Author: Thomas S. Tripodianos

Question. Can a lienor recover for work performed outside the contract even if the lien is deemed to be willfully exaggerated

Answer. YES. This case gives us the opportunity to examine how and when a lien is deemed “willfully exaggerated” under the Mechanics Lien Law.

Architect seeks foreclosure of a mechanic’s lien and money damages based upon breach of contract, quantum meruit and unjust enrichment. Owner counterclaims for damages based upon willful exaggeration of a mechanic’s lien and breach of contract.

Architect entered into a written contract with Owner whereby Architect agreed to provide architectural services to Owner in connection with the construction of a multi-use building for the sum of $50,000. Pursuant to the contract, which was drafted by Architect, additional fees were permitted, for preparation of amendments to conform to as-built conditions if required. Additionally, Owner was responsible for all fees including filing fees, microfilming, and permit fees. Pursuant to the agreement, Owner paid $74,555.50 to Architect for services rendered and costs incurred. Architect’s invoices, which do not seem to have been prepared or sent to Owner on a regular basis, indicate that Owner still owed Architect an additional $68,664.21.

Several months later Architect added $46,200 to Owner’s invoice for “coordination of plans and applications due to excessive construction delays.” Then ten days later, Architect added an additional $12,357.75, which represented 18 percent interest, to Owner’s bill, even though the contract entered into between the parties made no provision for interest. This increased the amount allegedly owed to Architect to $127,938.96.

Eventually, an agreement was reached between the parties whereby Owner would pay Architect an additional $20,000 in settlement of all claims for services performed and fees incurred. As part of this agreement, Architect agreed to remove the mechanic’s lien, replace some documents in the file of the Department of Buildings and obtain a final certificate of occupancy.

Owner paid Architect $15,000 and Architect filed a satisfaction of mechanic’s lien. The final payment of $5,000 pursuant to the agreement was to be made upon the issuance of a final certificate of occupancy. During this time, however, Architect was being investigated and was stripped of his ability to make any filings with the Department of Buildings. Owner went to the Department of Buildings and obtained a final certificate of occupancy and refused to pay the final $5,000 to Architect.

Architect then added 18 percent interest ($8,470.42) to the invoice of Owner, and $5,000 for the filing of the final certificate of occupancy. Shortly thereafter, Architect filed mechanic’s liens in the amount of $126,409.38.

While the mechanic’s liens filed herein included amounts which were not authorized by the contract between the parties, the issue is whether any of the amounts charged were “wilfully exaggerated” pursuant to Lien Law ¬ß39.

The burden of proving “wilful exaggeration,” namely that the amounts set forth were “intentionally and deliberately exaggerated,” is on the owner of the property. To be “wilful,” the exaggeration cannot be based upon an honest mistake, inaccuracies or a difference in opinion.

In this case, the parties did not memorialize most of their conversations and any agreements subsequent to the written contract. Although Owner paid Architect $39,555.50 more than the contracted amount, except for the $15,000 toward the settlement, there is no documentary evidence corresponding to or explaining any of these additional payments. Although much of the work appears to have been performed and necessary, some of the charges were clearly unilaterally concocted by Architect without any reasonable explanation. These charges include the $46,200 which was added right before the filing of the first mechanic’s lien, and the seemingly random $12,357.75 and $8,470.42 of 18 percent interest charges. The interest charges were neither authorized nor mentioned in the written contract which was drafted by Architect. These interest charges cannot be claimed to be an honest mistake since a similar interest charge was made and reversed seemingly after Owner complained. Additionally, the timing of these charges support the finding of willfulness since they were made either immediately prior to the filing of a mechanic’s lien and/or so far removed in time from when the charges accrued indicating that they were retaliatory and/or merely to inflate the bill. Regardless of the motive, the foregoing charges were added to Owner’s invoice without any reasonable justification. Accordingly, Architect, prior to filing the mechanic’s liens sought to be foreclosed knowingly, purposefully and intentionally added unauthorized charges to Owner’s account in the amount of $67,028.07.

