to them under the prime contract. Both contractors procured the insurance policies required of them under their respective contracts; Eilerson procured its policy through Amerisure, and C&D through Selective.

Shortly after the project started, one of C&D’s employees was injured. This employee sued Eilerson and the owners, and ultimately Eilerson asserted third-party claims against C&D. C&D’s insurance carrier, Selective, assumed Eilerson’s defense under C&D’s policy, as an additional insured. Selective, however, refused to similarly assume the defense of the owners, arguing that it was not required to do so under the terms of its policy. In light of Selective’s failure to assume the owners’ defense, Amerisure did so under its own policy.

Eilerson and Amerisure sued Selective (and ultimately moved for summary judgment on that claim), arguing that Selective breached its policy by refusing to assume the defense of the owners, as required by the incorporated prime contract. In support, Eilerson and Amerisure noted that the Selective policy contained a provision “including as an additional insured under the Selective CGL policy ‘any person or organization whom [C&D] agreed in a written contract, written agreement or written permit that such person or organization be added as an additional insured on [the] policy’”, and argued that although the C&D subcontract itself did not require that the owners be named as additional insureds, the C&D subcontract incorporated all of Eilerson’s obligations to the owners, including the additional insured requirement. Selective also moved for summary judgment, arguing that the general incorporation by reference provision was insufficient to obligate C&D to anything that did not affect the scope, quality, character, or manner of the work.

Decision

The motion court granted Selective’s motion and denied Eilerson’s/Amerisure’s motion. In doing so, the motion court held that the owners were not additional insureds under the Selective policy and, accordingly, Selective owed no duties to them under the C&D policy. Eilerson and Amerisure appealed, and the appellate court affirmed. Although the contract required the application of Virginia law (which the appellate court did), since there was a question of whether New York’s prohibition against foreign law applied, the appellate court also noted that the result would be the same under well settled New York law, which limits general incorporation by reference provisions to those terms which affect the scope, quality, character, or manner of the work.

Comment

While the shorthand of general incorporation by reference provisions are seductive (they are short, easy to include, and purportedly all-encompassing), contractors must be warned that these provisions are ineffective to incorporate many of the provisions that are the most important to incorporate, such as: dispute resolution provisions; insurance provisions; specific record keeping requirements (such as certified payrolls); indemnification requirements; and termination provisions, amongst others. Rather, specific references must be made for these provisions in order for them to carry over. In that regard, contractors would be well advised to consult with experienced construction counsel when drafting or negotiating contracts so that they can be sure that the provisions that they wish to incorporate will actually make it over to the downstream contract. Otherwise, a contractor risks a gap in the obligations which are flowed down, and may end up holding the proverbial bag.

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

As anyone who has had the displeasure of being on the defending end of a personal injury action knows, cross claims between various defendants (seeking to shift blame) can be litigated with greater fervor than the claim of the injured plaintiff. This is particularly true where the injured plaintiff fell from an elevation and Labor Law §240 is implicated (and the question becomes how much—as opposed to whether—the injured plaintiff is going to be paid). In order to blunt the expense of litigating these various cross claims, owners and general contractors have utilized “wrap-up” OCIP/CCIP (owner/contractor controlled insurance program) insurance policies. The theory is that with one carrier ultimately paying every claim, the determination of fault is less important. (As a practical matter, since fault does find its way onto a contractor’s loss run—essentially a credit report for insurance claims—and can still affect a contractor’s insurance premium, the resolution of the cross claims remains important, and they are still litigated with zeal, even in the presence of a wrap up policy.) In response, and because litigating issues relating to the priorities of insurance coverage are often as expensive as litigating the underlying cross claims, many general liability insurance policies contain exclusions for projects which are covered by such a wrap up insurance program. In the recent case of Skanska USA Building, Inc. v Harleysville Insurance Company of New York, an appellate court reminds us that these “wrap up exclusions” will be given effect—even where a contractor does not actually participate in the wrap up program.

Background

In 2013, Skanska USA Building entered into a contract with New York University to renovate NYU’s building at 370 Jay Street in Brooklyn. In August of 2015, Skanska subcontracted out the electrical scope of work to a subcontractor which, one year later, sub-subcontracted out a portion of that work to JM Electrical, Inc. Skanska maintained a contractor controlled insurance program (a “CCIP” or “wrap-up”) policy, but neither of the electrical subcontractors were enrolled in that program.

