Author: Thomas S. Tripodianos

Question. Does a commercial general liability (CGL) insurer have a duty to defend a subcontractor as an additional insured under a sub-subcontractor’s policy in an action brought by worker who alleged his injuries were caused by the sub- subcontractor’s operations, even if it was uncertain whether any judgment would be within coverage?

answer. YES. The relevant facts may be briefly stated. General contractor (GC), hired HVAC subcontractor (SC) for a construction project. SC, in turn, subcontracted the HVAC-related steamfitting work for the project to sub-subcontractor (SSC). Laborer, while working on the project as an employee of another subcontractor, allegedly was injured when he slipped and fell on a patch of oil at the work site. Laborer commenced an action against GC. It appears from the evidence gathered through discovery in the personal injury action that a question of fact exists as to which contractor was the source of the patch of oil on which Laborer slipped. Specifically, the oil may have originated from any of the contractors who used oil to thread pipe at the work site. Of these contractors, only SSC was a subcontractor of SC. SC’s insurer’s carrier argues that additional insured coverage under SSC’s policy would not be triggered until the cause of Laborer’s accident had been adjudicated. The insurance carrier also argued, in the alternative, that, even if its duty to defend SC under SSC’s policy had been triggered, it could not be determined whether it was required to bear 100% of SC’s defense costs as the primary insurer.

In the absence of unambiguous contractual language to the contrary, an additional insured (here the subcontractor) enjoys the same protection as the named insured (here the sub-subcontractor). An insurance company’s duty to defend is broader than its duty to indemnify. The duty to defend is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false, or baseless the suit may be. The duty remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered. For that reason, when a policy represents that it will provide the insured with a defense, it actually constitutes litigation insurance in addition to liability coverage. An insurer may be required to defend under the contract even though it may not be required to pay once the litigation has run its course. An insurer’s duty to defend an additional insured is not contingent on there having been an adjudication of liability issues giving rise to a duty to indemnify the additional insured.

question. Is a provision in an employment agreement prohibiting an employee from soliciting the employer’s workers during the one year post-employment period enforceable?

NOT LIKELY, unlessenforcement of the non-recruit provision serves a legitimate interest of the employer. Generally, a restrictive covenant in an employment agreement is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. A violation of any prong renders the covenant invalid. The reasonableness test however, may vary depending upon the type of restriction involved and the circumstances.

For the covenant to be enforceable you must satisfy the three prong test by alleging that the employee recruited possesses confidential or proprietary information, or that she was in any position to acquire trade secrets or that she was a particularly valuable or unique employee, or provided services which cannot easily be replaced. There has to be something more than just a showing that the two competing employers who would like the services of a good employee. To the extent that interest is affected by the alleged recruitment here, it is not one of those interests which permit enforcement of a restrictive covenant in New York. Accordingly, in circumstances involving no competition, and no confidential or proprietary information at stake, no legitimate interest of the employer is served by the covenant, and it will not likely be enforced.

Question. If notice of loss is provided to the individual or entity from who the policy was purchased and that individual or entity accepts the notice of loss on behalf of the insurer have the notice requirements of the policy been satisfied? The policy declarations page, which is a form with spaces to be filled in by the agent or broker when writing a new policy includes a space for “Named Insured and Mailing Address,” beneath which the name of the contractor and its address are entered. Adjacent to the space for the named insured and mailing address, the form includes a space for “Agent,” next to which an identification number is entered in type, and beneath which the name of the person who sold the policy appears.

answer. YES, under the above fact pattern and assuming there is nothing on the face of the policy to the contrary and nothing was communicated to the insured to lead him to believe that the powers of the agent were special or restricted. Insurance companies, doing business by agencies at a distance from their principal place of business, are responsible for the acts of the agent, within the general scope of the business intrusted to his care; and no limitations of his authority will be binding on parties with whom he deals, which are not brought to their knowledge.

The question that comes to my mind is why wouldn’t you send notice directly to the insurance company as well? The better practice is to read your policy and provide the insurance company as well as the person who sold you the policy with a Notice of Loss as soon as possible. The alternative is to pay you lawyer to convince a Court that your failure to comply with the policy requirements is excusable.

