Author: Thomas S. Tripodianos

You’ve probably seen indemnity and waiver of subrogation clauses in your contracts but, do you understand what they mean and how they operate?  In this two-part Legal alert, we go through a real-world example.  In the last alert we discussed subrogation.  This time we discuss indemnity.

A party is entitled to full contractual indemnification provided that the intention to indemnify can be clearly implied from the language and purposes of the entire agreement and the surrounding facts and circumstances.

When Insured renovated his residence in 2013, he hired General Contractor. General Contractor, in turn, retained Plumber to perform the plumbing work.  The plumbing work included. a water pipe, located between the exterior wall of the residence and the interior wall of the master bathroom that froze and burst. The pipe was attached to an exterior spigot, also known as a hose bib, that serviced an irrigation system for the 16th-floor terrace of the residence.  General Contractor also hired Drywall Contractor to perform the framing and drywall work, as well as the placement of insulation within the framing.

Insurance Company sued the General Contractor, Plumber, and Drywall Contractor, asserting negligence against all defendants based on their alleged failure to properly install and adequately insulate the plumbing involved in the incident, and breach of contract against them based on their alleged failure to perform the plumbing and construction work for the project in a workmanlike manner and in failing to properly protect the plumbing from freezing temperatures.

General Contractor sued the Drywall Contractor for contractual and common-law indemnification, contribution.

Here, General Contractor and Plumber executed a Subcontract Agreement Rider containing the following indemnification clause:

1. Indemnity. In consideration of the Contract Agreement, and to the fullest extent permitted by law, the Subcontractor shall defend and shall indemnify, and hold harmless, at Subcontractor’s sole expense, the Contractor, all entities the Contractor is required to indemnify and hold harmless, the Owner of the property, and the officers, directors, agents, employees, successors and assigns of each of them from and against all liability or claimed liability for…any and all property damage or economy damage, including all attorney fees, disbursements and related costs, arising out of or resulting from the Work covered by this Contract Agreement to the extent such Work was performed by or contracted through the Subcontractor or by anyone for whose acts the Subcontractor may be held liable, excluding only liability created by the sole and exclusive negligence of the Indemnified Parties. This indemnity agreement shall survive the completion of the Work specified in the Contract Agreement.

General Contractor maintains that it is entitled to contractual indemnification from Plumber in the form of reimbursement for all defense costs incurred by it in this action pursuant to the indemnification clause. However, General Contractor has not established that the damages in this case originated from, were incident to, or connected to the work performed by Plumber so as to trigger the application of clause.

General Contractor submits the affidavit of professional engineer who states that the water pipe which allegedly burst was intended to be active “only during the irrigation season — approximately from late April to early November” and that it was meant to be winterized for the remaining part of the year so as to “prevent  potential damage due to pipe component freezing”. He opines that the pipe was not winterized and “extremely cold, sub-freezing temperatures during mid-February 2016 caused the stagnant water in the irrigation pipe to freeze and subsequently rupture the pipe leading to the damage.”

Although he also maintains that Plumber was negligent in not warning General Contractor that the pipe could freeze without winterization, General Contractor was aware that the system needed to be winterized on an annual basis. Thus, General Contractor fails to establish, that the damage arose out of or resulted from the work performed by Plumber.

General Contractor also asserts causes of action against Drywall Contractor for contractual indemnification, common-law indemnification and contribution.

General Contractor and Drywall Contractor executed a Subcontract Agreement Rider containing the same indemnification clause as the one executed by General Contractor and Plumber, which requires indemnification in cases where the damages arose out of or resulted from the work performed by Drywall Contractor.

To support its position that it did not cause the flooding, Drywall Contractor claims that General Contractor hired Drywall Contractor to perform the framing and drywall work for the renovation, as well as the installation of Insulation on the perimeter walls of the residence.  The purpose of this insulation installed by Drywall Contractor was to keep cold air from entering the interior space of the residence. That is, the insulation was intended to keep the rooms inside warm, not to keep pipes or outdoor fixtures from freezing.

