Unjust enrichment is a legal theory of recovery holding that no person should be allowed to unfairly profit at another’s expense without making restitution or compensation to the other person. The concept of unjust enrichment is often used in construction litigation as an alternative to breach of contract or when there is no adequate remedy at law.

Recovery on a theory of unjust enrichment typically occurs when there was no contract between the parties or a contract turns out to be invalid.

In the case of Power v Darren Henault Interiors, Inc., the court ruled on whether a subcontractor stated a claim for unjust enrichment against a contractor.

Background

N. Power Painting, Inc. performed painting services at the 2010 Kips Bay Decorating Showhouse. The Showhouse is a charitable event which benefits the Boys and Girls Clubs. Darren Henault Interiors, Inc., was one of the designers who designed rooms at the Showhouse without compensation. Duce Construction Corp. was employed as a contractor on that jobsite. Duce approached Power to provide painting services at the Showhouse.

Duce informed the painting subcontractor that the painting job would not be compensated, but Power was assured that it would be worth it to work for free on the charity project since Darren, the designer, would then engage Duce on a future project on West 70th Street and Duce would, in turn, then engage Power as the painting subcontractor on the project.

No contract was entered into by the painting subcontractor with either Darren or Duce. Although Duce informed Power that the Showhouse project “was not a paying job”, he assured Power that it would be “worth it for [Power] in the long run to eat this one, because if we do , Darren will give us the job he has coming up on West 70th Street”.

Duce was given the West 70th Street project, but did not hire Power for the project. Power sued Duce and Darren on the basis of unjust enrichment to recover the cost of performing the painting work at the Showhouse. Duce and Darren moved to dismiss the claims of the painting subcontractor.

Decision

The Court ruled that the painting subcontractor’s claim against both Duce and Darren sufficiently established a cause of action for unjust enrichment. In doing so, the Court held that unjust enrichment is an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties concerned. According to the Court, “the essential inquiry…is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered…A plaintiff must show that (1) the other party was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit [the defendant] to retain what is sought to be recovered”.

The Court pointed out that that: (1) Darren was enriched by having received a finished showroom at the Showhouse project for which he received positive publicity; (2) Power contributed its time and effort before, during and after the project and expended $13,500 in performing their services at the Showhouse; (3) because of Power’s efforts, Duce did not have to send one of its own men to paint the showroom or hire another sub-contractor to do the work plaintiffs performed; and (4) because Power would be working with Duce and Darren on the more lucrative project at West 70th Street, it withdrew its demand for compensation on the Showhouse project and chose to forego other possible paying work to complete the work at the Showhouse. However, because Duce was given the project at West 70th Street by Darren and failed to hire Power as the subcontractor on the project as promised, the Court found that a claim for unjust enrichment had been established against Darren and Duce.

Comment

Here, the Court found that the elements of an unjust enrichment claim were sufficiently alleged to withstand a motion to dismiss the claim. If proven at a trial, Duce and Darren unjustly retained a benefit to the detriment of the painting subcontractor, and the retention of those benefits violated the fundamental principles of justice, equity and good conscience.

New York courts continue to rigidly enforce the “no-damages-for-delay” contract clause against contractors, which bars contractor delay claims. This clause is found mostly in public works contracts. The courts, however, have recognized certain exceptions to enforceability of a no-damages-for-delay provision.

The clause may not be invoked to bar damages for (1) delays caused by bad faith or willful, malicious or grossly negligent conduct; (2) delays not contemplated by the parties when they entered into the contract; (3) delays resulting from the breach of a fundamental obligations of the contract; and (4) delays so unreasonably that they constitute an intentional abandonment of the contract.

In the recent case of LoDuca Associates, Inc. v PMS Construction Management Corp., the appellate court demonstrates the difficulty faced by a contractor in seeking to persuade the court that the delay falls within one of the four recognized exceptions to the enforceability of a no-damage-for-delay clause.

Background

LoDuca entered into a $3.8 million contract with the New York City Department of Design and Construction for the construction of the New Aquatic Animal Medical Facility at the New York Aquarium. As the project progressed, major design revisions were undertaken (which LoDuca blamed on an improper initial design), and 111 change orders were issued. These change orders resulted in a $1.2 million increase in the contract price, as well as a delay of 27 months.

