Contractors, subcontractors and material suppliers are granted by New York statute the right to file a mechanic’s lien against the realty being improved to the extent of the work and labor performed and materials furnished. A mechanic’s lien operates much like attachment and garnishment, to make sure that a subcontractor, for example, who supplies labor or materials for a construction project and does not have a contractual relationship with the owner of the property will receive the amount due to himself or herself. The mechanic’s lien secures the amount due to the subcontractor by a lien on the real property improved. 

However, the rights of a subcontractor are derivative of the rights of the general contractor, and a subcontractor’s lien must be satisfied out of any monies due and owing from the owner to the general contractor at the time the lien is filed. The subcontractor cannot enforce his lien if full payment has been made by the owner to the general contractor. 

In the recent case of Trofien Steel & Construction Inc. vs. Sergey Rybak, et al., the court addressed the question of monies due to the general contractor when the lien was filed

Background 

Trofien Steel & Construction, Inc., as subcontractor, entered into an agreement with Rybak Development and Construction Corp., as general contractor, to supply and install the structural steel required for a project located at 26 Highlawn Avenue, Brooklyn, New York. After the structural steel work was completed, a $135,619 balance remained due on the subcontract. In an attempt to recover the unpaid balance, the subcontractor filed a mechanic’s lien and commenced a mechanic’s lien foreclosure action against the project owner. 

In defense, the owner argued that it had not contracted with the subcontractor and that if any money was due to the subcontractor, it was due from the general contractor to the subcontractor, not from the owner. The owner also argued that at the time of the subcontractor’s mechanic’s lien filing, no monies were due and owing to the general contractor. As proof, the owner submitted an affidavit from the general contractor stating that at the time the subcontractor’s mechanic’s lien filing, no money was due to the general contractor. Based on these defenses, the owner made a motion to dismiss the subcontractor’s mechanic’s lien foreclosure claim. 

Decision

The court ruled in favor of the owner, dismissing the subcontractor’s lien foreclosure claim. The court first noted that an owner is not liable to a subcontractor unless the owner has agreed to pay the subcontractor. According to the court, the mere fact that an owner consents to the improvements provided by the subcontractor does not render him liable to the subcontractor, whose sole remedy lies against the general contractor. 

The court went on to note that a mechanic’s lien will only attach to amounts due and owing from the owner to the general contractor at the time of the lien filing. Since the owner submitted an affidavit from the general contractor stating that no monies were due and owing to it at the time of the subcontractor’s mechanic’s lien filing, and no evidence was presented to the contrary, the court accepted the affidavit as proof that all monies properly due and owing to the general contractor had been paid at the time of the mechanic’s lien filing. Since no money was due from the owner to the general contractor at the time of the subcontractor’s lien filing, the court dismissed the subcontractor’s mechanic’s lien foreclosure claim.

Comment 

Where an owner pays the general contractor in full, an owner is generally not liable to a subcontractor unless the owner otherwise agrees to pay the subcontractor. The theory is that the services performed by the subcontractor are for the benefit of the general contractor who is responsible for the completion of the improvement, not for the benefit of the owner. A mechanic’s lien filed without delay increases the likelihood that the lien will attach to monies due and owing from the owner to the general contractor. Accordingly, the prudent subcontractor or material supplier should promptly file a mechanic’s lien once it becomes clear that there is a problem with payment on the project.

Most construction contracts have a standard provision requiring changes in the work or directions to perform extra work to be made in writing. Courts generally hold that a contractor who fails to obtain the required written authorization will not be paid for such work.

However, a contractor or subcontractor who performs extra work will not automatically lose his extra work claim just because he failed to follow the contract provision requiring written authorization. Courts are hesitant to deny a just claim for extra work and have found that contractual requirements for written orders can be waived under certain circumstances.

In the recent case of Penava Mechanical Corp. v. Afgo Mechanical Services, Inc., an appellate court ruled on whether recovery may be had for orally directed extra work despite the contract provision that an extra work claim must be supported by written authorization. 