Since Owner sustained it’s burden of proving willful exaggeration of the mechanic’s lien, pursuant to ¬ß39 of the Lien Law, Architect’s mechanic’s liens should be declared to be void and Architect’s cause of action to foreclose is dismissed. Additionally, Owner is entitled to damages in the amount of $67,028.17, the exaggerated amount of the liens.

Even though Architect’s foreclosure action is dismissed based upon its willful exaggeration of its mechanic’s lien, it’s claims seeking to recover damages for unpaid work performed can still be maintained.

Question. General Contractor was hired by Owner to construct a building (the “Project”) in Manhattan. Allegedly owed approximately $11 million, General Contractor contends that Owner has diverted certain New York’s Lien Law trust fund monies owed to General Contractor and, ultimately, the subcontractors that worked on the Project. Owner restored the funds and has made them available in the form of present cash to meet future trust claims as they matured. Does the restoration of the funds establish a defense to General Contractor’s trust fund diversion claim?

Answer. YES. The Developer established a restoration defense to the trust funds diversion claim asserted by the general contractor.

Owner borrowed monies to fund the construction of the Project. The Construction and Project Loans were advanced as construction progressed. Owner requested advances by submitting monthly Draw Requests to the Bank. The Draw Requests had to be accompanied by a Draw Request Certification that contained affirmative representations by Owner to The Bank that, among other things, the funds being drawn would be applied to fund the Project.

On June 28, 2007, Owner entered into a contract with General Contractor that designated General Contractor as the Construction Manager for the Project. General Contractor entered into subcontracts with various trade contractors and vendors to perform the necessary work. Owner was not in privity with the subcontractors; it paid General Contractor and General Contractor was responsible for paying the subcontractors.

The Bank funded certain requisitions but Owner failed to remit all of the funded proceeds to General Contractor. In addition, Owner sold condominium units and paid the proceeds to The Bank rather than General Contractor in satisfaction of its loan obligations. In a nutshell, General Contractor alleges that the funded requisitions and sales proceeds were trust funds under New York’s Lien Law that Owner illegally diverted and all such trust funds should be recovered and returned to the benefit of General Contractor and the Trade Contractors, as the trust beneficiaries.

An agreement was eventually reached that contemplated the sale of the hotel portion of the Project free and clear of all liens, claims and interests. Some of the sale proceeds would be paid to The Bank in partial satisfaction of its claim. Some monies would fund an $11 million Trust Fund Account for the benefit of the Lien Law/trust fund claimants. The $11 million contribution to the Trust Fund Account was not an arbitrary amount, and reflected a settlement.

Owner concedes that the money it requisitioned from The Bank and the net proceeds from the sale of the condominium units constituted trust funds. It argues, however, that it did not divert these funds because it used them to pay other trust fund obligations. Furthermore, even if it diverted trust funds, it restored the diverted funds through the establishment of the $11 million Trust Fund Account under the Plan.

Under Article 3-A of the New York Lien Law, an owner holds in trust the funds received in connection with a contract for the improvement of real property, as well as any rights of action with respect to those funds. N.Y. Lien Law ¬ß 70. The trust comes into “existence from the time of the making of the contract … out of which the claim arises.” N.Y. Lien Law ¬ß 71(5). It continues “with respect to every asset of the trust until every trust claim … has been paid or discharged, or until such assets have been applied for the purposes of the trust.” N.Y. Lien Law ¬ß 70(3).

Trust funds must be “held and applied for the payment of the cost of improvement.” N.Y. Lien Law ¬ß 71(1). If the trustee is the owner, trust claims include “claims of contractors, subcontractors, architects, engineers, surveyors, laborers and materialmen arising out of the improvement, for which the owner is obligated, and also means any obligation of the owner incurred in connection with the improvement for a payment or expenditure defined as cost of improvement.” N.Y. Lien Law ¬ß 71(3)(a); accord N.Y. Lien Law ¬ß 2(5) (defining “cost of improvement”). The trustee holds bare legal title to the trust funds, and an equitable interest vests in the balance of the trust funds only after all trust claims have been satisfied.