After the completion of the project, LoDuca commenced suit seeking to recover damages arising out of the 27 month delay. The defendant, who was the City’s construction manager, moved to dismiss the claim based upon the presence of a no-damages-for-delay clause in the contract.

Decision

The trial court dismissed the contractor’s delay claim, finding that the contract contemplated that delays resulting from “any act, neglect or default of the Construction Manager, the Owner, the Architect, another contractor or subcontractor or by any cause acknowledged by the Contractor to be beyond the control of the Subcontractor”, and that “since a defective design arises from an act of the owner and architect, this provision must be read to prohibit claims for damages on that basis”.

The appellate court agreed, finding that the design defects “constitute merely inept administration or poor planning which does not negate the application of the no damages for delay provisions”. The court also rejected the argument that the 27 month delay was so unreasonable that it went beyond the contemplation of the parties when they signed the contract. According to the court, the length of the delay is relevant to whether an exception to the no damage for delay clause may apply, but held that “the length of the delay does not transform a delay caused by an event specifically contemplated by the no damages for delay clause into something uncontemplated”. In doing so, the appellate court cited one of its prior decisions where it held that a 32 month delay was contemplated.

Comment

The court here reaffirms its rigor in upholding no damages for delay clauses by claiming that delays of 27 months and 32 months – nearly three years – are specifically contemplated by the contract. Clearly, contractors do not enter into construction contracts contemplating that the job will be delayed by years. However, under these latest court decisions, one is left to wonder whether under similar factual circumstances, a delay of any length can be found to be an uncontemplated delay.

Most contracts provide that before an extra work claim will be recognized, the contractor must give timely notice of its claim. The primary purpose for the notice is to provide the owner with prompt notice so that he can make an informed decision regarding how to deal with the cost of the extra work.

In the recent case of Phoenix Signal and Electric Corporation v New York State Thruway Authority, the Court rejected the contractor’s extra work claim because of its failure to comply with the contract’s notice provisions.

Background

In January 2005, Phoenix entered into a contract with the Thruway Authority to install CCTV cameras and overhead message signs along the Thruway. The contract required the work to be performed in accordance with the project’s specific plans and the DOT’s “Standard Specifications.” The contract also permitted Phoenix to request compensation for extra work exceeding the contract’s requirements.

During the project, Phoenix claimed that three situations arose which required Phoenix to perform extra work. Specifically, (1) Phoenix was required to modify the preparation of concrete foundations by using a two-stage concrete pour; (2) Phoenix’s subcontractor encountered rock while drilling certain foundation holes; and (3) a design error caused by the unexpected presence of a drainage catch basin required Phoenix to use custom-formed, rather than prefabricated concrete median barriers.

In July of 2005, Phoenix submitted notice forms called force account daily reports to the project’s engineer-in-charge for the drilling claim. In August of 2006, Phoenix also submitted force account daily reports pertaining to the two-stage pour and barrier claims. The Thruway Authority denied all three claims, and Phoenix sued for breach of contract.

Decision

The appellate court determined that Phoenix provided timely notice of the drilling claim, but failed to provide timely written notice for the two-stage pour and barrier claims. The Court found that the contract required Phoenix to notify the project’s chief engineer in writing within 10 days of any extra work claim, with copies to other specified officers. The contract further required Phoenix to submit force account reports to the chief engineer on a daily basis while the extra work was being performed, in addition to certain periodic summary reports, and to have the force account reports signed by the chief engineer.

The Court noted that where a notice provision is expressly agreed upon by the contracting parties, such condition “must be literally performed”, and that “no action for breach of contract lies where the party seeking to enforce the contract has failed to perform a specified condition precedent”. The Court held that because Phoenix did not provide initial written notice and summary reports for the two-stage pour and barrier claims, did not submit force account reports until more than a year after the work was performed, and did not have those force account reports signed by the project’s chief engineer, Phoenix’s failure to comply constituted a waiver of its extra work claims.

Comment

As this case demonstrates, Courts will not hesitate to strictly enforce contractual written notice provisions and other preconditions to the making of an extra work claim. Contractors are once again cautioned to be thoroughly familiar with notice provisions and other pre-conditions set forth in the contract. Failure to comply with such preconditions may result in the waiver of an otherwise valid, and substantial, claim.

