The general rule is that an officer of a corporation is not ordinarily liable in his individual capacity for actions taken on behalf of the corporation.  However, there are certain exceptions where he may be held personally liable.  One of the exceptions to the general rule is when an officer of the corporation participates in a tortious act, even if the participation of the corporate officer is in the interest of the corporation.

In the case of Power Air Conditioning Corp. v. Batirest 229 LLC, the court ruled on whether a corporate officer can be personally liable for filing a willfully exaggerated mechanic’s lien. 

Background

In February of 2014, Power Air Conditioning entered into a subcontract with IBC Business Groups, LLC, then the general contractor for a construction project at the premises owned by Batirest 229, LLC. Eighteen months later, Batirest terminated IBC as general contractor and hired Lithos Construction Solutions, Inc. as its replacement contractor. Power A/C entered into a new subcontract with Lithos, and a separate agreement with Batirest itself. Power A/C’s agreement with Batirest incorporated its agreements with Lithos and also required Batirest to pay Power A/C certain amounts for its work on the project.

Batirest became delinquent in paying Power A/C, IBC and Lithos, and all three filed mechanic’s liens against Batirest’s property. These liens were personally verified by Don Emanuel, Rance MacFarland and Andreas Christofakis, in their capacity as officers of Power A/C, IBC and Lithos, respectively. Power A/C commenced a lawsuit seeking to foreclose on its lien against Batirest. In its answer, Batirest asserted counterclaims for, among other things, willful exaggeration of mechanic’s liens and injury to property under General Construction Law § 25-b against the three entities and their respective officers individually. The officers of the three contractors moved to dismiss the personal claims against them, arguing that they cannot be held personally liable for acts taken on behalf of the corporation.

Decision

The court denied the individuals’ motion to dismiss the claims against them for willful exaggeration of mechanic’s liens. In doing so, the court relied on well-established case law that although an officer of a corporation is not ordinarily liable in his individual capacity for actions taken on behalf of a corporation, such insulation does not extend to corporate officers who participate in the commission of a tortious act—even if it is within the scope of his duties and for the benefit of the corporation. The tort here was the improper filing of willfully exaggerated mechanic’s liens by intentionally inflating the amounts of the liens, including by adding amounts for work the corporations did not perform, and subsequently verifying and filing the liens in their capacity as officers of their respective corporations.  

As to the claim for violating Section 25-b of the General Construction Law (which provides that “injury to property” is an actionable act), the court held that the sanctions set forth in Sections 39 and 39-a of the Lien Law for the willful exaggeration of a mechanic’s lien were exclusive remedies, and a claim on a different theory could not be maintained.

Comment

Although intentionally inflating the amount of a mechanic’s lien may be a good way to get someone’s attention, it has long been known to be a bad strategy because not only is the lien void (and it cannot be re-filed in the correct amount), the damages recoverable against the exaggerating lienor include the amount of any lien bond premium to discharge the lien, reasonable attorney’s fees and an amount equal to the difference by which the willfully exaggerated amount exceeds the amount actually due to the lienor. 

Subcontractors’ claims under a theory of unjust enrichment against owners are often one of those “Hail Mary” passes that they make when they have no other legal remedies available, such as a breach of contract action or where mechanic’s lien rights have expired. 

To recover in unjust enrichment against an owner, a subcontractor must demonstrate that the owner, by its actions, has agreed to pay the general contractor’s debt.  In the case of County Wide Flooring Corp. v. Town of Huntington, the Court addressed a subcontractors’ claim of unjust enrichment against an owner.   

Background

County Wide entered into a subcontract with Wenger Construction Co., Inc. to install flooring and perform related work in connection with the expansion of an ice rink in Dix Hills Park in the Town of Huntington. County Wide was owed $147,930.87 in connection with the work that it performed at the project.    

County Wide commenced a lawsuit against Wenger, the Town, and Hanover Insurance Co., Wenger’s payment bond surety. Both Wenger and Hanover moved to dismiss the respective claims against them, arguing that as the lawsuit was commenced more than one year after the completion of County Wide’s work at the project, those claims were time-barred under the terms of the subcontract and the payment bond. County Wide’s claim against the Town, however, remained to be adjudicated. The Town later moved for summary judgment dismissing the unjust enrichment claim, arguing that the existence of the contract between County Wide and Wenger bars the claim against the Town for unjust enrichment.