The use of trust funds for non-trust purposes constitutes a diversion, and if done voluntarily by the trustee, is also a breach of trust. N.Y. Lien Law ¬ß 72(1). The failure to maintain the books and records required by the Lien Law regarding the trust creates a presumption that trust funds have been diverted, see N.Y. Lien Law ¬ß 75(4), but the presumption is only a “permissible inference” and does not shift the burden of proof. Furthermore, the trustee is not required to segregate the trust assets, and may treat the trust funds as running bookkeeping balances rather than as segregated accounts.

The use of trust funds to pay the Project Loan was improper, and constituted a diversion for two reasons. First, the payment of the Project Loan was not a “cost of improvement.” A “cost of improvement” as defined by N.Y. Lien Law ¬ß 2(5). Second, even if the repayment of the Project Loan was a “cost of improvement,” the use of trust funds was still a diversion because The Bank never filed a Notice of Lending. See Section 73(2) of the Lien Law.

While General Contractor has demonstrated that Owner diverted trust funds, Owner has established a defense of partial restoration. A trustee or its assignee may defend against a diversion claim by showing that the diverted funds have been restored, and that the funds are available to pay trust claims. The restoration defense is based on the principle that the law is not designed to impose a penalty upon a violator so as to create a windfall of double repayment for creditors. Moreover, voluntary restoration serves the same purpose as an order directing one liable for diversion to post security to assure the proper distribution of trust assets, or furnish assurance in any other manner that trust funds will be available to pay trust claims. In either case, the spirit of the Lien Law is fulfilled and trust beneficiaries can rely on the restored fund for the payment of their claims.

The settlement that led to the funding of the $11 million Trust Fund Account was intended to restore the trust up to that amount. The amount of the Trust Fund Account was based on the amount of General Contractor’s claim, and reestablished the trust in a segregated account.

Question. Is an insurance broker liable for failure to procure adequate insurance coverage where the insured received the policy without complaint?

Answer. YES, but the ultimate answer depends on the specific facts at hand.

Supplier is a business which sells and furnishes building materials to general contractors. Supplier is located in the Bronx, where Supplier is the sole tenant of a building it subleased from Landlord, which had procured the property by entering into a lease agreement with the Building Owner. Pursuant to the lease agreement between Landlord and Building Owner, Landlord was, among other things, required to procure general liability insurance from a carrier licensed to do business in the State of New York in the minimum amount of $5,000,000 for bodily injury and property damage. The sublease agreement between Supplier and Landlord, both owned and managed by the same person, noted that the sublessee consented to all the terms of the lease agreement.

Prior to October, Old Insurance Broker, not a party to this appeal, was Supplier’s insurance broker and procured a policy with the Old Insurance Company (Old Insurance Company), an excess line carrier not licensed in the State of New York. Landlord was named an additional insured under the policy. The policy did not comply with the requirements set forth by the lease agreements and was subsequently cancelled due to nonpayment of premiums. In October, Supplier hired New Insurance Broker to replace Old Insurance Broker as its insurance broker. New Insurance Broker arranged to reinstate the Old Insurance Company policy. Supplier claims that in its discussions with New Insurance Broker regarding a new policy, it specifically requested general liability coverage for its employees in case of injury, as required by the lease agreements. Supplier also alleged that it informed New Insurance Broker that only employees entered the premises, never customers, as no retail business was conducted at the Bronx location. Finally, Supplier claims that New Insurance Broker visited the premises and had assured Building Owner that the insurance deficiencies would be corrected when the policy was up for renewal.

New Insurance Broker then renewed the Old Insurance Company policy for the period of June through June. The policy was essentially the same as Supplier had previously received through Old Insurance Broker. The policy contained a cross liability exclusion clause that provided: “This insurance does not apply to any actual or alleged ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’ to… A present, former, future or prospective partner, officer, director, stockholder or employee of any insured.” Supplier did not read the insurance policy upon receipt, nor did the broker.

In October of the new policy period, one of Supplier’s employees was injured at the Bronx facility in the course of performing his duties. Old Insurance Company disclaimed coverage based upon the cross-liability exclusion. The Court agreed that Old Insurance Company had no duty to defend or indemnify based on the cross liability exclusion clause.