The use of the corporate form to conduct business is primarily intended to protect the owners, shareholders, officers and agents acting on behalf of the corporation from personal liability related to the business. A corporate shareholder, officer, agent or employee is not normally liable for claims against the corporation.

In certain situations, however, if a corporate agent fails to disclose that he is acting in his capacity as an employee of the corporation, he may be held personally liable on the contract. In the recent case of Guo Window, Inc. v. A Affordable Storefront Sales & Service, Inc., the court denied an employee’s motion to dismiss the personal liability claim against him even though he claimed that he was acting on behalf of the corporation.

Background

Guo Window Inc., a window supplier, sold windows for which there was a balance remaining due of $32,562. In an attempt to collect the balance due, the supplier sued James Zitis, personally, and A Affordable Storefront Sales & Service Inc., d/b/a Affordable Storefront, which is a corporate entity. The supplier’s invoices were made out to “Affordable Enterprises” and checks that the supplier received from that entity were printed with the name of “Affordable Enterprises.” One of the checks paid to the supplier was signed by Mr. Zitis. Documents provided by the bank listed Mr. Zitis’ “title” as “V.P.”

The records from the New York State Division of Corporations, however, list the entity as “Affordable Enterprises, Ltd.”, which is the same name printed on both the companies’ checks and the supplier’s invoices, but does not include the “Ltd.”

Mr. Zitis moved for summary judgment, seeking to have the claims against him dismissed. According to Mr. Zitis, the windows were sold to the corporate entity, A Affordable Storefront Sales & Service Inc., of which he was an employee. Mr. Zitis argued that payment was the responsibility of the corporation, not him personally.

The supplier argued, however, that it was never informed that Mr. Zitis was acting on behalf of a corporate entity when he placed the order, or when the windows were supplied. According to the supplier, it believed that it had contracted directly with Mr. Zitis, and had it known that it was contracting with a corporate entity, its credit terms would have been different.

Decision

The court denied Mr. Zitis’ motion for summary judgment. The court held there was no evidence that Mr. Zitis disclosed to the supplier that he was acting as an agent for a corporate entity.

The court relied on well settled case law that when an agent acts on behalf of a disclosed principal, the agent will not be personally liable for breach of contract absent clear and explicit evidence of the agent’s intent to be personally bound. However, where the agent enters into a contract for an undisclosed or partially disclosed principal, a third-party may proceed directly against the agent, the principal or both. The law imposes no duty on the window supplier, as the third-party, to inquire or conduct an investigation to obtain actual knowledge whether the person with whom it was dealing was in fact an agent for a disclosed principal. Absent appropriate disclosure by the agent, the agent may be held personally liable on the contract.

Since there was no evidence that Mr. Zitis informed the window supplier that he was acting in a corporate capacity when he ordered the windows, the court had no basis to dismiss the claims against him.

Comment

Corporate agents are not legally liable for the debts and liability of a corporation. However, doing business in the corporate form requires the disclosure of the entity that you are acting on behalf of. If a corporate agent enters into a contract and fails to disclose that he is acting in his capacity as an employee of the corporation, he may be held personally liable for claims made under the contract.

In a recent New York Court of Claims case, Liddell v. The State of New York, a contractor made a novel claim for breach of contract. The contractor sought compensation based on the unanticipated increase in the cost of materials. Notably, the claim to recover the increase in the cost of materials was not caused by any delay by the State in the completion of the project.

Background 

Liddell Brothers, Inc. contracted with the State of New York to upgrade the Intelligent Transportation System on the Northern State Parkway in Nassau and Suffolk Counties. Part of the contractor’s work included the installation of copper cable. Between the contract signing and the contractor’s purchase of the copper cable, the cost of copper materials increased. The contractor claimed that the price increase was unanticipated and requested additional compensation from the State. The State denied the request on the grounds that it was not contractually or statutorily required to pay the contractor for the increased cost of the copper cable. The State’s representatives also noted that under the contract, the contractor was entitled to purchase and stockpile the copper cable once the contract was signed, and invoice the State for the materials purchased, which the contractor did not do.