Decision

The court granted the Town’s motion and dismissed the unjust enrichment claim, relying upon well settled case law that the existence of an express contract between a general contractor and a subcontractor precludes an owner from being held liable to the subcontractor for unjust enrichment unless the owner has, in fact, agreed to such an obligation. The court pointed out that the mere fact that the owner has consented to the improvements provided by the subcontractor and has accepted their benefit does not render the owner liable to the subcontractor, whose sole remedy is against the general contractor.

As to County Wide’s reliance upon Section 106-b of the General Municipal Law, which sets forth the procedure for payment on public projects, the court cited the language of the statute itself, which provides that it shall not be construed to create any independent obligation on the part of a public owner to pay or see to the payment of monies owed to any subcontractor.

Finally, the court noted that the record “does not reflect that the Town expressed a willingness to pay County Wide for the work it performed at the ice rink.”

Comment

Typically, a subcontractor who does not have a contractual relationship with an owner will seek to enforce a mechanic’s lien on the project to recover payment refused him by the general contractor. Where the subcontractor has failed to comply with the filing time limits or other technical requirements of the Lien Law, the subcontractor will seek to invoke equity to prevent the owner’s being unjustly enriched at the subcontractor’s expense. But, as this court demonstrates, “unjust enrichment” is always a difficult theory of recovery against the owner.  

New York’s construction trust-fund statutes provide that all payments to a contractor on a project are held as trust funds to be used to pay subcontractors, material suppliers and laborers. The trust fund statutes are intended to prevent contractors from paying creditors on other projects or keeping the monies for themselves, rather than paying for the costs of construction on the project. If the contractor diverts such funds to pay other non-project creditors, personal—and even criminal—liability can be imposed for the trust fund diversion.

Section 76(1) of the Lien Law provides for beneficiaries of the trust, such as unpaid subcontractors, to demand a verified statement from the contractor, itemizing all monies that the contractor received and spent on the project. If the verified statement fails to fully account for the funds on the project, there is a statutory presumption of a wrongful diversion of trust assets, thereby exposing the contractor to liability for the unpaid amount owed to the subcontractor.

In the recent case of Onekey, LLC v Knight Harte Construction, Inc., the court addressed the adequacy of a contractor’s verified statement, as required by the statute.

Background

Onekey was the general contractor for a construction project on East 61^st Street in New York City, and Knight Harte was a subcontractor retained to furnish and install the millwork and carpentry work. The base contract sum was $253,050, which was increased to $467,842 as a result of change orders. A dispute arose over Onekey’s payments to Knight Harte, with Onekey claiming that Knight Harte completed less than 56% of its work under the contract and, having been paid $237,863, Knight Harte was actually overpaid by $2,311. Knight Harte, on the other hand, claimed that it had completed its work at the project, and it was owed $235,082.

Knight Harte filed a mechanic’s lien on the project seeking the $235,082 it claimed was owed. It served a demand under Lien Law §76(1) for a verified statement on Onekey “setting forth the entries contained in Onekey, LLC’s books and records” with respect to the trust funds received by Onekey in connection with the project. In response, Onekey sent Knight Harte a single page spreadsheet setting forth the items from Knight Harte’s schedule of values, and the amounts paid by Onekey to Knight Harte for these items. Thereafter, Knight Harte requested that the court direct Onekey to provide a proper verified statement of trust, arguing that it was entitled to a detailed accounting covering all of the trust funds received from the owner, not simply records relating to Knight Harte. Onekey argued in opposition that inasmuch as it had obtained a mechanic’s lien discharge bond that would secure payment to Knight Harte, the primary purpose of the trust fund statutes—to assure payment to subcontractors—had been met. Therefore, according to Onekey, there was no longer a need to provide Knight Harte with a more detailed verified statement.