Supplier now claims its broker was negligent and breached the contract in connection with New Insurance Broker’s procurement of insufficient insurance. Supplier claims that it informed New Insurance Broker it required coverage if any employee injured himself or herself and therefore made a specific request for such coverage to New Insurance Broker. The opposing argument is that Supplier’s failure to read and understand the policy precludes recovery.

Insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage. To set forth a case for negligence or breach of contract against an insurance broker, a Supplier must establish that a specific request was made to the broker for the coverage that was not provided in the policy. A general request for coverage will not satisfy the requirement of a specific request for a certain type of coverage.

Here, Supplier claims that it specifically requested “general liability for the employees… if anybody was to trip and fall and get injured in any way.” Supplier also claims that New Insurance Broker was aware of Supplier’s operations, i.e., that there were no retail sales to the public at the premises and that the only persons at the premises were Supplier’s employees. New Insurance Broker, of course, maintains that the procured coverage satisfied Supplier’s request. Issues of fact exist as to whether Supplier specifically requested coverage for its employees in case of accidental injury and New Insurance Broker, being aware of such request, failed to procure the requested coverage.

Here, however, the evidence arguably supports Supplier’s claim. Since no one but employees ever entered the premises, the coverage New Insurance Broker obtained, which excluded coverage for injuries to employees, hardly made sense.

New Insurance Broker maintains, however, that Supplier’s claim is barred by its receipt of the insurance policy without complaint.

That Supplier requested specific coverage and upon receipt of the policy did not read it and lodged no complaint, should not bar Supplier from pursuing its claim against the broker. While it is certainly the better practice for an insured to read its policy, an insured should have a right to look to the expertise of its broker with respect to insurance matters. The failure to read the policy, at most, may give rise to a defense of comparative negligence but should not bar, altogether, an action against a broker

Because there are issues of fact as to whether Supplier requested specific coverage for its employees and whether New Insurance Broker failed to secure a policy as requested it cannot be determined which party is right in this case. However, Supplier’s failure to read and understand the policy should not be an absolute bar to recovery under the circumstances.

Question. Contractor executed a homeowner/contractor agreement with Homeowner for renovations to her property, to be financed by a loan provided by Bank. The loan was the subject of a rehabilitation loan agreement, executed by Homeowner and Bank. Can the Contractor sue the Bank for the work it completed on Homeowner’s home under the theory that it has benefitted Bank by increasing the home’s value..?

Answer. YES, under a third party beneficiary theory. The Contractor executed a Homeowner/Contractor Agreement with Homeowner for renovations to Homeowner’s property, to be financed by a loan provided by the Bank. The loan was the subject of a Rehabilitation Loan Agreement, (hereinafter the “Agreement “), executed by Homeowner and Bank.

Since the Contractor is not a party to this contract, and it did not sign any other contract with the Contractor, a breach of contract claim against Bank cannot stand. However, the Contractor does not argue that it has contracted directly with Bank, but that it is a third party beneficiary to the Agreement. It is sufficient to state here that the absence of a party’s name in a contract does not preclude a claim that the contract bestows a benefit upon him and that he is, therefore, a third party beneficiary of that contract.

In order to succeed on a claim that one is a third party beneficiary of a contract, it must be shown that a recognition in the right of performance in the Contractor is appropriate to effectuate the intention of the parties and the performance of the promise will satisfy an obligation of the Bank to pay money to the Contractor or the circumstances indicate that the Bank intends to give the Contractor the benefit of the promised performance. The Contractor must also show that the contract was intended to provide him with a benefit which was sufficiently immediate, rather than incidental, to support the assumption that Contractor would be entitled to compensation if the benefit was lost. The best evidence of the intent to grant a benefit to a third party, is the language of the contract itself.

The Agreement states that the “Lender [Bank] shall release the escrowed funds by check, payable to the Borrower [Homeowner] and/or the contractor [Contractor] or other appropriate payee who performed the work and supplied the materials in connection with this Agreement…” Surely, the performance of Bank’s promise to release the funds to Homeowner, will help to ensure that Homeowner will satisfy her obligation to pay the contractor (beneficiary). Importantly, it will effectuate the intention of the parties to the Agreement, which is to have Homeowner’s home rehabilitated with the funds provided by Bank. This intention could not be accomplished unless Contractor completed the work in Homeowner’s home. Indeed, Bank recognized this when it associated Contractor to the Agreement by requiring the Contractor to sign a “Notice To Contractor”, written on Bank letterhead, which specified how Bank expected the Contractor to perform the work on Homeowner’s home, and how Contractor would be paid by Bank. And the Contractor clearly stands in the position of one to whom the Agreement grants a benefit sufficiently immediate, so that it can reasonably be assumed, it would be entitled to compensation if the benefit under the Agreement was lost.