After the contractor’s request for additional compensation was denied, the contractor sued the State. The State moved for summary judgment, dismissing the contractor’s claims.

Decision

The court ruled in favor of the State, granting summary judgment and dismissing the contractor’s claims. The Court based its decision on the plain terms of the parties’ contract. Although the parties’ contract included provisions for an increase in the cost of steel, iron, asphalt and fuel, it did not include any provision for increases in the cost of copper. Additionally, the court noted that the contract provision addressing unanticipated price increases related to delays caused by the State. This was not a delay claim. Here, the contractor acknowledged that there were no delays caused by the State, so the contract provision that the contractor was attempting to rely upon was inapplicable.

According to the court, “the mere fact that a contract becomes economically unprofitable is insufficient reason to relieve a contracting party from its contractual obligations.” Further, the court stated “there is no moral obligation to give public money to disappointed contractors.” Based on the plain terms of the parties’ contract, the court dismissed the contractor’s claims.

Comment

With limited exceptions, courts will enforce contract terms that are clear and unambiguous. Here, there was simply no contractual basis for the State to provide the contractor additional compensation for the increased cost of copper cable. Nor would the contractor have been required to provide the State a refund if the cost of copper had gone down. The court system does not exist to rewrite the terms of the parties’ contract. Courts will not substitute for an agreement reached by two parties the court’s view of what the agreement should have been. The court’s role is to interpret and enforce the agreed-upon terms. Contractors should keep this in mind when negotiating a contract and performing their work.

One of the most effective ways to protect an owner from liens is to require as a precondition to payment that the contractor execute an affidavit and waiver of lien which states that it has been paid to date for work performed at the project. But what if the contractor has not received all the money it is due through the date on the lien affidavit and waiver? Is the lien affidavit and waiver a complete bar to the contractor’s right to file a mechanic’s lien and sue the owner for monies owed for work performed through the date on the lien affidavit and waiver?

The court addressed the enforceability of the lien affidavit and waiver in the recent case of Atlantic Line Construction LLC v. Marsten Development Corp., et al.

Background 

Argyle Development LLC, as owner, hired Marstan Development Corp., as general contractor, in connection with a construction project located at 753 St. Nicholas Avenue in Manhattan. The general contractor subcontracted the project’s carpentry work to Atlantic Line Construction LLC.

On June 9, 2009 the general contractor provided the owner with an “Affidavit & Waiver of Lien”, in which the general contractor acknowledged receipt of all sums due from the owner for all work performed and materials furnished through May 29, 2009. On June 11, 2009, the subcontractor filed a mechanic’s lien against the project, alleging that $82,300 was past due to it for labor and materials supplied to the project. The subcontractor thereafter attempted to enforce the mechanic’s lien by commencing a foreclosure action. The owner moved to dismiss the lien claim, arguing that it had paid the general contractor in full and that the general contractor’s own statement contained within the lien affidavit and waiver confirmed full payment. The owner also presented cancelled checks and wire transfers to show that all monies were paid to the general contractor. In opposition, the general contractor argued that, notwithstanding the terms of the lien affidavit and waiver, money remained due from the owner, and that the lien affidavit and waiver had been obtained through fraud.

Decision

The court ruled in favor of the owner, dismissing the mechanic’s lien foreclosure action. The court noted that mechanic’s lien rights are derivative. As stated by the court, “The principle is well settled that the rights of a subcontractor are derivative of the rights of the general contractor and a subcontractor’s lien must be satisfied out of funds due and owing from the owner to the general contractor at the time the lien is filed.” Since the general contractor provided the owner with a lien affidavit and waiver stating that it had been paid in full, the court ruled that no monies were due from the owner to the general contractor. Accordingly, there was no lien fund from which the subcontractor could recover.

The court further ruled that no evidence was presented to find that the lien affidavit and waiver was procured through fraud.

Comment 

This case follows the general principle that courts will enforce an affidavit and waiver of lien provided by a general contractor to the effect that the contractor has no existing claims and has paid all of its subcontractors and suppliers on the project. These affidavits and lien waivers may be problematic for contractors where the owner relies on them to reject a contractor’s legitimate claims, such as extra work claims, arising before the affidavit and lien waiver was signed. As this case demonstrates, the owner is entitled to rely on the clear and express terms of the affidavit and lien waiver to reject such claims.