Drywall Contractor was not involved in the plumbing and was not responsible for insulating any pipes.

In addition, Drywall Contractor points out that both General Contractor’s expert and Plumber’s expert identify the failure to winterize the hose bib and water line as the cause of the incident. Drywall Contractor contends, and it is undisputed that, it had no responsibility to perform the winterization or to notify the Insured or his representative that winterization was necessary.

Drywall Contractor established that the damages at issue did not arise out of or result from the work it performed so as to trigger the application of the indemnification clause.

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

You’ve probably seen indemnity and waiver of subrogation clauses in your contracts but, do you understand what they mean and how they operate?  In this two-part Legal alert, we go through a real-world example.  Part one will deal with subrogation.

Subrogation, an equitable doctrine, allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse.

When Insured renovated his residence in 2013, he hired General Contractor. General Contractor, in turn, retained Plumber to perform the plumbing work.  The plumbing work included. a water pipe, located between the exterior wall of the residence and the interior wall of the master bathroom that froze and burst. The pipe was attached to an exterior spigot, also known as a hose bib, that serviced an irrigation system for the 16th-floor terrace of the residence.  General Contractor also hired Drywall Contractor to perform the framing and drywall work, as well as the placement of insulation within the framing.

Insurance Company sued the General Contractor, Plumber, and Drywall Contractor, asserting negligence against all defendants based on their alleged failure to properly install and adequately insulate the plumbing involved in the incident, and breach of contract against them based on their alleged failure to perform the plumbing and construction work for the project in a workmanlike manner and in failing to properly protect the plumbing from freezing temperatures.

General Contractor sued the Drywall Contractor for contractual and common-law indemnification, contribution.

General Contractor argues that the Insurance Company’s claims against it are barred by a waiver of subrogation clause in Insured’s contract with General Contractor (the Insured/General Contractor Agreement). Specifically, General Contractor contends that Insured waived Insurance Company’s right of subrogation against General Contractor by virtue of the following provision in the Insured/General Contractor Agreement:

Unless specifically precluded by the Owner’s property insurance policy, the Owner and Contractor waive all rights against (1) each other and any of their subcontractors, suppliers, agents and employees, each of the other; and (2) the Architect, Architect’s consultants and any of their agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance or other insurance applicable to the Work.
 

General Contractor asserts that this waiver is triggered here because Insured’s Insurance Company property insurance policy does not “specifically preclude the waiver”, highlighting the following provision in the policy:

If the insured person has rights to recover all or part of any payment we have made under this policy, those rights are transferred to us. The insured person must do nothing after loss to impair such rights of recovery. At our request, the insured person will bring suit or transfer those rights to us and help us enforce them.

General Contractor argues that since its contract with Insured contains a clear waiver of subrogation provision and the Insurance Company policy does not forbid the waiver, Insurance Company is barred from bringing this action against General Contractor.

In opposition, Insurance Company contends that because the clause is not conditioned upon there being a provision permitting a waiver of subrogation in each of their insurance policies and because Insurance Company did not issue a policy to Insured in which Insurance Company waived its subrogation rights it should be allowed to maintain this subrogation action against General Contractor.

Here, Insured and General Contractor waived “all rights” against each other “for damages caused by fire or other causes…to the extent covered by property insurance,” so long as such waiver is not “specifically preclude[d]” by Insured’s property insurance policy. While the policy of insurance issued by Insurance Company to Insured provides that Insured “ must do nothing after loss” to impair such rights, it does not preclude Insured and General Contractor’s anti-subrogation agreement.

Additionally, the policy “ acknowledge[s] the right of the insured to waive the insurer’s subrogation rights” by allowing Insured to relinquish his claims prior to the loss.

Contrary to Insurance Company’s contention, the fact that the Insurance Company policy does not contain a waiver of subrogation is not fatal under the circumstances because there is no language in the Insured/General Contractor Agreement requiring that the parties’ insurance policies contain such a waiver.