Background 

Absolute Electrical Contractors, Inc. entered into a subcontract with general contractor Richter & Ratner Contracting Corp. The parties’ subcontract contained a so-called “no-oral modification clause.” Pursuant to the clause, all changes in the work or directions to perform extra work were to be made in writing or were otherwise not compensable. 

During the course of construction, representatives of the general contractor verbally directed the subcontractor to work overtime. The representatives also orally agreed to pay for this premium time over and above the contract price, as they had previously paid for other overtime work throughout the project. The promised overtime payment was in lieu of an extension of time to finish the work. In addition, the general contractor’s project manager testified that he instructed the subcontractor not to bother with the “tickets” that were usually prepared by the subcontractor for such extra work and formed the basis for change orders issued, but rather directed the subcontractor to “just get the work done.” The subcontractor sued when the general contractor refused to make payment for the subcontractor’s overtime. 

In defense, the general contractor argued that the subcontract’s no-oral modification clause barred any claim by the subcontractor, since the direction to perform overtime work and promise to pay at a premium rate were made orally, and were not in writing. In addition, the general contractor argued that the subcontractor had waived any claims to the overtime pay pursuant to the express language of the lien waivers signed by the subcontractor. 

The general contractor moved for summary judgment, which the trial court granted. The subcontractor appealed. 

Decision

The appellate court reversed the trial court, denying the general contractor’s motion for summary judgment and directing a trial on whether the subcontractor had been paid in full for the overtime work performed. 

According to the appellate court, under New York law, oral directions to perform extra work, or the general course of conduct between the parties, may modify or eliminate contract provisions requiring written authorizations or notice of claims. The appellate court relied heavily on the verbal directions by the general contractor to the subcontractor to perform the overtime work and verbal promises to pay the subcontractor. The court also relied on the general contractor’s verbal direction that the subcontractor not bother with the work tickets that would form a written basis for a formal change order. Under these circumstances, the court held that the general contractor cannot argue that it did not have to pay for the overtime. 

As to the general contractor’s argument that the claims had been released, the appellate court held that since the subcontractor was required to sign these waivers whenever it received partial payment, and since payments were made after waivers were given, the parties treated the waivers as mere receipts of the amounts stated in the waivers, not as complete waivers of all claims to that point. 

Comment 

While courts routinely seek to enforce the express terms of an agreement that was freely negotiated, courts also seek to prohibit bad-faith dealings. Here, where the general contractor verbally promised payment, and verbally stated that written work tickets were not necessary to protect the subcontractor’s right to payment, the court would not allow the general contractor to rely on the subcontract’s provisions to the contrary.

A prudent contractor or subcontractor, however, should not ignore the contractual requirement for written extra work orders in the hope that a court may make an exception and find a waiver of the contract provisions under particular circumstances. He should insist on a written order in the form specified by the contract provisions before he performs any extra work. A written extra work order will ensure his right to be paid for performing such work. 

Under New York’s Statute of Limitations, an action for breach of contract must be commenced within six years after the claim has accrued. No claim can be asserted beyond that six year period, but parties, by agreement, may provide for a much shorter period within which to start suit for breach of contract. An agreement to shorten the limitations period will be enforced provided the shortened period is reasonable. For example, a time period of 14 days has been held unreasonably short and therefore unenforceable. 

In Mulvihill Electrical Contracting Corp. v. NAB Construction Corporation, the contractor argued that the subcontractor’s breach of contract claim was time barred because it was not brought within the six month contractual limitations period within which an action must be commenced. 

Background 

NAB Construction Corporation entered into an agreement with Metro North Commuter Railroad for the rehabilitation of the Park Avenue Viaduct. In January 1994, NAB entered into a subcontract with Mulvihill Electrical Contracting Corp. to perform electrical work at the project. A dispute over payment arose, with the subcontractor claiming that $722,135 remained due to it. On July 12, 2004 Mulvihill sued the contractor, seeking to recover the unpaid balance. 