The trust fund provisions of New York’s Lien Law provide that monies received by an owner, such as a building loan, and monies received by a contractor or subcontractor are trust funds to be held by them as trustees for payment to those performing work and supplying materials on their behalf for the project. The statute is intended to prevent owners, contractors and subcontractors from diverting trust monies from a project to pay creditors on other projects or keeping the monies for themselves.

Where there has been an improper diversion of trust monies, a corporation’s officers may be personally liable for the unpaid project debts of the corporation, even though the officer was acting for the corporation. In the recent case of Ippolito v. TJC Development, LLC, the appellate court ruled on whether a corporate officer could be personally liable for diversion of trust funds.

Background 

TJC Development, LLC contracted to substantially renovate a residence located in Babylon, New York. A dispute arose between the contractor and the homeowners, and the homeowners ultimately terminated the contractor. In addition to claims against the contractor for defective work and performance, the homeowners also sued the contractor and the contractor’s principals for trust fund diversion under the Lien Law. According to the homeowners, the contractor received payments from the homeowners for work performed, but the contractor failed and refused to pay the project’s subcontractors and suppliers. Since the contractor’s principals directed the distribution of funds received from the homeowners, the homeowners argued that the principals were personally liable for trust fund diversion.

The contractor argued that the homeowners’ trust fund claims were improper and should be dismissed. According to the contractor, its principals were not personally liable since the homeowners contracted with a company and made payments to that company, and therefore only the company was a trustee of funds received by the homeowners. In addition, the contractor argued that the homeowners did not have any right to claim against the contractor for trust fund diversion. Rather, according to the contractor, such a claim would only belong to the contractor’s subcontractors and suppliers, not the homeowners.

The contractor made a motion for summary judgment, requesting that the trust fund diversion claims against it and its principals be dismissed. The trial court ruled in favor of the contractor and its principals. The homeowners appealed.

Decision

The appellate court reversed, ruling in favor of the homeowners. In its decision, the court stated that Article 3-A of the Lien Law creates trust funds out of certain construction payments or funds to assure payment to subcontractors, suppliers, architects, engineers and laborers. The purpose of Article 3-A is to ensure that those who actually perform the work and furnish materials are paid. The court noted that upon receipt of payments from the owner, the contractor is required to pay its subcontractors and suppliers for work performed. According to the court, the funds remain the property of the owners until the proper distribution of the trust funds by the contractor. Accordingly, the court held that the homeowners had the right to maintain trust fund diversion claims against a contractor who diverted funds.

In addition, the court noted that officers and directors of a company are guilty of the crime of larceny if they divert trust funds. Since a company’s officers and directors can be charged criminally, the court reasoned that they may also be held personally liable for the money damages caused by their diversion of trust funds. Accordingly, the court held that the homeowners could claim against the contractor and its principals, personally, for misappropriation of the trust funds.

Comment 

The construction trust fund statute is a valuable tool for collecting money for labor performed or materials supplied. This may be the only source of recovery where mechanic’s lien rights have expired, the claimant is not protected under a labor and material payment bond or where the project debtor is bankrupt. Personal liability of corporate officers for diversion of trust funds is not dischargeable in bankruptcy. It is only fair that project claimants, who have provided the wherewithal that made possible the construction of the project, should be allowed to sue corporate officers for personal liability where they direct trust funds for purposes other than paying the claims of unpaid material suppliers or subcontractors on that project.

The majority of cases regarding abandonment of work occur after a dispute over payment. A contractor or subcontractor is justified in stopping the work for nonpayment if there is a substantial delay in making a substantial progress payment. In such instance, the nonpayment constitutes a material breach of contract. But contractors should proceed with caution prior to taking drastic action such as stopping the work.

Contractors who consider abandoning a job should make sure that they follow the requisite provisions of the contract prior to stopping work.

In the recent case of Zip Sys., Inc. v. Lettire Constr. Corp., the court ruled that a subcontractor wrongfully abandoned the work for nonpayment because he failed to comply with the notice of termination provisions of the subcontract.