Decision

The court determined that the verified statement provided by Onekey was inadequate because it only related to Knight Harte, which is only a portion of the required trust. It did not contain the statutorily required entries regarding what trust assets were received, what trust payments were made by Onekey, or the specific information underlying each trust transaction. The spreadsheet furnished by Onekey was also deficient because it did not set forth “the names, addresses, dates of payment or receipt, dates sums become due or are earned or become payable, conditions of payment, nature of claims paid, whether by check or cash, or other relevant details, as required by the statute”. The court directed Onekey to provide a further verified statement of all trust assets it received in compliance with the trust fund statute.

Comment

Construction trust fund statutes can be a valuable tool for unpaid subcontractors and material suppliers. They impose fiduciary trustee duties upon a contractor to use the funds it receives to pay project subcontractors, material suppliers and laborers. A right to recover under the construction trust fund statute for diversion of trust funds may be the only source of recovery where there are no mechanic’s lien rights or where there is no protection under a labor and material payment bond. 

In the recent case of County Wide Flooring Corp. v Town of Huntington, the court addressed a contractor’s motion to dismiss a subcontractor’s mechanic’s lien foreclosure action commenced against the contractor and the Town of Huntington.

Background

County Wide entered into a subcontract with Wenger Construction Co., Inc. to install flooring and perform related work in connection with the expansion of an ice rink in Dix Hills Park in the Town of Huntington. County Wide was owed $147,930.87 in connection with the work that it performed at the project, and it filed a mechanic’s lien against the project on December 30, 2011, which it renewed on December 7, 2012, but did not renew after that.

On March 7, 2014, the plaintiff commenced a lawsuit against Wenger, the Town, and Hanover Insurance Co., Wenger’s payment bond surety. For various reasons applicable to different parties, that lawsuit (which did not seek to foreclose the mechanic’s lien) was ultimately dismissed. County Wide filed a new mechanic’s lien against the project on December 2, 2015, and it commenced a new lawsuit against Wenger and the Town to foreclose on that lien.

Wenger moved to dismiss the new lawsuit, claiming that the underlying mechanic’s lien was not timely filed. In opposition, County Wide argued that Section 12 of the Lien Law allows for the filing of a mechanic’ lien on a public improvement project any time prior to, or within 30 days after, the completion or acceptance of a public improvement. According to County Wide, the ice rink project had not been completed and accepted by the Town and, therefore, it’s lien was timely filed. In reply, Wenger argued that its last day on the project was October 20, 2011, that the Town issued a formal termination letter to Wenger on May 2, 2012 and, accordingly, County Wide’s lien had to be filed no later than June 1, 2012 (30 days after its termination).

Decision

The court upheld County Wide’s complaint and declined to dismiss the lien foreclosure action. In doing so, the court held that Section 12 of the Lien Law did not prevent the filing of successive mechanic’s liens for the same work as long as the second lien is filed within the 30-day statutory time limit.

As to the timing of the filing of the lien, the court cited well-established law that the right to file a lien under a contract for a public improvement does not expire until 30 days after the improvement is “completed and accepted” by the state or public corporation. If the requirements regarding formalities of acceptance are specified in the contract, such as the filing of a final certificate of acceptance, the court stated that they must be followed and a subcontractor may rely on them in deciding when to file a notice of lien.

With these principles established, the court noted that it was not provided with the contract between Wenger and the Town and, accordingly, it could not determine whether the Town’s cancellation and termination of Wenger’s contract on May 2, 2012 qualified as “completion and acceptance” for purpose of determining when the 30-day time period to file a mechanic’s lien started to run. Without a contract for review, and without knowledge of the events leading to the cancellation and termination of Wenger’s contract, the court was unable to determine if the Town’s hiring of another contractor to complete the project after Wenger’s termination served to toll the running of the 30-day period until the completion of the project by the replacement contractor, and whether the specific contractual provisions relating to completion and acceptance of the work were satisfied. The court also noted that the Town’s taking possession of the building and assuming its operation and maintenance before a final certificate was issued was not automatically determinative of whether acceptance had taken place.

Comment

A mechanic’s lien is a powerful tool for a subcontractor to use in its efforts to collect monies owed for its work. However, resorting to that tool requires strict compliance with the provisions set forth in the Lien Law, including the time limit for filing the lien. The time period for filing a mechanic’s lien on a public improvement project is 30 days from the completion of the project and the public owner’s acceptance of the work. As this case demonstrates, it may actually be years before the 30-day period starts to run after completion and acceptance. However, as the determination of a project’s completeness and acceptance is determined in accordance with the provisions of a contract that a subcontractor may not be in possession of, it is advisable for the subcontractor to file the lien as soon as it is clear that it is not receiving payment for its work. 