The Contractor also makes an unjust enrichment claim, theorizing that the work which it completed on Homeowner’s home has benefitted Bank by increasing the value of the home in which Bank holds a mortgage. This claim lacks merit inasmuch as it is a quasi-contractual remedy, and it has been held that when there is a valid and enforceable written contract governing the disputed subject matter, it precludes claims in quasi-contract. The prohibition of quasi-contractual claims where a written contract exists, applies to non-contracting parties as well.

Question. Lienor’s lien foreclosure action was settled by a stipulation of discontinuance contingent on General Contractor filing a demand for arbitration regarding the dispute as per the arbitration clause contained in the parties’ contract. Should the mechanic’s lien be vacated and the surety bond given to discharge the mechanic’s lien be cancelled?

Answer. YES. Under Lien Law ¬ß19(4), the filing of a surety bond discharged the mechanic’s lien. Further, as the lien foreclosure action was discontinued, and the parties agreed to go to arbitration, the surety bond was discharged as a surety on a bond given to discharge a mechanic’s lien was only obligated to satisfy a judicially established lien. Once Lienor discontinued the lien foreclosure action, defendants’ surety could no longer be compelled to pay an arbitral award out of the surety.

In March, Lienor and General Contractor entered into an agreement (the Agreement) whereby Lienor agreed to perform certain work at the premises. The Agreement contained an arbitration clause which required any controversy or claim arising out of the Agreement to be settled by arbitration.

In August, Lienor stopped work over an alleged dispute. In December, Lienor filed a Notice of Mechanic’s Lien against Owner; General Contractor was named in the lien as the party by whom Lienor was employed. Lienor then commenced an action to foreclose the Mechanic’s Lien the following June.

Subsequently, the lien was bonded.

Before answering in the litigation, the parties agreed to submit their dispute to arbitration, as required by the Agreement. As a result of the parties’ agreement to arbitrate, Lienor’s lien foreclosure action was settled by a stipulation of discontinuance. The Stipulation provides that the discontinuance was contingent upon General Contractor filing a demand for arbitration with the AAA with respect to the parties’ dispute. Subsequently, General Contractor filed the required demand for arbitration which was acknowledged by the AAA in January.

Owner and General Contractor seek to vacate, cancel and discharge the Mechanic’s Lien and Surety Bond.

In light of the fact that the lien foreclosure action has been discontinued and the parties have agreed to go to arbitration, the the Mechanic’s Lien has already been vacated and the Surety Bond is discharged. That is because a surety on a bond given to discharge a mechanic’s lien is only obligated to satisfy a judicially established lien. Hence, once Lienor discontinued its lien foreclosure action, defendants’ surety can no longer be compelled to pay an arbitral award out of the Surety Bond.

In order to prevent this unfortunate outcome, the Stipulation should have provided that Owner and General Contractor were to maintain the Surety Bond as a condition to Lienor’s staying its lien foreclosure action. The Stipulation the parties actually exchanged provided for a one-for-one exchange between Lienor on the one hand and Owner and General Contractor on the other. Specifically, the Stipulation provides that Lienor will discontinue its action to foreclose its Mechanic’s Lien so long as General Contractor files a demand for arbitration.

Question. Is an employee who worked on a mix of private and public projects, but cannot identify the specific “public works” contracts he worked on entitled to be paid the prevailing wage for time spent on “public works” projects?

Answer. NO. Because there was no evidence Employer agreed to pay its workers a prevailing wage, Employee could not maintain a contract breach action. Thus, he was limited to statutory enforcement mechanisms under §220 or other laws.