Background 

Zip Systems, Inc., as subcontractor, entered into a contract with Lettire Construction Corp. to install elevators at the “Honeywell II” project, located in the Bronx. The subcontract called for periodic payment requisitions as the work progressed. The first payment application was timely paid. The second payment application, made on February 5, 2008, was not paid until June 24, 2008. The third payment application was made in September 2008 for $193,500, was partially paid on October 31, 2008 in the amount of $85,000, and was never paid in full. The subcontractor stopped work on December 1, 2008 and sent a letter on the same day stating that it would not return until it received payment. The subcontractor then sued the general contractor for the balance due, and moved for summary judgment.

In opposition, the general contractor argued that the subcontractor breached the contract by failing to follow the contractual procedure for stopping work. Under the contract, the subcontractor was required to send a written notice not earlier than seven days after payment became due, advising that if payment was not received within seven days of the written notice, the subcontractor would stop work. Alternatively, the contract permitted the subcontractor to stop work sixty days after nonpayment. Under either provision, the contractor argued that the subcontractor improperly abandoned the work since the proper notice was not sent and payment was not sixty days past due.

In addition to opposing the subcontractor’s summary judgment motion, the general contractor made its own motion for summary judgment, arguing that it incurred $31,000 in extra costs to complete the subcontractor’s work.

Decision

The court ruled in favor of the general contractor. The court focused on the language of the parties’ contract, which set forth the terms under which the subcontractor was permitted to stop its work. The court ruled that the subcontractor wrongfully abandoned the project and breached the subcontract because it failed to comply with the contract terms prior to stopping the work for nonpayment. Since the subcontractor breached the agreement, the general contractor was entitled to the fair market value of the excess costs incurred in completing the subcontractor’s work.

Comment 

There are a number of factors that a contractor should weigh in deciding whether to stop its work. How much work is left? How much is owed? How long past due is the debt? What are the contract provisions for stopping the work? In this case, an otherwise valid debt due was waived on account of the subcontractor’s failure to comply with the work stoppage provisions of its contract. To make matters worse for the subcontractor, rather than recovering monies due to him, the subcontractor was held responsible for the general contractor’s excess completion costs.

The decision whether to “walk off the job” should never be taken lightly. Although it rarely occurs, there are times when abandonment is the best alternative despite the inherent risks. The decision, however, should only be made after consultation with legal counsel.

There are circumstances when a party may unintentionally repudiate a contract. In legal terms, the repudiation constitutes an anticipatory breach of contract. Whether a repudiation has occurred is determined on a case-by-case basis, depending on the particular statements made or demonstrated by the conduct of the party.

In the recent case of Joseph P. Carrara & Sons, Inc. v. A.R. Mack Construction Company, Inc., an appellate court ruled on whether a concrete supplier’s breach of contract claim should be denied because he repudiated the contract.

Background

In May 2008 Joseph P. Carrara & Sons, Inc., a concrete supplier, entered into a purchase order agreement with A.R. Mack Construction Company, Inc., a general contractor, to supply the concrete needed for the construction of a project in Ticonderoga, New York. The agreement did not specify delivery dates, but indicated that deliveries would be as scheduled by the parties. The subcontractor made deliveries from August through November 2008, at which point all that remained to be delivered was the concrete for the interior floor slab. Due to colder weather, the supplier informed the contractor that it could not deliver on the five-day pour schedule that contractor sought. After discussions among the parties, the supplier sent a December 2, 2008 letter proposing a six-day pour schedule, and outlining the weather conditions that would be required in order to meet that schedule. The concluding paragraph of the letter required written acceptance of the terms by 3:00 P.M. that day or the supplier would “begin immediately shutting our New York operation down for the winter.” The contractor did not reply to the letter, but instead obtained the concrete from another concrete supplier.

The supplier then sued the contractor, arguing that it was contractually entitled to supply concrete to the project, and that it was entitled to its lost profits. The contractor moved for summary judgment, arguing that the supplier’s December 2, 2008 letter was an anticipatory repudiation of the parties’ agreement, which excused the contractor from any further obligations under the agreement, and permitted the contractor to obtain concrete from another supplier. The court ruled in favor of the contractor, granting summary judgment and dismissing the supplier’s claims. The supplier appealed.