The subcontract stated that no action or proceeding may be commenced by the subcontractor for breach of contract or any other claim arising out of the contract, unless such action or proceeding is commenced within six months of the earlier of the contractor’s or the owner’s acceptance of the subcontractor’s work as complete or the issuance of a certificate of occupancy. 

Based on this provision, NAB moved to dismiss Mulvihill’s claim. According to NAB, the owner accepted Mulvihill’s work as complete on September 28, 2001, the acceptance triggered the provisions of the subcontract regarding the six month period to commence an action, and the limitation period expired on March 28, 2002. Accordingly, the contractor argued that the subcontractor’s lawsuit, commenced on July 12, 2004, was untimely and must be dismissed.

The subcontractor argued that the contractor was never paid in full for the subcontractor’s work, thereby showing that the work was never accepted as complete by the owner. Mulvihill also noted that no certificate of occupancy was ever issued. Since NAB could not show that the owner accepted Mulvihill’s work as complete, or that a certificate of occupancy was issued, the subcontractor argued that NAB’s motion to dismiss should be denied. 

Decision

The court ruled in favor of the contractor, dismissing the subcontractor’s claim. The court acknowledged that NAB did not show that it received full payment from the owner. However, the court relied heavily on a memorandum prepared by the owner’s construction manager. The memorandum stated, “as of September 28, 2001, NAB Construction Corporation satisfactorily completed all outstanding items on the punch list, and submitted all deliverables to the Railroad.” The court also relied on the owner’s construction manager’s deposition testimony, which noted that no certificate of occupancy had been issued because certificates of occupancy are not issued in connection with a project of this type. Consequently, the court found that the owner accepted NAB’s work as having been completed as of September 28, 2001. Since six months from the date of acceptance was March 28, 2002, and the action was not commenced until July 12, 2004, the court held that the subcontractor’s action was time barred under the six month contractual limitations period. Accordingly, the court ruled that the subcontractor’s lawsuit was untimely and granted NAB’s motion to dismiss Mulvihill’s claim. 

Comment 

Courts will strictly construe time limitations periods that are voluntarily agreed to by the parties. This means that before even considering the merits of a claim, courts will dismiss a breach of contract claim if the claimant failed to comply with a shortened contractual limitations period. Courts will not rewrite or change the terms of an agreement that was freely entered into between the parties. The unpaid claimant, or potential claimant, should make every effort to become thoroughly familiar with their contractual limitation period. A claim will be lost if a shortened limitations period is not complied with. 

Claims by contractors for extra work arising from unanticipated subsurface or other physical conditions at the work site continue to be a major source of litigation. A differing site condition is usually discovered during excavation or demolition, or is an otherwise concealed condition which is different from the conditions reflected in the contract documents. 

Many claims for unanticipated conditions are based on natural subsurface conditions, such as the presence of rock or the unusual characteristics of the soil, which are not shown on the site plans. Claims for differing site conditions may also be based on the existence of artificial conditions, such as the existence of unknown underground utilities.

In the case of CATCO v. State of New York, several of the claims brought by a contractor sought recovery for extra work arising from differing site conditions not contemplated by the contract documents. 

Background 

Concrete Applied Technologies Corporation d/b/a CATCO entered into an agreement in August of 2000 with the State of New York for the reconstruction of 3.6 kilometers of highway, together with the replacement of two bridges. The contract price was $14,882,586. The project was competed and accepted by the Commissioner of Transportation in February of 2003, at which time there remained twenty-one unresolved claims by the contractor for additional compensation. Three of the claims were for differing site conditions.

The contractor argued that it unexpectedly encountered subsurface rock formations while excavating for the installation of the project’s waterlines and drainage structure, which resulted in differing site conditions not contemplated by the contract documents. According to the contractor, it was entitled to an additional $18,787 on account of the differing site conditions. In denying the contractor’s request for additional compensation, the State argued that the parties’ agreement clearly placed responsibility for determining subsurface conditions upon the contractor, that the parties’ agreement did not affirmatively indicate the subsurface conditions in the disputed areas, and that to the extent subsurface conditions were set forth in the bid documents, they were identified as estimates only. When the State refused to pay, the contractor sued. 