In the recent case of County Wide Flooring Corp. v Town of Huntington, the court addressed a contractor’s motion to dismiss a subcontractor’s mechanic’s lien foreclosure action commenced against the contractor and the Town of Huntington.

Background

County Wide entered into a subcontract with Wenger Construction Co., Inc. to install flooring and perform related work in connection with the expansion of an ice rink in Dix Hills Park in the Town of Huntington. County Wide was owed $147,930.87 in connection with the work that it performed at the project, and it filed a mechanic’s lien against the project on December 30, 2011, which it renewed on December 7, 2012, but did not renew after that.

On March 7, 2014, the plaintiff commenced a lawsuit against Wenger, the Town, and Hanover Insurance Co., Wenger’s payment bond surety. For various reasons applicable to different parties, that lawsuit (which did not seek to foreclose the mechanic’s lien) was ultimately dismissed. County Wide filed a new mechanic’s lien against the project on December 2, 2015, and it commenced a new lawsuit against Wenger and the Town to foreclose on that lien.

Wenger moved to dismiss the new lawsuit, claiming that the underlying mechanic’s lien was not timely filed. In opposition, County Wide argued that Section 12 of the Lien Law allows for the filing of a mechanic’ lien on a public improvement project any time prior to, or within 30 days after, the completion or acceptance of a public improvement. According to County Wide, the ice rink project had not been completed and accepted by the Town and, therefore, it’s lien was timely filed. In reply, Wenger argued that its last day on the project was October 20, 2011, that the Town issued a formal termination letter to Wenger on May 2, 2012 and, accordingly, County Wide’s lien had to be filed no later than June 1, 2012 (30 days after its termination).

Decision

The court upheld County Wide’s complaint and declined to dismiss the lien foreclosure action. In doing so, the court held that Section 12 of the Lien Law did not prevent the filing of successive mechanic’s liens for the same work as long as the second lien is filed within the 30-day statutory time limit.

As to the timing of the filing of the lien, the court cited well-established law that the right to file a lien under a contract for a public improvement does not expire until 30 days after the improvement is “completed and accepted” by the state or public corporation. If the requirements regarding formalities of acceptance are specified in the contract, such as the filing of a final certificate of acceptance, the court stated that they must be followed and a subcontractor may rely on them in deciding when to file a notice of lien.

With these principles established, the court noted that it was not provided with the contract between Wenger and the Town and, accordingly, it could not determine whether the Town’s cancellation and termination of Wenger’s contract on May 2, 2012 qualified as “completion and acceptance” for purpose of determining when the 30-day time period to file a mechanic’s lien started to run. Without a contract for review, and without knowledge of the events leading to the cancellation and termination of Wenger’s contract, the court was unable to determine if the Town’s hiring of another contractor to complete the project after Wenger’s termination served to toll the running of the 30-day period until the completion of the project by the replacement contractor, and whether the specific contractual provisions relating to completion and acceptance of the work were satisfied. The court also noted that the Town’s taking possession of the building and assuming its operation and maintenance before a final certificate was issued was not automatically determinative of whether acceptance had taken place.

Comment

A mechanic’s lien is a powerful tool for a subcontractor to use in its efforts to collect monies owed for its work. However, resorting to that tool requires strict compliance with the provisions set forth in the Lien Law, including the time limit for filing the lien. The time period for filing a mechanic’s lien on a public improvement project is 30 days from the completion of the project and the public owner’s acceptance of the work. As this case demonstrates, it may actually be years before the 30-day period starts to run after completion and acceptance. However, as the determination of a project’s completeness and acceptance is determined in accordance with the provisions of a contract that a subcontractor may not be in possession of, it is advisable for the subcontractor to file the lien as soon as it is clear that it is not receiving payment for its work.