In March of 2017, a worker of Sirina Fire Protection was working in the area of JM’s work and was injured. The worker inevitably sued Skanska. Skanska, in turn, tendered its defense to its electrical subcontractor, which did the same to its sub-subcontractor, JM. JM’s carrier denied the tender because JM claimed that it was not currently working in the area of the injured plaintiff’s accident, and JM’s insurance policy only covered losses which arose out of JM’s operations. Harleysville, the intermediate subcontractor’s carrier, took a different tactic. Harleysville disclaimed coverage based not on the location of the work, but on a wrap up exclusion in its policy. Accordingly, Harleysville argued, no fight need be had over the location of its insured’s work vis-à-vis the location of the injury because even assuming that they happened in the same area, there would still be no coverage because of the wrap up exclusion.

After discovery, Skanska moved for summary judgment against Harleysville, arguing that the cited wrap up exclusion was inapplicable as neither its insured nor JM were enrolled in the wrap up program. Harleysville opposed, arguing that the policy was not limited to excluding enrollees of a wrap up program, but to projects where there was a wrap up program.

Decision

The motion court denied Skanska’s motion for summary judgment, finding that the wrap up exclusion was clear that it applied to any project at which there was a wrap up insurance program. Accordingly, the court rebuffed Skanska’s argument that the enrollment status in the wrap up was relevant, following well settled law requiring an examination of the specific policy language. In the absence of policy language making the wrap up exclusion contingent on enrollment status in the wrap up program, the court held that the exclusion applied simply because the wrap up program was available. The appellate court affirmed, similarly holding that under the policy language at issue, the subcontractor need not have enrolled in the wrap up—its existence alone was sufficient to trigger the exclusion.

Comment

While the law requires that courts strictly construe exclusions in insurance policies against the carriers who draft them (and in favor of the insureds who pay for coverage), this case serves as a reminder that where policy language is clear, courts will enforce it. Here, the policy language was clear that where there was a wrap up insurance program, the primary general liability policy would not afford coverage—and Skanska was left to defend the underlying personal injury action with its own insurance policy.

Wrap up insurance programs can be beneficial on a larger construction project, streamlining all of the insurance under one program, and putting all of the risk with one carrier. However, since many general liability policies exclude coverage on projects where there is such a wrap up program, it is crucial for contractors to understand what the wrap up program does, and does not, cover. For instance, will the wrap up cover the insured’s shop operations, or just its work on site? (Using HVAC contractors as an example, would a contractor be covered by its own insurance when it fabricates ductwork in its shop for a wrap up project?) If the wrap up will not cover shop operations, will its primary policy do so, or will it be left uninsured? Further, if a wrap up policy includes a high self-insured retention (the amount the insured must spend in defense or indemnity costs before the wrap up insurance kicks in), can it get its primary carrier to cover the difference?

A contractor’s insurance policy is a difficult enough document to understand in the best of circumstances. When the complexities of a wrap up policy are added, it becomes more crucial to understand what each one covers, and what each one does not, and how one policy can fall by the wayside where the other is present. At the end of the day, a failure to understand the relation between a contractor’s primary general liability policy and a project specific wrap up policy can leave dangerous gaps in coverage. In order to avoid such gaps, contractors would be well advised to consult with construction counsel who is also experienced in reviewing such policies. While the policy language will control, such counsel can point out gaps in coverage and recommend what additional coverage may be necessary to plug such gaps.