Employee alleges he is entitled to be paid the prevailing wage for time he spent working on “public works” projects pursuant to contracts that Employer allegedly made with various public entities. Employee maintains that he was an intended third-party beneficiary of those contracts, which under New York Labor Law Section 220 (“Section 220”) would have been required to contain a provision guaranteeing that each laborer on the project was paid a prevailing wage. Section 220 provides in relevant part:

The wages to be paid for a legal day’s work, as hereinbefore defined, to laborers, workmen or mechanics upon such public works, shall be not less than the prevailing rate of wages as hereinafter defined…. Such contracts shall contain a provision that each laborer, workman or mechanic, employed by such contractor, subcontractor or other person about or upon such public work, shall be paid the wages herein provided.

N.Y. LABOR L. §220(3)(a) (emphasis added). Among other things, Section 220 gives employees a statutory mechanism with which to initiate an administrative enforcement proceeding.

Employee is suing to enforce Employer’s alleged public works contracts on a third-party beneficiary theory. In New York, a party asserting rights as a third-party beneficiary must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost. And, New York law is clear that laborers may ordinarily assert third-party beneficiary claims to enforce the “prevailing wage” provision that Section 220 requires of public works contracts. But because there is no evidence that Employer contracted to pay its laborers a prevailing wage, the issue is whether Employee can maintain a breach of contract case even though he cannot point to a contract with a prevailing wage clause. Employee cannot.

New York courts have indicated that a breach of contract claim depends on the actual insertion of Section 220’s prevailing wage language into the contract. In short, although Section 220 sets out what Employer was supposed to promise in its public works contracts, Employee needs to prove what Employer actually promised before he can prevail in a breach of contract case.

Because there is no evidence that Employer actually agreed to pay its workers a prevailing wage, Employee cannot maintain a breach of contract action. Employee is limited to the statutory enforcement mechanisms under Section 220 or other laws.

Question. Can a Home Owners Association (HOA) sue a developer of residential units completed and sold fifteen years ago for indemnification when a resident slips and falls in the street even though the statute of limitations (the time within which a law suit can be commenced) for negligence is three years and for breach of contract six years?

Answer. YES. The answer to whether someone can sue you is almost always yes. However, before thoughts of never-ending liability come into mind realize this does not mean all lawsuits are successful. Unfortunately, even unsuccessful suits must be defended.

The lawsuit we are talking about here arises when the plaintiff slipped on black ice. The plaintiff sued the HOA and the snow removal company. The HOA in turn sued the developer for breach of contract, negligence and common law indemnification. The breach of contract and negligence claims are clearly outside the statute of limitations and will fail. The common law indemnification is viable.

The statute of limitations applicable to a claim of common law indemnification is six years. The concept of common law indemnification (also referred to as “implied indemnification”) is rooted in the principal of equity and recognizes that a person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity. In other words, if and when the HOA is made to pay for plaintiff’s injuries the HOA argues, such payment should have been made by the Developer. Therefore, because of the quasi contractual nature of the indemnification action, the six year limitations period applicable to a breach of contract claim is applied.

However, a cause of action for indemnification is not complete until loss is suffered. This occurs upon payment by the party seeking indemnity. An indemnity claim is a substantive cause of action that is independent of the underlying wrong for which the claim arises out of (i.e. the slip and fall). So the clock on the six year statute of limitations for indemnification does not begin to tick until the HOA is compelled to pay the plaintiff. Nonetheless, asserting such a claim before a loss has been suffered is permissib le.

So we’ve now established that the HOA can sue. But will they win? In order for a party to establish a claim for common law indemnification, it must be proven (1) that the party seeking indemnification [the HOA] was not negligent, (2) that the person indemnification is being sought from (the indemnitor) [the Developer] was responsible for the negligence that contributed to the injury claimed, and (3) in the absence of negligence, that the indemnitor [the Developer] had the authority to direct, supervise and control the work giving rise to the injury, and that the indemnitor [the Developer] actually exercised such supervision and control.