New York’s competitive bidding statutes require contracts for public work to be awarded to the lowest responsible and responsive bidder. The statutes are designed to reject a contractor who is unqualified or whose bid is not responsive to the criteria in the request for bids. Although the law does not define “responsible”, it has been interpreted as meaning that the low bidder has sufficient skill, experience, financial resources and integrity to perform the contract. Bid responsiveness, on the other hand, is the factor most likely to cause problems in the bid selection process, as shown in the recent case of Matter of Framan Mechanical, Inc. v State University Construction Fund.

Background

In November of 2015,  the State University Construction Fund (“SUCF”) solicited bids for  HVAC upgrades at SUNY Downstate Medical Campus. The bid specifications required the bidders to “demonstrate, to the satisfaction of  [SUCF], that it has successfully completed one (1) contract of similar size, scope and complexity to this contract within the last five (5) years”. Framan submitted a bid that identified certain work at the SUNY Stony Brook Life Sciences building, completed earlier that year, as it’s prior similar project.

After reviewing Framan’s prior project, the SUCF advised Framan that the prior project did not “satisfy the requirements for size, scope and complexity”, as defined in the request for bids.  SUCF provided Framan with the opportunity to provide information about another similar project. However, rather than provide information about a different project, Framan submitted a detailed explanation as to how the prior project at Stony Brook was, in fact, a similar project. The SUCF ultimately rejected Framan’s bid as unresponsive because the prior project was not successfully completed and poorly performed. Framan commenced an Article 78 proceeding challenging  SUCF’s determination to reject its low bid.

Decision

In its petition, Framan  argued that its prior project was indeed similar to the project under bid, and that the issues claimed by SUCF were fabricated to cover the actual reason for the SUCF’s determination, which was retaliation against Framan for its commencement of a breach of contract lawsuit seeking nearly $3,000,000 from SUCF arising out of that prior project. In opposition,  SUCF submitted evidence showing that the prior project was quite complicated because the existing equipment that maintains temperature and humidity controls in the laboratory spaces to be upgraded were, by the nature of their use, sensitive to disruption. Adding to the complexity,  the project under bid had to be completed in phases in a building that would require continuous cleaning in light of its use as an active laboratory and animal research facility, and would have to remain occupied throughout the project.  

In light of the sensitive nature of the project under bid, the court relied on SUCF’s determination of a “‘pattern of violation of contract requirements’ including ‘(1) [f]ailure to complete the [prior] project on time; (2) [f]ailure to complete project work, requiring [ SUCF] to hire contractors to complete the work; (3) [r]epeated failures to follow directions from [ SUCF] and its consultant; (4) [f]lagrant safety violations; (5) [c]onsiderable disruption to building occupants, including numerous building evacuations and building service outages; (6) [f]ailure to keep the project site clean; (7) [f]ailure to comply with permit requirements resulting in permit revocation and stop work orders being issued[;] and (8) [p]roperty damage to the project and campus’”. Accordingly, the court found that SUCF had a sufficiently rational basis to reject Framan’s bid as not responsive because it determined that the prior project was not a “similarly successfully completed project”. As to Framan’s claim of retaliation, the court noted that the fact of the Framan’s breach of contract lawsuit was not evidence of retaliation by SUCF but, rather, evidence that the project was not successfully completed. The appellate court affirmed the lower court’s dismissal of Framan’s petition.

Comment

Public agencies have broad discretion in determining what constitutes compliance with the bid documents. Here, the agency’s determination that the prior project was not successfully completed was supported by ample evidence and, therefore, was neither arbitrary nor capricious. This case demonstrates yet again that a court will not substitute its judgment for that of the contracting agency unless its decision was irrational, dishonest or otherwise unlawful.

The Attorney’s Column has cautioned contractors of short contractual limitation periods within which to commence a lawsuit. The generally applicable New York statute of limitations provides for a six year time limit to start an action for breach of contract. Contractors, however, should be made aware that a construction contract may provide a much shorter time limitation within which the lawsuit must be commenced. Shortened contractual time periods are often written into construction bond and insurance contracts. The contractual time period will be enforced by the courts, provided the time period is not unreasonably short.

In the recent case of AWI Security & Investigations, Inc. v Whitestone Construction Corp., the court addressed a contractual six month time to sue limitation.