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

As this column has often noted, a mechanic’s lien is a powerful tool to help a contractor to get paid. Because of the power of this tool—and the ability of a stranger to the property, and perhaps even a stranger to the contract with the owner, to affect title to the property—there are certain protections built into the Lien Law to provide balance. One of these balancing tools is the ability of an owner to demand a verified itemized statement of the lien, pursuant to Section 38 of the Lien Law. This statement is designed to provide the owner or upstream contractor with a line-by-line breakdown of what comprises the mechanic’s lien (which court holdings over time have demonstrated that, as a practical matter, should resemble a time and materials billing statement). The statement may also help identify whether the lien is exaggerated. The penalty for failing to provide the required verified itemized statement is the cancellation and discharge of the lien. Courts have also held that defenses to the requirement to provide such a statement are very limited. Accordingly, some who are the subject of a mechanic’s lien will use the demand for a verified itemized statement as a weapon to attempt to discharge the lien through the attrition of litigating the sufficiency of the response, as opposed to forcefully litigating the substance of the lien in a foreclosure action. For that reason, in the recent case of York Restoration Corp. v Pedrol Contracting Inc., a court reaffirmed that where a stipulated sum contract is substantially complete, a statement of the terms of that contract, together with a statement of the amounts owing, will be sufficient to apprise the owner of the basis for the lien.

Background

In August of 2018, York Restoration and Pedrol Contracting entered into a purchase order contract whereby Pedrol would rent certain scaffolding equipment to York for use on a construction project in Manhattan. The contract required Pedrol to provide 5 two-point scaffold, including 10 motors and accessories, as well as a “rigging license”. Each scaffold cost $1,200 per month, and the license cost $400 per month; the total cost for all equipment was agreed to be $6,400 per month. The rental ran through February of 2021, during which time York accrued $128,000 in arrears.

To secure its right to collect, Pedrol filed a mechanic’s lien on July 25, 2021 with the New York County Clerk. On August 26, 2021, York served a demand for an itemized statement, pursuant to Section 38 of the Lien Law, which required Pedrol to set forth the items of labor and material, and the value of same, together with the terms of the contract under which such were furnished, in a written and verified statement, within 5 days of the demand. Because Pedrol failed to comply with the demand, on September 16, 2021, York brought a special proceeding to compel Pedrol to comply. Alternatively, if Pedrol did not comply with the court order compelling production, York sought a further order cancelling the lien.

In opposition, Pedrol provided a copy of the contract setting forth the terms of the rental, together with the statements previously sent to York setting forth the computation of the amounts owed. As these documents set forth the accounting by which Pedrol arrived at the amount of its lien, it argued that such were sufficient to meet Pedrol’s burden under Section 38 of the Lien Law.

Decision

The court denied York’s motion and dismissed its petition. In doing so, the court focused on the language in Section 38 that an itemized statement “may” be required of a lienor, following well settled law that such language establishes that there is no absolute right to an itemized statement where it would not serve the purpose of apprising the property owner of the details of the leinor’s claim. Here, the court found that as the contract had been substantially completed, and as the information as to what comprised the lien was easily ascertainable by multiplying the fixed price per month times the number of months of the rental—neither of which York disputed—there was no need for anything further to satisfy Pedrol’s obligations under Section 38. The court went on to note that while a more detailed statement may be required in certain complex contractual disputes, such was not required here because the owner was sufficiently apprised of the basis of the lien.

Comment

The demand for an itemized statement of lien, like its cousin the demand for a verified statement of trust, is a useful tool to ascertain certain information in an expeditious fashion without having to await a lawsuit and its often arduous discovery process. However, like the discovery process in a lawsuit, these tools can be abused—particularly where, as here, a failure to comply with the demand can lead to a discharge of the lien (or, in the case of the demand for a verified statement of trust, a presumptive finding that trust funds were diverted). Accordingly, in order to prevent an overly litigious party from abusing the process in order to short circuit the lien—particularly with regard to a substantially complete project at a fixed price, where the computation of the amount owed is a matter of simple mathematics—the court will look to see whether the purpose of the statute (apprising the owner of the basis for the lien) has been met. Where it has, then any further litigation will be reserved for the foreclosure action.

While the court here held that the appraisal requirement was met because the contract was complete and the computation of damages was relatively simple (fixed sum times number of months), the court did leave open that a more thorough statement may be required where the computation is more complicated, or where the work is disputed. Accordingly, because the sanction for failing to adequately comply with these statutory requirements is cancellation of the lien, lienors would be well advised to consult with experienced construction counsel to determine what kind of a response is necessary under your particular set of circumstances.