Decision

The appellate court affirmed the lower court’s decision. According to the court, the supplier’s December 2, 2008 correspondence was a clear refusal to deliver the concrete unless the supplier’s delivery terms were accepted by the contractor within a matter of hours. The supplier’s delivery terms were not part of the parties’ purchase order agreement. The court noted that the supplier’s New York operation was critical to its performance under the contract and that the supplier’s stated closure of its New York operation confirmed an intention not to perform unless its demanded terms were immediately agreed to. Under these circumstances, the court agreed that the supplier’s letter amounted to a repudiation of the contract, which permitted the contractor to obtain concrete from another supplier.

Comment

The repudiation or renunciation of a contract must be an unqualified or clear refusal to perform with respect to the entire contract. An intent to repudiate may be expressed by words or acts communicated to the other party. Here, the supplier stated that unless its delivery terms were immediately agreed to, it would close its plant operations, thereby making it impossible for the supplier to deliver the concrete. Since the court determined that this was a repudiation by the supplier of the parties’ agreement, the contractor was excused from the parties’ agreement, and was free to obtain concrete from any supplier.

Real estate developers form corporate entities to conduct business to primarily protect them from personal liability on high-risk ventures, such as the construction of a major real estate project. A corporate form of doing business normally insulates corporate shareholders from any debts or liabilities of the corporation.

But courts will not allow an individual owner to escape personal liability by hiding behind the corporate shield when he creates a corporate entity for the purpose of evading payments to contractors and subcontractors. This issue was addressed in the recent case of Puma Sidewalk Corp. v. GDY Properties, Inc.

Background 

Ron Herscho formed a number of corporate entities that were engaged in the business of developing and selling real estate. He is the principal shareholder and officer of each of the companies. GDY Properties, Inc. was one of the entities formed by Mr. Herscho. GDY Properties, Inc. contracted with Puma Sidewalk Corporation to supply labor and concrete for a project to be developed on property in which Mr. Herscho had an interest. The contractor supplied labor and concrete valued at $270,400, none of which was paid.

The concrete contractor sued GDY Properties, Inc., and other corporate entities formed by Mr. Herscho, and also sued Mr. Herscho personally for fraud. The basis of the contractor’s claims against Mr. Herscho was that he intentionally created more than thirty corporate entities that had no assets, other than the property to be developed, for the purpose of evading payment for services provided by contractors and subcontractors on properties in which he had an interest. GDY Properties counterclaimed against the concrete contractor for defective workmanship, claiming damages of $250,000.

Mr. Herscho made a motion for summary judgment, seeking to have the claims against him dismissed. According to Mr. Herscho, since he did not personally contract with Puma Sidewalk Corporation, he could not be held personally liable for the debts of GDY Properties.

Decision

The court denied Mr. Herscho’s motion for summary judgment. In so ruling, the court first noted that simple allegations that an individual dominates a corporation are inadequate to establish personal liability, since that could be said about virtually any single-person corporation. Rather, the court noted that the party seeking to “pierce the corporate veil” to establish personal liability must also establish that the owner, through his domination, abused the privilege of doing business in the corporate form. The factors to be considered in determining whether or not there has been such an abuse include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and the use of corporate funds for personal use.

In this case, the court noted that Mr. Herscho failed to produce any corporate records, failed to show in any meaningful way that the entities he formed were operated separate and apart from one another, and acknowledged that funds from multiple entities were intermingled without any distinction between or among corporate or limited liability companies. Whether or not this conduct was such as to constitute a conspiracy to defraud the contractor, or to warrant piercing the corporate veil was a factual question, which required a trial.

The court dismissed the counterclaim for defective workmanship since no evidence was produced to substantiate this claim.

Comment

The corporate form is a legitimate means of avoiding personal liability, and a corporation may be organized for the very purpose of avoiding personal liability. However, a court may pierce the corporate veil or disregard the corporate form where the corporate owner commits a fraud by means of a corporate vehicle. As this case demonstrates, if a corporation is formed as a “dummy” by the individual stockholders for the purpose of evading payment to contractors and subcontractors for services provided by them, the stockholders will be held personally liable for these corporate debts.