Background

Whitestone entered into four contracts with AWI for security services at school or housing project worksites. All four contracts contained the following provision:

Limitation on Suit:

No claim or action by [plaintiff] arising out of or related to this Agreement shall lie or be maintained against [defendant] unless such action is commenced no later than six (6) months after either (a) the cause of action accrues, (b) the termination or conclusion of this agreement, or (c) the last day [plaintiff] performed any physical work at the Project site, whichever of the proceeding [sic] events shall occur first.

AWI performed its services at the four jobsites through April of 2012. In July of 2014, AWI sued Whitestone, claiming that it was not paid for its services. Whitestone moved to dismiss the action based on the six month contractual time to sue limitation. AWI opposed the motion, arguing that: (1) Whitestone had a continuing obligation under Section 106 of the General Municipal Law to remit to AWI payments that Whitestone received from the City of New York on account of AWI’s work; and (2) Whitestone’s counsel acknowledged in writing, in June of 2012, that the amounts owing to AWI were not then due.

Decision

The court granted Whitestone’s motion and dismissed the complaint, finding that the lawsuit was indeed commenced more than six months after the earliest of the first of the three triggering events. In doing so, the court noted that AWI made no challenge to the shortened six month time to sue limitation period as being unreasonably short or the product of overreaching by Whitestone. With no such challenge having been made, the court went on to rule that Section 106 of the General Municipal Law, which requires prompt payment to subcontractors after receipt of payment from public owners, did not effectively extend the contractual limitation period. In a like vein, the court rejected the argument that the June, 2012 letter of acknowledgement from Whitestone’s counsel acted to extend the time limitation period, holding that the written acknowledgement would have had to have been of an existing debt, and the debt was not existing at the time of the acknowledgement.

Comment

The courts continue to enforce agreed-upon shortened contractual time to sue limitations. There is little else in the law that can destroy a case so quickly as a short time to sue period. The courts do not have any discretion to extend the short contractual time limitation period, even though there may be good reasons for delay in starting the lawsuit. An unpaid claimant is well advised to become familiar with the contractual time to sue limitation period. A claim will often be lost if the limitation period is not complied with. 

The recent case of CTS Contracting, Inc. v Town of Cheektowaga, raises the issue of whether a town could engage a second contractor to perform emergency snow removal work without competitive bidding where the town already completed the competitive bidding process and awarded a contract to the first contractor.

Background

The Town of Cheektowaga undertook a competitive bidding process to retain an emergency snow removal contractor, and awarded a contract to CTS Contracting, Inc. CTS  used seven subcontractors in the course of carrying out a portion of the work under the contract.  In addition to CTS, the Town thereafter engaged another contractor to perform snow removal work.

CTS commenced a lawsuit against the Town, claiming that the Town, by retaining another snow removal contractor, had breached CTS’s contract. The Town  moved for summary judgment dismissing the complaint, arguing that: (1) section 103(4) of the General Municipal Law permits municipalities to let contracts without public bidding where there is a public emergency arising out of unforeseen circumstances; (2) CTS’s subcontracting of its contract work to other subcontractors violated the anti-subletting provisions of section 138 of the State Finance Law and section 109 of the General Municipal Law; and (3) CTS’s contract was non-exclusive, and therefore, the Town had the right to engage  other contractors to perform the snow removal work.

The lower court denied the Town’s motion for summary judgment and the Town appealed the decision.

Decision

The appellate court affirmed the lower court’s decision to deny the Town's motion for summary judgement dismissing the complaint.  First, as to the “public emergency” argument, the court held that the public emergency had to be unforeseeable such that the municipality did not have time to advertise for bids for emergency snow removal.  The fact that the Town had already solicited competitive bids and awarded a contract to CTS covering the same “emergency” snow removal work demonstrates that the “emergency” work performed by the second contractor was reasonably foreseeable by the Town and, therefore, did not qualify as an exception to the competitive bidding requirement for public work.  