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

As this column has noted on many occasions, the contract between the parties is the ultimate definition of their relationship. While that document should provide guidance in the “good times”, it will certainly be relied on when a party is looking to terminate the contract. However, in the absence of something in the contract justifying termination, a party may attempt to manufacture the circumstances it ultimately uses to do so. While such a termination would be improper, an appellate court, in the recent case of Tycoon Construction Corp. v New York City Housing Authority, reminds us that where the contract contains a “converter clause” converting an improper termination for cause into one for convenience, the contractor will have no recourse for the improper termination—no matter how ugly the circumstances of the termination were.

Background

In October of 2014, Tycoon Construction Corp. was awarded a contract by the New York City Housing Authority to perform certain “building entrance improvements”, which primarily focused on the installation of alarmed, ballistic security doors. The contract contained a “converter clause” which provided that “[i]f, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been for the convenience of [NYCHA]”. The contract also required that Tycoon provide NYCHA with notice of any claims within 20 days of their accrual.

In order to perform its work under the contract (specifically, the access control system), Tycoon needed for NYCHA to coordinate with Verizon to provide working telephone jacks and lines. For whatever reason, NYCHA could not provide the required working telephone service, thus precluding Tycoon from having the entrances tested and signed off. At around the same time (in October of 2016), NYCHA undertook to change the design of the entryways, and directed Tycoon to perform the extra work required to undertake the new design (which involved ripping out some of its newly installed entrances to install the ones with the updated design). On December 27, 2016, Tycoon submitted a change order of nearly $3 million to NYCHA for this work, and on January 11, 2017, it submitted a formal Notice of Claim under the contract.

Within a few weeks of this change order, NYCHA ordered Tycoon’s workers off of the site, and on March 27, 2017, it declared Tycoon in default (and placed a claim under Tycoon’s performance bond). None of the reasons cited in the March 27^th letter were enumerated in the contract as bases to default the contractor. Because NYCHA is a public entity, Tycoon commenced an administrative review proceeding under Article 78 of the Civil Practice Law and Rules to annul the decision to terminate the contract, arguing that it was unsupported by the terms of the contract and, therefore, was arbitrary and capricious. Based on the language of the contract the court agreed, and the default was annulled (which annulment was subsequently affirmed on appeal).

Subsequently, Tycoon commenced a lawsuit against NYCHA to recover for the improper termination and unpaid extra work. NYCHA moved to dismiss, arguing that the converter clause insulated it from the effects of its judicially determined improper termination, and that the late Notice of Claim precluded Tycoon from recovering its extra costs pursuant to the change order. Tycoon opposed, offering a novel argument conceding that while the contract contained a converter clause giving NYCHA the right to terminate for any reason, such did not insulate it from having to pay financial damages resulting from such an improper termination. As to the late Notice of Claim, Tycoon argued that its damages were only ascertainable upon the issuance of the change order on December 27, 2016, and that its Notice of Claim, filed 15 days later, was timely.

Decision

The court granted NYCHA’s motion, finding that as NYCHA had the unilateral right to terminate the contract, it could not be made to pay costs related to an improper termination. As to the extra work claim, the court found that Tycoon’s claims accrued upon the change of the design in October of 2016—and not the issuance of the change order in December—and, therefore, the Notice of Claim filed in January of 2017 was untimely. The appellate court affirmed, citing well settled case law on both propositions, holding that where there is an unqualified right to terminate the contractor (here, by the converter clause deeming an improper termination as one for convenience), NYCHA had the right to do so “without court inquiry as to whether the termination was driven by an ulterior motive”. Similarly, as the service of a timely Notice of Claim was a condition precedent to the recovery on the extra work claim, the failure to do so amounted to a complete waiver of the claim.

Comment

On a construction project, the contract is the document by which claims live or die. A converter clause is a dangerous one for a contractor (or for a subcontractor) because it insulates the upstream party from the consequences of taking improper actions (which, here, were judicially determined to be improper, and included the making of an improper demand upon Tycoon’s performance bond). Similarly, a short Notice of Claim provision can serve to insulate an owner or an upstream contractor from having to pay for services rendered in good faith.

Holdings such as the one here serve as warnings to contractors to be familiar with all of the terms of their contract, and to be diligent about sending out correspondence, such as a Notice of Claim, so as to preserve their right to collect later on. Likewise, familiarity with all of the terms of the contract could have enlightened the decision as to whether to pursue a separate special proceeding to determine whether the termination was improper. Given the converter clause, that determination served only as a pyrrhic victory.