As a general rule under New York law, an insurance broker is the agent of the insured, not the insurance company, and notice to an insurance broker, absent exceptional circumstances is not notice to the insurer. Such exceptional circumstances have been found in situations where the agent’s role went far beyond that of solicitor of the policy and included responsibilities such as collecting premiums, issuing the policy, and being designated as an agent or broker for the insurer. For a broker to become the insurer’s agent, there must be evidence of some action on the insurer’s part from which a general authority to represent the insurer may be inferred. Selling a policy to the insured does not by itself make the broker an agent of the insurer. Furthermore, the use of the term “agent” in a contract is not conclusive as to whether an agency relationship existed. Rather, the acts of the individual may determine the category into which the person falls, and whether an agency exists hinges predominately on the facts and circumstances of a particular case. The question of whether an agency relationship exists is both a question of law and fact.

The doctrine of apparent authority also bears discussion here. Apparent authority arises when a principal places an agent in a position where it appears that the agent has certain powers which he may or may not possess. If a third person holds the reasonable belief that the agent was acting within the scope of his authority and changes his position in reliance on the agent’s act, the principal is estopped to deny that the agent’s act was not authorized. Where the insurer has voluntarily placed the agent in such a situation that a person of ordinary prudence may be justified in believing that the agent has authority to perform a particular act, apparent authority may exist.

Bottom line is the under New York law, with limited exceptions, an insured must comply with the notice provision of an insurance policy in order to obtain coverage under that policy. Absent a valid excuse, a failure to satisfy the notice requirement vitiates the policy, and the insurer need not show prejudice before it can assert the defense of noncompliance.

Question. What statutory limitations period applies to an action challenging the validity of a local law?

Generally speaking, statutes of limitations are statutes of repose representing a legislative judgment that occasional hardship is outweighed by the advantage of barring stale claims. In order to determine what limitations period governs a particular declaratory judgment action, the court is required to look to the substance of the action to identify the relationship out of which the claim arises and the relief sought. If the dispute can be, or could have been, resolved through a form of action or proceeding for which a specific statute of limitations is furnished by statute, then that limitations period will govern the action, regardless of the form in which it is presented Otherwise, the six-year “catch-all” provision of CPLR 213(1) will apply.

Specifically with regards to an action challenging the validity of a local law there is a dichotomy between issues addressed to the substance of the law or its constitutionality, as to which a declaratory judgment action is appropriate, and issues that arise from the procedures by which the law was enacted, which may be raised in a CPLR article 78 proceeding. The distinction drawn is between defects that are substantive, and those that are procedural. This distinction proceeds from the axiom that an article 78 proceeding is unavailable to challenge the validity of a legislative act.

The limitation, however, applies only to the review of the “wisdom or merit” of the determination in i.e., its substance, not to the procedures by which the law was enacted. Where the issue is not the “wisdom or merit” of the legislative act, relief may be had in an article 78 proceeding and the four-month statute of limitations is, therefore, controlling.

Question. Where the Owner hires an Architect to design and draw the plans and specifications for the project, including the roof construction and the Contractors then contracted with the Subcontractors for roofing materials and provided written specifications on how to install those materials and the Owner sues the Contractors and the Subcontractors for breach of contract and warranty, alleging that the roof was defective can the Contractors assert a claim against the Subcontractors for implied indemnification?

Answer. No. There could be no cause of action for implied indemnification because the responsibility for constructing and installing the roofing system was shared by the Contractors, the Subcontractors, and the Architect. Consequently, the Contractors did not state a cause of action for implied indemnification against the Subcontractors.

Question. Is a mandatory arbitration clause in an agreement between property owners and a contractor engaged by them to manage and direct renovation of their residence enforceable?

USUALLY. Although the Courts of New York favor alternative dispute resolution clauses, generally few things in the law are black and white. This is especially true in matters involving consumers.

In the case in question, the home owners entered into a Construction Management Agreement with construction manager, in which construction manager agreed to manage and direct the renovation of home owners’ residence. The Construction Management Agreement provided that:

Any disagreement, dispute, controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof.

The home owners terminated the construction manager. Prior to receiving notice of termination the construction manager had sent home owners several invoices, some of which remain unpaid. The construction manager, in accordance with his contract, served home owners with a Demand for Arbitration and Notice of Intention to Arbitrate. Home owners in turn, served and filed their Answering Statement to the construction manager’s Demand for Arbitration.

Home owners now seek a permanent stay of the arbitration.

General Business Law Section 399-c(2)(a) provides, in relevant part, that: “no written contract for the sale or purchase of consumer goods, entered into on or after the effective date of this section [September 5, 1984], to which a consumer is a party, shall contain a mandatory arbitration clause.” General Business Law Section 399-c(2)(b) further provides that: “the provisions of a mandatory arbitration clause shall be null and void.”