Insurance Company additionally argues that its breach of contract claim against General Contractor is not barred by the waiver of subrogation clause because the waiver does not encompass contractual claims. However, even assuming the waiver applies only to tort-based liability, the breach of contract claim against General Contractor, essentially based upon General Contractor’s alleged negligence in the performance of its contract with Insured, is clearly within the scope of the waiver of subrogation clause and its preclusion of claims arising from a party’s tortious acts

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

In early May of this year we sent out a Legal Alert advising you of the passage of the New York Health and Essential Rights Act (HERO Act) into law. Section 1 of the Act requires the New York State commissioner of labor, in consultation with the New York State Department of Health, to create and publish a model airborne infectious disease exposure prevention standard for all worksites, by industry, and to establish minimum requirements for preventing exposure to airborne infectious diseases in the workplace. In establishing these minimum requirements, the labor commissioner is charged with developing protocols to address the following topics: (1) employee health screenings; (2) face coverings; (3) personal protective equipment (PPE) required by industry and at the employer’s expense; (4) hand hygiene; (5) cleaning and disinfecting of shared work equipment and surfaces (e.g., hand tools); (6) social distancing protocols; (7) mandatory or precautionary isolation or quarantine orders; (8) engineering controls; (9) assignment of enforcement responsibility of the safety plan and federal, state, and local protocols to one or more supervisory employees; (10) compliance with employee notice requirements; and (11) verbal review of standards, policies and employee rights.

The Act requires the labor commissioner to publish these industry-specific airborne infectious disease exposure prevention standards in both English and Spanish in addition to other languages depending on predominant languages used in the industry.

On July 6, 2021, the Department of Labor, in consultation with the NYS Department of Health, released a new Airborne Infectious Disease Exposure Prevention Standard , a general Model Airborne Infectious Disease Exposure Prevention Plan, and various industry-specific model plans (including construction) for the prevention of airborne infectious disease.

The HERO Act requires employers to adopt and maintain an airborne infectious disease prevention plan to be implemented when an airborne infectious disease is designated by the New York State Commissioner of Health as a “highly contagious communicable disease that presents a serious risk of harm to the public health.” This plan will not apply to any seasonal or endemic infectious agent or disease, such as the seasonal flu, that has not been designated by the Commissioner as a highly contagious communicable disease that presents a serious risk of harm to the public health.

The airborne infectious disease exposure prevention plans must go into effect when an airborne infectious disease is designated by the New York State Commissioner of Health as a highly contagious communicable disease that presents a serious risk of harm to the public health. Currently, while employers must adopt plans as required by the law, as of the date of this writing no designation has been made and plans are not required to be in effect.

Employers must adopt plans within 30 days of the release of these documents (Thursday, August 5, 2021), and communicate the plan to employees with 30 days after adoption (Saturday, September 4, 2021). Employers must also post the plan at the worksite and incorporate the plan into an employee handbook if the employer has a handbook. In addition, employers must make the plan available for review upon request by an employee, independent contractor, employee representative, collective bargaining representative, the labor commissioner, or the Commissioner of public health.

Section 2 of the Act dealing with the establishment of workplace safety committees applies to employers that employ at least ten employees or have an annual payroll of over $800,000 and a “workers’ compensation experience modification rating of more than 1.2.” and is effective on November 1, 2021. We expect more guidance from the Labor Department regarding these committees over the summer.

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

If being a public works contractor, consultant or supplier wasn’t already difficult enough things just got harder.  Public Authorities Law Section 1279-h, became law without public comment on April 12, 2019, when it was passed as part of the New York State budget bill.  The MTA provided the regulations called for under the law on June 5, 2019, which mandate retroactively that the MTA debar contractors (defined to include consultants, vendors and suppliers) if they: (1) fail to achieve substantial completion of their contractual obligations within 10% of the adjusted contract time; or (2) present claims (which includes change orders) for additional compensation that are denied in an amount that exceeds the total adjusted contract amount by 10% or more.