Decision

A trial was held and the court ruled in favor of the State. According to the court, in order to prevail on a differing site condition claim, the contractor must prove six elements: (1) the contract documents affirmatively indicated the subsurface conditions; (2) the contractor acted reasonably in interpreting the contract documents; (3) the contractor reasonably relied on the indications of subsurface conditions in the contract; (4) the actual subsurface conditions encountered must have been reasonably unforeseeable; (5) the subsurface conditions must be materially different than indicated on the contract documents and, (6) the contractor’s claimed damages must be solely attributable to the different subsurface conditions. 

Here, the contractor’s claim failed to satisfy the first element. The contract documents did not affirmatively indicate the subsurface conditions in the disputed areas. Accordingly, the court held that the contractor failed to prove the elements of its claim, necessitating judgment in favor of the State. 

The court also noted that if the State were proven to have withheld relevant information concerning site conditions, or furnished inadequate or misleading information to bidders which did not fairly represent the conditions at the site, then the State could be held liable for breach of contract. However, in this case, the court determined that the State did not conduct test borings to determine subsurface conditions, and did not make any affirmative representations as to those subsurface conditions. Accordingly, the proof did not show that the State acted in bad faith, or provide any basis not to enforce the broad exculpatory disclaimer provisions of the contract. 

Comment 

This case follows well settled law which upholds disclaimer provisions where the owner makes all existing data available to bidders but warns them not to rely on the data furnished. Faced with such express cautionary language, the contractor would be well-advised before bidding to analyze carefully all site conditions and information furnished by the owner, and to undertake an adequate pre-bid site inspection to ascertain the actual site conditions. By doing so, the contractor can minimize the risk of having to bear the cost of unforeseen site conditions. 

The “no-damages-for-delay” clause found in many public construction contracts and some private contracts continues to vex contractors. New York courts generally bar a contractor’s delay claim where the contract contains a so-called no-damages-for-delay clause. This provision bars claims by the contractor for damages due to delay caused by the owner.

There are recognized exceptions, however, to the no-damages-for-delay clause. It will not be enforced against the contractor where (1) the delays are caused by the owner’s bad faith or willful, malicious, or grossly negligent conduct, (2) the delays are uncontemplated, (3) the delays are so unreasonable that they constitute an intentional abandonment of the contract by the owner, and (4) the delays resulted from the owner’s breach of a fundamental obligation of the contract.

In the recent case of Dart Mechanical Corp. v. City of New York, the contractor attempted to prove that the project’s 32-month delay fell within at least one of the exceptions to the enforceability of the no-damage-for-delay clause. 

Background 

In June 1999 Dart Mechanical Corp., a prime contractor, entered into a $3,637,000 agreement with the New York City Department of Sanitation to provide HVAC work at the construction project known as New Annex Building, Queens Sanitation District 7. The project was delayed 32 months beyond the originally scheduled 36 month completion period. At the end of the project the contractor submitted a $1,300,000 delay claim to the City, consisting of summaries of additional costs, charts, and tables relating to delay and wage escalation analyses. In rejecting the contractor’s request for additional compensation, the City relied on the no-damages-for-delay clause contained within the parties’ agreement. The clause stated, “The Contractor agrees to make no claim for damages for delay in the performance of this Contract occasioned by any act or omission to act of the City or any of its representatives, and agrees that any such claim shall be fully compensated for by an extension of time to complete performance of the work as provided herein.” 

The contractor argued that this provision was inapplicable since (1) the City’s failure to timely terminate the project’s general contractor who was primarily responsible for the delay amounted to gross negligence and demonstrated willful misconduct; (2) the delays were uncontemplated; and, (3) the City breached a fundamental obligation of the contract by failing to timely terminate the general contractor. When the City refused to pay, the contractor sued. The City moved for summary judgment, relying on the contract’s no-damages-for-delay provision. The trial court awarded summary judgment in favor of the City and the contractor appealed.