At first glance, therefore, it would seem that General Business Law Section 399-c bars enforcement of a mandatory arbitration clause in a residential construction agreement with the property owners. It would follow therefore that the mandatory arbitration clause in the agreements between homeowners and construction manager herein would be similarly unenforceable.

However, it may be argued that, General Business Law Section 399-c is pre-empted by the Federal Arbitration Act.

Section 2 of the Federal Arbitration Act makes enforceable a written arbitration provision in “a contract evidencing a transaction involving commerce.” In order for the Federal Arbitration Act to apply, the transaction at issue must “involve interstate commerce,” which the US Supreme Court has defined to be the equivalent of “affect commerce.”

InNew York, the Court of Appeals, (the highest appellate court in the state system) recently addressed the issue of the applicability of the Federal Arbitration Act to a construction contract performed in New York, which contained a mandatory arbitration provision. In that case, the Court of Appeals concluded that the project “affected interstate commerce, “triggering application of the Federal Arbitration Act. Among the factors cited by the Court were the following: the project manual and engineer’s drawings were created in a joint effort with a structural engineering firm headquartered in Illinois; petitioner’s largest supplier of materials for the project was a New Jersey company; project meetings and visits were often scheduled at the New Jersey supplier’s offices; the largest supplier of equipment for the project was a Massachusetts company; and further additional materials, equipment and services for the project were obtained from Oklahoma, Maryland and Kansas.

The construction manager in our case may argue that its agreements to renovate the house “affect commerce” because certain materials used during the course of the home improvements came from out of state. The counterargument would be that, if the use of any out of state materials triggers the applicability of the Federal Arbitration Act, then General Business Law Section 399-c would be eviscerated and pre-empted in most cases.

While the Federal Arbitration Act may in some cases pre-empt a state statute such as Section 399-c, it may only do so in transactions “affecting commerce.” The agreement herein, when measured against the standards set by applicable caselaw, may not be found to “affect commerce.” Indeed, too liberal an application of the Federal Arbitration Act would render General Business Law Section 399-c a virtual nullity.

The mandatory arbitration clause contained in the Construction Management Agreements may be declared null and void, pursuant to General Business Law Section 399-c even if the home owners’ application for a stay of arbitration is untimely. Pursuant to CPLR 7503(c), which provides, in relevant part, that “an application to stay arbitration must be made by the party served within twenty days after service upon him of the notice or demand, or he shall be so preclude.” an untimely application to stay arbitration may, be granted if the agreement for which arbitration is sought is facially illegal or if upon facial examination of the agreement, a court may conclude that it would be against public policy to permit arbitration of the issue sought to be arbitrated.

Because the arbitration clauses contained in the Construction Management Agreement may be declared null and void pursuant to General Business Law Section 399-c the untimeliness of their application to stay the arbitrations should not be a bar due to the public policy issue involved.

Question. Is a “binder agreement” for the sale and purchase of real property owned by a husband and wife enforceable by purchaser if only the husband signed the agreement?

answer. YES. To be enforceable, the purchase deposit agreement or as it’s commonly called the “binder” must satisfy the statute of frauds. In other words, it must be in writing, identify the parties to the subject real estate sales transaction, described the realty to be sold with reasonable particularity, and state the purchase price of the realty, the down payment called for as well as its due date, and the balance due upon closing. In the case at hand the binder also provided for a closing date, and stated that the transaction was not subject to mortgage financing. The additional fact that the agreement stated that a more formal contract was to be signed does not render the purchase deposit agreement unenforceable

Generally, where spouses own real property as tenants by the entirety, an agreement of sale signed by only one spouse is ineffective to convey title. However, if it is shown that the wife was aware of and actively participated in the transaction, the wife will be stopped from denying the husband’s authority to execute the contract on behalf of the wife. The wife’s contention that she did not sign the purchase deposit agreement, while true, does necessarily mean that the binder is not enforceable. The same reasoning applies if the roles of the husband and wife are reversed.

That being said, the better practice is to have all title owners sign the binder thus eliminating any questions as to who is authorized to do what.

Question. Over the course of the job, Subcontractor submitted a number of invoices for completed work, including work changes, for which Contractor only made partial payments. When it did make a payment, Contractor required an “Affidavit of Release,” which acknowledged receipt of the progress payment and, in pertinent part, stated that such receipt released Contractor “from any liens or suits arising from non-payment on the above referenced job.” Contractor argues that the affidavits of release barred the Subcontractor from pursuing the unpaid balance. In response, Subcontractor reasserts that a balance is due and argues that the affidavits of release were never intended to serve as a release of claims for unpaid work. Did the Subcontractor waive his right to collect the unpaid balance?