Common-law indemnification is predicated on “vicarious liability without actual fault,” which necessitates that a party who has itself actually participated to some degree in the wrongdoing cannot receive the benefits of the doctrine. So if for example, the HOA failed to properly maintain the sidewalk and street (as is required by many offering plans and municipal codes) and that failure contributed in even the most minute way to plaintiff’s injuries, the HOA’s cause of action for common law indemnification will also fail. If the HOA is found liable in the main action, it will likely be because it failed in these duties and consequently shares part of the blame. Therefore, it will likely be barred from obtaining indemnification.

Question. Does a Supplier have any right to increase the price for materials after delivery based upon its mistake in pricing?

Answer. NO. The agreed-upon price for the materials delivered by the Supplier to the Contractor, was $1.00 per unit, and the Supplier had no right to increase the price for the materials after delivery based upon its one-sided mistake in pricing. The Supplier renounced its agreement to supply Contractor with certain materials, thus forcing Contractor to purchase the materials from another supplier at a higher price. Contractor is entitled to recover the difference in price.

Question. Owner alleges Contractor fraudulently induced him to contract with Construction Company, making misrepresentations about the company. Owner made an initial payment but Construction Company abandoned the project a month later. Owner attempted to show that Contractor could not have expected Construction Company to perform by pointing to other suits and allegations of failure to pay subcontractors. Was Owner defrauded?

Answer. NO. Owner alleges fraud based on breach of contract arising out of a written contract entered into between Owner and Construction Company. Owner and Construction Company entered into a standard AIA construction contract whereby Construction Company agreed to provide services for the project, Owner’s residence. Owner alleges that Contractor, a principal of Construction Company fraudulently induced him to contract with Construction Company, and that he made misrepresentations regarding Construction Company.

Contractor states that not long after the contract was executed, he suffered illness and his partners took over control of the operations of Construction Company. Through a combination of mismanagement and the bad economy Construction Company’s business failed with a number of projects unfinished, including the Owner Project.

Owner alleges that Contractor misrepresented to Owner that (1) Construction Company fully intended to perform [the Owner Project] for which it was hired, and (2) that the down payment would be used strictly for the [Owner Project] and would not be used for any other purpose. Owner further alleges that Contractor misrepresented that Construction Company was licensed to conduct the work outlined in the agreement and qualified to complete the work and furnish the materials outlined therein.

Contractor has copies of invoices and other documents purchased by Construction Company in connection with this project, and Construction Company was a licensed home improvement contractor during the relevant time periods.

Fraud in the inducement must be shown by the party asserting the fraud by clear and convincing evidence. The party asserting the fraud must show that the signer knew the terms of the contract, assented to the terms of the contract, and intended to execute the contract, but the assent itself was induced by a fraudulent representation. It requires a knowing misrepresentation of material fact, intent to deceive another party and to induce that party to act on it, causing injury. Owner alleges that Contractor, the only person with whom he dealt regarding the transaction, represented to Owner that Construction Company fully intended to perform the contract.

Owner attempts to show Contractor could not have expected Construction Company to perform by pointing to other lawsuits, and allegations of failing to pay subcontractors which originated prior to execution of this contract.

Owner also asserts there were representations about how the down payment would be applied, but such representations are alleged to have been made after the execution of the contract. The contract, which already stated the terms of how the funds would be applied, was signed before these representations were made and thus could not have induced the signing of the contract.

The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the Owner and damages.

The law is well settled that a cause of action for fraud does not arise when the only alleged fraud relates to a breach of contract. Owner in asserting a fraud claim in the context of a contractual relationship must establish that the alleged false representation of facts was collateral and extraneous to the contract.

Article 1 of the contract states, “the contractor shall fully execute the Work described in the Contract Documents..” Thus, the allegation that Contractor misrepresented that Construction Company fully intended to perform the project for which it was hired, is nothing more than a representation that Construction Company would perform its obligations under the contract. Moreover, Article 4 of the contract provides that the down payment would be “applied against the first progress payment(s) due to the Contractor.” Owner’s cause of action alleging that Contractor represented that “[the down payment] would be used strictly for contracting services at Owner’s residence and would not be used for any other purpose” is unsupported since Article 4 of the contract set forth how the down payment would be used, and there was no written modification of that provision as would be required under the contract. Owner has failed to address how the allegations of fraud are collateral to the contract, and as such, Owner has not met his burden and his claim must fail.