While the MTA regulations provide that debarment by one is debarment by all of the agencies under the MTA umbrella things get even worse because Executive Order 192, issued on January 15, 2019, mandates debarment by all state agencies and authorities of contractors debarred by any state agency or authority forever [the MTA Regulations suggest the debarment in only for five years but EO 192 would override that] unless a court determines the debarment was in error, or a secure a waiver from the Counsel to the Governor.  Considering the weight given to past debarment in considering bid awards the detrimental effect could extend past New York.

It gets even worse.  The MTA cannot consider mitigating factors or whether claims have been made in good faith. Debarment is required once a final determination is made by the MTA that the regulations have been violated “and its contracting personnel have no discretion to excuse or justify violations of any provision.”

But wait, there’s more.  Not only is the debarment hearing held and decided by the MTA itself the “ panel may, in its discretion, also debar any of (1) the contractor’s parent(s), subsidiaries and affiliates; (2) any joint venture (including its individual members) and any other form of partnership (including its individual members) that includes a contractor or a contractor’s parent(s), subsidiaries, or affiliates of a contractor, (3) a contractor’s directors, officers, principals, managerial employees, and any person or entity with a ten percent or more interest in a contractor; (4) any legal entity controlled, or ten percent or more of which is owned or controlled, by a contractor, or by any director, officer, principal, managerial employee of contractor, or by any person or entity with a 10 percent or greater interest in contractor, including without limitation any new entity created after the date of the notice of intent to debar”.

A coalition of industry associations has been formed to challenge the validity of the law and regulations but, for the time being they are in full force and effect.  Anyone doing business on public work in New York and especially with the MTA is urged to consult with competent counsel as to how to mitigate the risks imposed by these new laws.

At least in New York’s First and Second Departments; maybe not.  In recent cases on the subject, General Contractor, hired Subcontractor to provide security services at several different construction sites, pursuant to separate subcontracts. Each subcontract involved a public construction project. The subcontracts were identical, and contained the following relevant provision:

“Article 33 – CLAIMS AND DISPUTE RESOLUTION
Paragraph 33.5 Limitation on Suit
“No claim or action by [Subcontractor] arising out of or related to th[e] [contract] shall lie or be maintained against [General Contractor ] unless such action is commenced no later than six (6) months after either: [a] the cause of action accrued, [b] the termination or conclusion of th[e] [contract], or [c] the last day [Subcontractor] performed any physical work at the [project site], whichever of the proceeding [sic] events shall occur first.”

Both the Subcontractor and General Contractor were named as defendants in a class action under New York’s prevailing wage statute commenced by present and former employees of Subcontractor (the Wage Action). In a letter, counsel for Subcontractor informed counsel for General Contractor that it considered the Wage Action to be frivolous, and that Subcontractor intended to move for summary judgment dismissing it. In the same letter, however, Subcontractor asserted that $232,213.13 was due and owing to it for its work under the subcontracts, and demanded payment of same. In a responsive letter, counsel for General Contractor informed counsel for Subcontractor that General Contractor was relying upon an indemnity provision in the subcontracts that entitled it to withhold money due and owing to Subcontractor, pending the outcome of the Wage Action, stating that

“[w]hile it may be ultimately determined that the [Wage Action] Plaintiffs’ claims are frivolous and/or without merit, be advised that General Contractor  will continue to enforce the indemnity provisions contained in the contracts with your client until such determination is made by the Court [in the Wage Action].”

The letter further noted that, in connection with one of the jobs, payment was not yet due, since the public owner had not yet approved a change order. Subcontractor did move for summary judgment in the Wage Action. However, after the summary judgment motion was denied, and the Wage Action became protracted, it decided it could no longer wait to be paid. Accordingly, it commenced an action to collect its alleged balance due.

General Contractor argued that the action was time-barred by the contractual limitations provision, which required Subcontractor to commence suit within six months of the last time it performed physical work under any of the subcontracts. General Contractor asserted that, in accordance with the limitations clause, this was the earliest of the three possible dates for measuring the time to commence suit, the others being the “accrual date,” and termination of the subcontracts.