The answer depends on the parties conduct and intent. The affidavits of release were all-encompassing releases executed without protest. Under normal circumstances the Courts will enforce those releases and deny the Subcontractor further payments.

However, the Subcontractor argues that the executed affidavits of release are ineffective to bar claims for additional payments where it was the Contractor’s practice to condition any partial payments due on the execution of the release and the terms of the release itself expressly so provided. Subcontractor further argues that, due to Contractor’s financial difficulties during the project, Contractor and Subcontractor orally agreed to a system of partial payments. According to Subcontractor, under this system, the Payment Forms reflected amounts that Contractor was able to pay at the time and Contractor agreed to pay Subcontractor the full amounts stated in the invoices. Contractor did in fact make some additional payments.

In such a case, the waiver form is construed as merely a receipt for the monies referenced in the waiver. Moreover, Contractor’s conduct in subsequently paying Subcontractor for work theoretically released by prior payments is completely inconsistent with its theory of general release. Where a waiver form purports to acknowledge that no further payments are owed, but the parties’ conduct indicates otherwise, the instrument will not be construed as a release.

New York case law directly on point supports this conclusion: “Where a waiver form [submitted by a subcontractor] purports to acknowledge that no further payments are owed, but the parties’ conduct indicates otherwise, the instrument will not be construed as a release.

The same analysis and results would apply as between an Owner and Contractor. The lesson to be learned is that while legal wrangling may save your hide you should not sign a release that does not reflect the reality of the situation. As a general rule, the payment releases should indicate that they are operative only to the extent that payment is actually received.

Question. Do you recommend the use of form contracts?

The answer is a qualified yes. Form contracts that have been intelligently prepared are a very useful tool and more than pay for themselves when you consider the future litigation dollars you may be able to avoid spending. By “intelligently prepared” I mean that the contract should (a) provide the appropriate and enforceable legal protections; (b) be customized to address the concerns of your particular business; and (c) be periodically updated to keep current with business customs and constantly emerging law. The use of old agreements, or general forms supplemented by “borrowed” provisions from competitors contracts is strongly discouraged and can often leave you with less protections or result in significantly increased legal fees in the event of litigation.

A good place to start is with the form agreements prepared by the American Institute of Architects (“AIA”) which are widely recognized as the industry standard. AIA Contract Documents comprise over 80 forms and contracts that define relationships and terms involved in design and construction projects. The forms and contracts are prepared with input from owners, contractors, attorneys, architects, engineers, and others and are periodically updated. These forms and contracts should however, be modified to suit your particular needs.

Preventative medicine is the key in the case of form agreements. Consultation with your attorney to review your current agreements or prepare new ones is well worth the time and effort. While you’re at it, why not have her prepare a few form letters addressing common events or situations that may arise to supplement and integrate with your new agreements?

Question. Does a general contractor’s postponement of the subcontractor’s start date for installation of concrete panels on a building to be constructed constitute a breach of the subcontract where the contract requires the subcontractor to perform work “in accordance with the project schedule” developed by the general contractor?

As is the case with most questions that I receive, the answer lies in the parties’ agreement and the surrounding facts. In this case, the contractor’s postponement of the start date did not constitute a breach of the subcontract.

The original start date for installation of the precast concrete panels was shown to have been May and the subcontractor seeks to recover the costs incurred for transportation and storage of the panels resulting from the general contractor’s postponement of the start date until September. The subcontract required the subcontractor to perform the work in accordance with the project schedule developed by the contractor. Although the initial planned start date was established as being in May, the date was changed after the subcontract was execute and the contractor had the right to make such changes and such changes were anticipated by the parties. Significantly, the subcontract gave the contractor the authority to set the schedule and placed no limits on its exercise of that authority.

Subcontractor failed to reserve the right to limit changes in the schedule and in fact complained about the start date “slipping away” in August. Subcontractor also failed to ask for a fixed start date. In addition, the minutes of job site meetings, at least one of which was provided to plaintiff before it began fabricating the panels, listed a September planned date for the precast installation.

The lesson to be learned here is that contractors and subcontractors alike must pay close attention to their agreements to ensure that they have the appropriate language to protect them and thereafter make sure their actions or inactions don’t dilute those protections.