Decision

The appellate court affirmed the trial court’s decision, relying on well established case law upholding the validity of no-damage-for-delay clauses. According to the court, the delay did not fall within one of the four exceptions to the enforceability of the no-damages-for-delay clause. 

The court rejected the contractor’s claims that the delays were caused by the City’s gross negligence, or bad faith, and that the City’s failure to timely terminate the general contractor amounted to a breach of a fundamental obligation of the contract. The court noted that the City retained a construction manager and scheduling consultant to set and maintain a schedule for project completion, that regular progress and scheduling meetings were held, that the City and their representatives repeatedly requested that the delinquent general contractor adhere to the schedule, and that the City had no affirmative obligation to terminate the general contractor. Under those circumstances, the court stated that it could not see any evidence of gross negligence, willful misconduct or any breach of a fundamental obligation of the contract on the part of the City.

In rejecting the contractor’s claim that the delays were uncontemplated at the time the contract was entered into between the parties, the court pointed out that the contract recognized that delays may be caused by other contractors for which the City would not be responsible. The contract contained an exculpatory clause which recognized the fact that delays may be caused by other contractors. The contract provided that the City is relieved from liability for such delays of other contractors. The court also noted that when an owner uses multiple co-prime contractors, as in this case, the risk of delay by the other co-primes is foreseeable, and therefore cannot be considered uncontemplated. 

Finally, although the contractor never argued that the delay was an abandonment of the project by the City, the court also noted that the evidence did not demonstrate any action by the City to suggest that it had any intention of abandoning the project.

Comment 

Comment This case demonstrates the heavy burden a contractor must overcome to establish an exception to the no-damage-for-delay clause. It appears that this contractor at the time of contract did not foresee or contemplate that the project would be delayed 32 months beyond the 36 month contract completion period. It seems unfair for a contractor to be saddled with the heavy cost of such an unforeseen delay caused by others. 

Municipalities are required by statute to award contracts to the “lowest responsible bidder.” In making its lowest responsible bidder determination, city agencies are directed to use information supplied by prospective contractors including VENDEX (acronym for Vendor Information Exchange) and prequalification questionnaire replies. VENDEX forms are completed by a contractor as part of the bid process, which a city relies on in evaluating the lowest responsible bidder designation.

A responsible contractor determination is normally made prior to the award of the contract to the contractor. But what if a city discovers that the contractor made false statements or withheld information on its VENDEX form after the contractor was paid for substantial completion of the work and the contractor sues the city to recover delay damages? Can the city disregard the contract and avoid payment based on the contractor’s false VENDEX statements? This question was addressed in the recent case of Omni Contracting Company, Inc. v. The City of New York. 

Background 

In June 2005 Omni Contracting Company, Inc. submitted a bid to contract for a public improvement project known as “Reconstruction of Thompson Street (Vesuvio) Playground.” The contract was awarded to Omni. In March 2006 the contractor entered into an agreement with the New York City Department of Parks and Recreation to construct the project. The contract price was $2,127,000. The contractor was originally required to complete work within 270 consecutive calendar days. During construction the contractor requested, and the City approved, six time extensions, extending the project’s completion date by nearly seven months. The City paid the contractor $2,143,866 for its work under the contract. Thereafter, the contractor sued the City, alleging that it had fully performed the contract, but that its performance was delayed by the acts of the City, and those delays caused the contractor to incur $319,386 in additional costs.

In defense to the contractor’s lawsuit, the City argued that it was fraudulently induced to enter into the contract. According to the City, the contractor made false statements and withheld information on its VENDEX form originally filed with the City in April 2004, and reaffirmed those same false statements in July 2004, February 2005, and April 2005, in the contractor’s sworn “no change” certifications. Accordingly, it was the City’s argument that when the contractor submitted its bid for the playground project in June 2005, the contractor failed to make a required disclosure regarding its failure to pay employees a prevailing wage on several of the contractor’s other projects with the City. Based on the failed disclosure, the City argued that in was fraudulently induced to enter into the contract. The City moved for summary judgment, seeking to dismiss the contractor’s claims.