As to the Town’s “anti-subletting” argument, the court found that the Town’s knowledge of CTS’s use of subcontractors and its failure to object to the subcontracting indicated that there were questions of fact to be determined at trial as to whether the Town had waived the protection afforded by the anti-subletting statutes.  The court pointed out that “a party may not, with full knowledge of all the facts, have the benefit of work done… by a subcontractor without objection, and then urge as an excuse for not paying for the same that the sub-contractor was not consented to by him.” The court also found that notwithstanding the waiver issue, there were factual questions as to whether the use of subcontractors violated the anti-subletting statutes.

Finally, as to the “non-exclusivity” argument, the court followed well settled law that the contract must be interpreted to give effect to, and not nullify, it’s primary purpose. In doing so, the court found that the Town’s awarding a second contract to perform the same work would render  CTS’s contract meaningless.

Comment

The CTS court applied established case law to hold that a Town could not award a second contract covering the same scope of work as an existing contract. While the Town had argued that CTS did not have the capacity to handle a major snowfall, the Town improperly retained the second contractor to perform all of CTS’s work, and not just the “excess” work that CTS could not handle. 

It is a general rule of law that a party induced by fraud to enter into a contract may, upon discovery of the fraud, elect either to rescind the contract or continue his performance and seek recovery for any damages he may have suffered as a result of the fraud.

In the recent case of Pike Company, Inc., v Jersen Construction Group, LLC, a subcontractor claimed that the general contractor made intentionally false statements in order to induce the subcontractor to enter into the contract.

Background

Pike was the general contractor for a construction project at SUNY Plattsburgh. Pike entered into a subcontract with Jersen under which Jersen would perform masonry work after the “concrete foundations were installed, structural steel was in place, metal framing was erected and the concrete floors had been poured.” Before Jersen began work on the project, Pike was informed by at least one of its other subcontractors that its substrate work was not “accurate, flat or level,” and was deficient. Nevertheless, prior to entering into the subcontract, Pike represented to Jersen that the substrate work “had been erected in accordance with the contract requirements and was plumb, level, and true and that [Pike] had performed a professional survey of the structural steel to confirm the same.”

Pike commenced a lawsuit against Jersen, and Jersen asserted a counterclaim for fraud and breach of contract. In support of its fraud claim, Jersen alleged that Pike’s representations to Jersen were false, and that Pike “concealed and recklessly withheld from Jersen knowledge that the substrate was not dimensionally accurate, flat or level.” Additionally, Jersen alleged that Pike made those false representations “in order to deceive Jersen and induce Jersen to commence installation upon the substrate.” Jersen further alleged that it relied on Pike’s representations and would not have commenced installation of the masonry work had Pike not misrepresented to Jersen that the substrate had been installed in accordance with the contract requirements. Jersen suffered damages as a result of its reliance on Pike’s false representations.

Pike moved to dismiss Jersen’s fraud claim, arguing that it was barred by Section 1.8 of the contract, which provides that “[Jersen] accepts responsibility for the inspection of conditions that could affect the Subcontract Work at the Project site, and based on that inspection, and not in reliance upon any opinions or representations of [Pike], its officers, agents or employees, acknowledges its responsibility to satisfactorily perform the Subcontract Work without additional expense to [Pike].” The trial court agreed and dismissed Jersen’s fraud claim, and Jersen appealed.

Decision

On the appeal, Jersen argued that Section 1.8 is a typical site investigation disclaimer, which “attempts to place the risk of changed conditions on the [sub]contractor by requiring it to investigate the site before bidding and to familiarize itself with all conditions under which the job will be performed”.  According to Jersen, this disclaimer language applied only to site inspections and representations that occurred before execution of the subcontract, and not to any representations made after execution of the subcontract. Jersen pointed out that Section 1.8 is written in the past tense and concerns conditions of the site, rather than referring to conditions of the work performed by others.

The appellate court reinstated Jersen’s fraud claim, holding that although fraud claims can be barred by the existence of a specific disclaimer and the corollary failure to exercise reasonable diligence, the subcontract was ambiguous as to whether the disclaimer clause in Section 1.8 precluded Jersen from relying on any opinions or representations concerning work performed by others after Jersen executed the subcontract. Accordingly, in light of the ambiguous language in Section 1.8, Pike could not conclusively establish its defense at the motion to dismiss stage that the clause “specifically disclaims representations concerning the very matter to which the fraud claim relates”.