Subcontractor asserted that General Contractor had been paid in full by the public owner on all four of the projects for which it provided security services, wherefore General Contractor could not rely on certain provisions in the subcontracts making Subcontractor’s right to payment contingent on payment to General Contractor by the owners. Subcontractor argued that the contractual limitations period did not bar the claim because General Contractor, pursuant to General Municipal Law section 106–b(2), (which requires a contractor who receives any payment from a public owner to make prompt payment to its subcontractors for their work), imposed upon it a continuing and ongoing obligation to pay Subcontractor. Subcontractor also relied on the letter from General Contractor’s counsel, claiming that it constituted an acknowledgment of the debt, as contemplated by General Obligations Law section 17–101, thus defeating any statute of limitations claim.

In reply, General Contractor asserted that the public owner was either retaining funds in connection with the Wage Action or that the General Contractor, while acknowledging it had been paid, was holding the money, in case it was later determined that Subcontractor had to indemnify it as the result of an adverse judgment in the Wage Action.

The Subcontractor’s argument in the case that went up on appeal to the First Department was that the contractual limitations provision was unenforceable, because it permitted a scenario in which,  even though a claim had not accrued by the time six months had passed since the last time physical work was performed, it was still time-barred. Subcontractor argued essentially that, in light of General Contractor’s stated position that payment was not due to Subcontractor until such time as the Wage Action was resolved, Subcontractor should not have been subjected to the “catch–22” of having to file a lawsuit to toll the statute of limitations, where the claim was not yet ripe for adjudication.

General Contractor noted that Subcontractor demanded payment from General Contractor in its counsel’s letter, which was still within the six-month limitations period. It characterized this as an acknowledgment by Subcontractor that it had a ripe claim. However, in its counsel’s response, General Contractor explicitly rejected the claim as premature. Accordingly, Subcontractor rightfully saw filing a lawsuit at the time as a futile gesture.

A recent Second Department case further undermines General Contractor ’s position. Similarly in that case the subcontractor was owed money pursuant to a subcontract that contained a one-year contractual limitations period, and a provision making payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the plaintiff. It took nearly two years for the owner to approve payment to the general contractor, and when the plaintiff sued to recover, the general contractor moved to dismiss, relying on the contractual limitations period. The court refused to dismiss on statute of limitations grounds.

In this First Department case, it was not clear that General Contractor was relying on a specific contractual condition precedent, in advising Subcontractor it would not pay until a favorable resolution of the Wage Action had been reached. Nevertheless, General Contractor made clear that it would not release monies to Subcontractor until the Wage Action was resolved. Accordingly, Subcontractor’s argument that the limitations period was rendered ineffectual by General Contractor’s position was correct.

The New York State Senate's 2018 Budget Resolution includes language that calls for a "discussion about whether the definition of public work should be updated."  It can be construed that this "discussion" opens the door to applying prevailing wage laws to many private construction and improvement projects which were previously not within the definition of public work.

Both houses currently have legislation (S.2975/A.5498) that defines public work so broadly as to encompass construction of private residential buildings, which are assisted only indirectly by government.  This bill bootstraps minimum subsidies for affordable housing as the justification to require the wage regimen applied to public works, which inures to the benefit of construction income.

Covered could be any or all of the following:

1.   Local real property tax abatement or exemption, which is essential for any construction of one and two family homes in the outer boroughs of the City of New York, or most moderate rehabilitation and new apartment renovation or construction. Real property tax abatement programs are used by local governments outside New York City to promote and target first time homebuyers to assist in the purchase of residential housing.  These programs provide assistance to the purchaser, not to the builder/developer.

2.   State agency bonds issued under Federal tax exemption rules, which are used to purchase privately issued bank mortgages on one and two family homes and apartments.  This program is also directed to the purchaser.

3.   Guarantees through SONYMA insurance on State agency bonds which provide credit enhancement to attract private investors in apartment construction or rehabilitation.

President Trump announced on Thursday March 1, 2018 that his administration intends to  impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum.  Many details are lacking and official administrative action has not yet been implemented.  Some countries may be exempt so the breadth of the tariffs is not yet known.