While a contract on a publicly bid job cannot be negotiated, contractors would nevertheless be well advised to have experienced construction counsel review the contract pre-bid and advise of both its “highlights” and “lowlights” so as to enlighten the contractor’s decision as to whether to bid or not. (To borrow a late-July baseball analogy, sometimes the best trade you make is the trade you don’t make.) Post-bid, the contractor should have counsel prepare “claim books”, which set forth the rights that the contractor has (and does not have) under the contract. These claim books also tailor notice and other documents to the terms of that contract, and include specific timelines clearly setting forth what notices have to be given, and when, so as to best preserve the contractor’s right to payment.

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

A crucial part of any construction business is a solid insurance policy. In today’s highly litigious society, it’s not a matter of if, it’s just a matter of when an injured worker lawyers-up and starts a sequence of events that results in you becoming embroiled in a lawsuit. This fact is not limited to the personal injury context: where there is a claim of defective work and a suit against a general contractor, that GC typically sees to it that everyone who touched the building is also brought into court. While there are other situations, these are two of the more likely scenarios where you will have to reach out to your insurance carrier to assign counsel and ultimately handle the loss. However, a court, in President and Fellows of Harvard College v Zurich American Insurance Company, reminds us that by failing to comply with notice provisions of your policy, you can forfeit coverage that would have otherwise covered the loss—coverage that you paid for.

Background

Harvard University is the subject of a lawsuit brought by a group calling themselves Students for Fair Admissions, which seeks to challenge Harvard’s policy of affirmative action favoring minority candidates for admission (and, by seeking to litigate this through the US Supreme Court, other schools’ polices, as well). While that lawsuit raises issues of greater constitutional law not relevant to our discussion, as concerns us Harvard had the foresight to obtain policies of insurance which would cover its defense costs in the affirmative action litigation. However, these policies had requirements that required Harvard to notify the carrier as soon as it had knowledge of the lawsuit, but in no event later than 90 days after the end of the policy term. Harvard notified its primary carrier in accordance with these timetables, but neglected to notify its excess carrier, Zurich American Insurance Co., which ultimately disclaimed coverage on this basis.

Harvard sued Zurich for breaching the policy by disclaiming coverage, arguing that as Zurich had actual knowledge of this extremely high profile litigation (which was just argued to the US Supreme Court last October, and which will be decided this spring), the notice requirement was actually met. In support of its motion for summary judgment, Zurich argued that notwithstanding any actual notice of the lawsuit through the high profile media coverage, as the policy required specific notice, and as Harvard failed to provide that specific notice, it breached the policy itself, thus removing Zurich’s obligation to provide any coverage.

Decision

The court granted Zurich’s motion, crediting its argument that regardless of any fortuitous actual knowledge that it may have had as a result of the media coverage, as the policy required specific notice—which was undisputedly not provided—Zurich had no obligation to provide any coverage under the policy. The court went on to address several other arguments relating to the “claims made” nature of this particular policy, but returned to the subject of prejudice, holding that as the policy language regarding notice was clear, it did not have to show that it suffered prejudice as a result of the failure to give such notice. Accordingly, the court dismissed Harvard’s lawsuit, leaving it to pay the defense costs of the affirmative action lawsuit itself.

Comment

Harvard University is widely reputed to produce the best and brightest minds in our nation. However, even such minds can fail to appreciate the terms of a complicated insurance policy, and that courts will enforce those terms, as written. While there is somewhat of a reprieve in New York for personal injury actions, with the operative statute requiring a carrier who argues that it did not receive timely notice also show that it was actually prejudiced by the failure to notify, it does not take much to show such prejudice. Accordingly, contractors would be well advised to be smarter than those at Harvard and provide any insurance carriers—including those which you may not initially think may afford coverage, as contractors may have more than one type of policy—with timely notice of any claim (or potential claim) as soon as they learn about it. By giving such timely notice, not only are you complying with the policy, you are also removing any potential claim that the carrier was somehow prejudiced, and ensuring that you receive the coverage you paid for.