Comment

The key factor in determining whether a fraud in the inducement claim can survive a contractual disclaimer is whether the disclaimer is sufficiently specific to match the alleged fraud. Here, the Pike court held that the disclaimer clause was not sufficiently explicit to match Jersen’s fraud claim. In other words, the boilerplate disclaimer provision was not a bar to the fraud in the inducement claim because it did not specifically disclaim reliance by Jersen on Pike’s representations concerning the substrate work. It is worth noting, however, that the denial of the motion to dismiss only preserved Jersen’s claim for the meantime; Jersen still has to prove the claimed fraud at trial.

Public works construction contracts normally contain one-sided and onerous provisions favoring the governmental authority. Since bidding contractors have no leverage in negotiating unfair provisions of a contract, it is faced with a “take it or leave it” situation. The contractor should carefully review the contract provisions and be aware of the provisions that a governmental agency may use to reject a legitimate claim for payment.

In the recent case of Lakhi General Contractor, Inc. v New York City School Construction Authority, the Court relied upon two contract provisions to dismiss the contractor’s extra work and delay claims.

Background

In June of 2011, the SCA solicited bids to perform exterior masonry work on a school building in Brooklyn. The notice to bid urged all prospective bidders to attend a pre-bid meeting, which Lakhi did not do. Lakhi similarly did not submit any written request to the SCA for a clarification of any ambiguity in the design drawings, contract drawings or contract documents regarding the scope of work.  Lakhi submitted the low bid, which was accepted by the SCA, and was awarded the contract.

 After it was awarded the contract, Lakhi submitted several Requests for Information concerning the replacement of certain terra cotta panels and a pre-cast stone band.  Lakhi claimed that it was not clear from the drawings whether the terra cotta decorative panels had to be replaced.  Lakhi also claimed that the drawings did not provide for replacement of a pre-cast stone band.  

The SCA responded that the replacement work was included in the scope of work under the contract, which Lakhi disputed and submitted a change order for the work. The SCA issued a notice of direction for Lakhi to perform the replacement work. In denying Lakhi’s change order, the SCA interpreted the drawings and contract documents to provide that Lakhi would perform the disputed replacement work.

Lakhi filed a notice of claim with the SCA, seeking $824,000 for the extra replacement work performed outside the scope of the contract.  Lakhi also filed a claim seeking $323,000 in delay damages caused primarily by the extra time required to perform the replacement work. Lakhi ultimately started a lawsuit to recover its damages.  The SCA moved to dismiss the claims as barred by the specific terms of the contract.

Decision

The lower court dismissed Lakhi’s lawsuit, finding that the terms of the contract prohibited the extra work claim. The delay claim was also barred by the “no damages for delay” clause in the contract, which provided that the contractor’s sole remedy for any delay was an extension of time.

As for the extra work claim, it was barred by the provision of the contract which provides that in case of any discrepancy or inconsistency between the drawings and the contract documents, the decision of the SCA shall be final. The court pointed out that Lakhi failed to seek a pre-bid clarification from the SCA about the perceived ambiguities concerning the replacement work.  The court noted that Lakhi sought clarification of the contract drawings and documents concerning the replacement work only after it was awarded the contract.   Accordingly, Lakhi was bound under the stated terms of the contract by the SCA’s interpretation that the disputed extra work was within the scope of the contract.

Lakhi appealed, but fared no better before the appellate court. In affirming the dismissal of Lakhi’s complaint, that court held that the bid documents mandates that the bidding contractor discover and inquire about any claimed ambiguity prior to the submission of a bid, and that by failing to seek such clarification its extra work claims were barred.

The appellate court further agreed with the lower court that Lakhi’s delay damage claims are barred by the contract’s “no damages for delay” clause described above.

Comment

Disputes over the scope of the work defined in the contract are a major source of construction litigation.  However, the contractor may avoid scope of work issues by thoroughly reviewing the contract provisions and documents concerning possible ambiguities and inconsistencies in the scope of the work prior to submission of its bid.

In the Lakhi case, had the contractor followed the bid instructions by examining the contract documents and obtaining an SCA clarification prior to submission of its bid. Lakhi probably would have avoided unnecessary litigation over the scope of the work.