The construction industry relies on steel and aluminum and will likely face higher prices.  Price escalation may result in  delays, , a reduced scope,  or projects being cancelled and a force majeure declared or a termination for convenience provision being exercised. Escalation clauses could also impact public projects adversely due to the fact that bidders cannot hold their prices for an extended period of time.

If you don’t have an escalation clause, you may be at  the mercy of the owner to allow a change order for the increased material costs or you may be able to rescind. 

If you’d like to discuss ways to manage this risk please review your agreements and speak with counsel about what steps you should consider.

On April 4, 2016, Governor Andrew M. Cuomo signed into law the legislation enacting New York's Paid Family Leave program, the most comprehensive paid family leave program in the United States. Commencing January 1, 2018, all eligible employees will be able to take time off, while still being paid a portion of their income, to bond with a new child, care for a family member or handle personal matters arising from an immediate family member being called to active duty in the Armed Forces of the United States.

All employers are required to participate in the New York Paid Family Leave program. Upon the renewal of a business's statutory disability benefit, employers will be automatically billed for the New York Paid Family Leave program. Employers have the option to pay for these costs themselves, or they can issue a deduction from their employee's gross incomes. If an employer elects to delegate payment to its employees, the deduction will appear on the employee's pay-stub, which will look similar to a tax deduction.  An employer may continue to deduct a qualified employee’s contributions while the employee is on family leave.

Under the New York State Administrative Procedure Act, the proposed regulation is open for a second round of comments from the public.  This 30-day comment period will close on June 23, 2017.

Below are the highlights of the current proposed regulation:

• A “covered employer” is any employer who employs one or more employees.  Sole proprietors and members of limited liability companies are considered “individual business owners,” so long as they are entitled to keep all the profits after taxes, are liable for all losses and do not have any employees.
• An employee of a covered employer who works 20 or more hours a week becomes eligible for benefits after 26 consecutive weeks of employment. Any employee of a covered employer who regularly works less than 20 hours a week becomes eligible for benefits after the 175^th day of employment.
• Any employee taking weekly leave, regardless of their hours worked, is eligible for the maximum number of weeks of leave in a 52-consecutive week period.
• Beginning in 2018 PFL will allow for a qualifying individual to receive 8 weeks off and 50% of their salary during their paid time off. In 2019, this number increases to 10 weeks and 55%. In 2020, the numbers will increase to 60%. Finally, in 2021, the numbers increase to 12 weeks and 67%.  
• However, in all of these circumstances, the employee may not take home more than the maximum percentage of the NY State Average Weekly Wage. This time off can be used in consecutive weeks or spread out throughout a 52 week period.
• PFL benefits are limited to family, and do not cover the employee’s own illness. It provides for leave for bonding with a child in the first 12 months after birth, placement in foster care or adoption, or to care for qualified family members who have a “serious health condition.” This means that some FMLA leave will not qualify for PFL, but PFL will most likely qualify for FMLA leave.
• If an employee takes a designated FMLA leave for their own serious health condition, it does not reduce the amount of paid family leave an employee is eligible for.
• If an employee refuses to apply for benefits for a qualified family leave under both FMLA and PFL, the employer and the carrier may charge the leave against the maximum duration of leave allowed, so long as the employer has notified the employee of their eligibility for both leaves.
• An employer covered by the FMLA that designates a concurrent period of family leave under this regulation may charge an employee’s accrued paid time off “in accordance with the provisions of the FMLA”. 
• When an employee takes intermittent leave, the employer is permitted to require that the employee provide notice before each day of leave taken.
• Disability benefits do not run concurrently with PFL benefits. In essence, an employee can take short-term disability leave before PFL followed by using their PFL benefits.
• The employer must continue to provide health insurance benefits while the employee is on leave if the employee receives their benefits through the employer. The employer also must reinstate the employee upon their return from PFL.
• Any dispute brought by an employee, employer or carrier is settled through an arbitration system that is on a strict timeline to settle the disputes quickly.