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

In the world of today’s lightning speed communications, it is easy to fire off an intemperate slapshot response to an email without thinking about the ramifications. While often the result is merely some egg on one’s face (and perhaps the need for an apology, or an explanation), the result can include the waiver of the attorney/client privilege. While a court, in the recent case of Dworkin Construction Corp. (USA) v Kelly’s Sheet Metal, Inc., saved a contractor from a finding that the privilege was waived, it serves as a lesson that one should take a deep breath before hitting the send button on any email.

Background

In May of 2019, Dworkin Construction Corp. and Kelly’s Sheet Metal entered into a subcontract for Kelly’s to perform all heating, ventilation and air-conditioning work in connection with a construction project at 2162 Broadway in Manhattan. Kelly’s was alleged to have breached the subcontract by, amongst other things, failing to: timely submit required technical data and shop drawings; adhere to the overall job schedule; send a sufficient number of employees to the job site; follow construction plans and specifications; correct defective work timely; and complete its contractual scope of work as scheduled. Accordingly, Dworkin commenced a breach of contract lawsuit against Kelly’s seeking to recover delay damages, as well as the expenses it incurred in attempting to bring the project back on schedule. Kelly’s denied the claims, and the parties engaged in discovery.

During the course of discovery, Dworkin’s counsel blind-copied Dworkin’s president on an email to counsel for Kelly’s regarding a discovery schedule. Dworkin’s president sent an email to that counsel inquiring about the merits of the lawsuit (and a related action in New York City Civil Court) by using “reply-all” to that unrelated email—which included counsel for Kelly’s—rather than simply reply, or draft a whole new email. Moments later, Dworkin’s counsel sent an email to counsel for Kelly’s advising of his client’s inadvertent email, and demanded that counsel for Kelly’s confirm the deletion of the email. Rather than delete the email, counsel for Kelly’s responded that the “reply-all” email waived the attorney/client privilege, and demanded that Dworkin’s counsel preserve all communications between him and Dworkin client because counsel for Kelly’s reserved the right to “seek other communications between you and your client”.

Upon counsel’s refusal to destroy the inadvertently produced email—and upon his claim of a right to seek other communications between Dworkin and its counsel—Dworkin moved for an order of protection clawing back the privileged email, and protecting Dworkin against the disclosure of other attorney/client privileged emails. Kelly’s opposed, contending that the use of a blind-copy email negligently heightened the chances of precisely what occurred here (broadcasting a privileged response to a non-privileged email) such that the use of the blind-copy should be deemed a waiver of the privilege. Kelly’s also contended that regardless of the use of the blind-copy by Dworkin’s counsel, the sending of the privileged email by Dworkin’s president formed an independent waiver of the privilege such that Kelly’s was required to disclose other attorney/client communications.

Decision

The court granted Dworkin’s motion and directed that counsel for Kelly’s destroy the privileged email, holding that the circumstances of the inadvertent disclosure—and counsel’s notification, moments later, of the inadvertent disclosure and attempt to claw the communication back—evidenced that the disclosure was never intended to waive the attorney/client privilege. The court held that to deny the motion would produce a Draconian result and countenance what the court described as “gotcha litigation tactics”, rather than deciding cases on their merits.

Comment

While this matter arose out of a typical construction dispute, its lesson is not limited to those in the construction industry: before communicating on an instant medium such as email, one should pause a moment to ascertain that the recipients are only those who are intended. Such a pause will also give the sender the benefit of one last review to be sure that what is in the email is what is intended—with the ancillary benefit that the sender will be afforded one last opportunity to tone down anything intemperate, or anything else that the sender may come to regret later on. While the court here noted “bcc’ing a client is not a good idea” because it opens the door to just such an inadvertent “reply-all” response, it saved Dworkin’s president from the effects of a waiver by noting the speed of its counsel in acting “just 15 minutes after the inadvertent communication”.

The lesson to be taken from this case is not that the court saved Dworkin’s attorney/client privilege, but what should be done to prevent someone from having to scramble in order to do so. Here, aside from the fortuity of Dworkin’s counsel immediately seeing the email and having the ability to immediately respond, it was only directed to counsel for both Dworkin and Kelly’s—so Dworkin’s counsel was able to immediately spot the problem. However, what about situations where counsel may not immediately see the email (which encompasses not only the obvious vacation/illness out of office, but also periods when counsel may be busy such as being on trial, in a series of depositions, or otherwise committed and unable to be alerted to emails in real time), or where the unintended recipient’s email address is buried in with a group of 20, 30, or more intended recipients such that the inclusion of the unintended recipient is not readily apparent? There are other situations that may also come to mind where the speed standard referenced by the court here may not be able to be met, even though the communication is clearly inadvertent. Those situations, we would posit, are more common than the one here, where the error was immediately apparent and able to be responded to in real time. Accordingly, the best advice is to take that moment to double check not only the content of the email, but who it is going to before hitting the send button—and only use “reply all” where you truly want the reply to go to more than one recipient.

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 advised that a mechanic’s lien is a powerful tool to help unpaid contractors get paid. Private liens have the benefits of attaching to the title of the land which was improved, and permitting the contractor to recover from the owner of the property—even though there may be no contractual relationship between the unpaid contractor and that property owner. However, the countervailing consideration given to property owners is that the owner cannot be made to pay twice for the same improvement. In that regard, as a court reminded us in Tri-Crete, Inc. v Forthill Construction Corp., where the owner has already fully paid for the improvement, there is no “lien fund” which would support recovery on a mechanic’s lien.

Background

In mid-2016, Gilbane Building Company entered into a contract to perform construction work at 1010 Park Avenue in Manhattan. Gilbane subsequently entered into a subcontract with Forthill Construction to perform certain concrete work on the project. Forthill, in turn, subcontracted some of its work to Tri-Crete. Tri-Crete performed $550,000 worth of work on the project, for which it was not paid. Tri-Crete filed a mechanic’s lien to secure its payment (and ultimately sued to foreclose the lien).

In late-2017, issues arose with Forthill’s work, including improper concrete strength, weak and unconsolidated concrete, improper clearances, incorrect sizing, unlevel concrete, and other examples of improper placement. Further, Forthill did not undertake a crucial pour as scheduled, causing delays. Accordingly, on December 22, 2017, Gilbane served Forthill with a Notice of Default and Demand to Cure. Forthill’s response was to walk off the job and abandon the project. Consequently, Gilbane terminated Forthill’s contract, and undertook to complete Forthill’s work (at added expense, the amount of which exceeded any funds held by Gilbane).

After discovery in the lien foreclosure action, Gilbane and its lien discharge bond surety moved for summary judgment dismissing Tri-Crete’s complaint. In doing so, Gilbane noted that Forthill breached the contract and abandoned the project, and argued that as the cost to complete exceeded the funds still held on Forthill’s contract, no money could be left owing to Forthill sufficient to form a lien fund from which lienors could recover.

Decision

The motion court granted Gilbane’s motion. In doing so, it cited to well settled law that the rights of a mechanic’s lienor are dependent on the existence of a lien fund (the sums due and owing, or to become due and owing, at the tier(s) above the lienor). Forthill’s breach of its contract with Gilbane necessarily negated the possibility of any monies being owed to Forthill, and therefore precluded the existence of any lien fund. Accordingly, the lien was discharged, and Tri-Crete’s lawsuit dismissed.

Comment

As the court noted, a lien fund is that sum of money remaining between the amount of the upstream contract, and what has been paid on that contract. Where the entire sum has been paid to the upstream contractor, there can be no lien fund. Aside from actual payment, another way for the contract sum to be “paid” is for it to be utilized to satisfy any backcharges accrued by the upstream contractor. Once those monies are completely spent, the lien fund is depleted. Any recovery above those amounts would result in the owner having to pay for the improvement twice—an outcome which was specifically rejected at the time the first mechanic’s lien statutes were enacted.

While the depletion of the lien fund necessarily precludes any recovery on the mechanic’s lien, there are other potential routes of recovery: a claim on a labor and materials payment bond, a breach of contract claim against the non-paying contractor, or perhaps a trust fund diversion action against the principals of the non-paying contractor. While filing a mechanic’s lien is always a good first step to obtaining payment (particularly given the tight deadlines involved in such a filing, which may run out earlier than the allotted-for eight months if the lien fund is dissipated), an unpaid contractor would be well advised to consult with experienced construction counsel to discuss all avenues for obtaining payment may be available.

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