Decision

The court ruled in favor of the City. The court first noted the requirement that public projects be awarded to the lowest responsible bidder. It went on to note that under the New York City Procurement Policy Board Rules, the “failure of a firm to provide relevant information specifically requested by the Contracting Officer may be grounds for a determination of non-responsibility.” Since the contractor failed to provide requested information relating to its past prevailing wage investigations and violations, which occurred in 1999, 2001, 2004 and 2006, the court held that the contractor was not a “responsible” contractor. 

The court went on to state that contracts procured through fraudulent bidding are void as against public policy. Where work is done pursuant to such an illegal contract, the court held that the contractor is not entitled to recover on its claims. Additionally, the court pointed out that the municipality can recover from the contractor all amounts paid under the illegal contract.

The court accordingly dismissed the contractor’s delay claim for the $319,386. Given that the City was not seeking to recover the entire amount paid to the contractor, the contractor was permitted to retain the monies previously paid to it by the City.

Comment 

This case emphasizes the importance of accurately completing and updating VENDEX and prequalification questionnaire replies. The failure to do so may not only support a non-responsible determination, but, as shown, it may also be grounds for non-payment for work performed and the recovery of payments already made for work performed. 

An architect acts as the owner’s agent in some situations. The general conditions of a construction contract will determine in what areas the owner has designated the architect as his representative. In areas of shop drawings approval, construction schedules, material samples, and the like, an architect is typically considered the agent for the owner. 

But can a contractor make a valid extra work claim directly against an architect for nonpayment? This issue was raised in the recent case of Pulver Roofing Company, Inc. v. SBLM Architect’s P.C. 

Background 

Pulver Roofing Company, Inc. entered into a contract with the Rome City School District to install a roof on a school. The roof was to be installed in accordance with plans provided by SBLM Architects, P.C. According to the contractor, the architect requested that the contractor perform extra work, which was outside the scope of work originally agreed to. The contractor also claimed that the architect promised the contractor that it would be paid for the extra work. When the architect refused to pay the contractor for the extra work performed, the contractor sued the architect for the reasonable value of the extra work. 

The architect defended on the grounds that that the contractor’s agreement was with the School District, that the extra work was performed for the benefit of the School District, that the architect was simply acting as an agent for the School District, and that the architect was not responsible for ensuring that the contractor was paid. 

The architect moved to dismiss the claim by the contractor. The trial court ruled in favor of the architect, holding that the work was in fact rendered for the benefit of the School District rather than the architect. The contractor appealed. 

Decision

The appellate court reversed the decision of the trial court. In so doing, the appellate court relied upon the elements necessary to state a claim for recovery in quantum meruit.

The legal theory of “quantum meruit” is available where there is no express contract, but rather a legal obligation is imposed in order to prevent a party’s unjust enrichment. The elements of a quantum meruit claim are: (1) the performance of services in good faith; (2) the acceptance of the services by the party for whom they were rendered; (3) the expectation of compensation for those services; and (4) a statement of the reasonable value of the services. While the appellate court agreed that the work was in fact rendered for the benefit of the School District, the court pointed out that the contractor is not required to establish that the architect received a benefit in order to recover in quantum meruit. 

According to the appellate court, the contractor performed the work at the architect’s request, pursuant to an express promise that it would be paid, and the contractor was accordingly entitled to recover the reasonable value of its work, regardless of whether or not the architect in any economic sense benefitted from the work. 

Where a contract covering a specified subject matter exists, recovery in quantum meruit is not permitted. Here however, because the work was extra work, beyond the scope of the contractor’s agreement with the School District, the appellate court permitted the quantum meruit claim. The case proceeded to trial because there is a dispute whether the additional work was outside the scope of the work originally agreed to.

Comment 

This case is unique in that a contractor traditionally has not been permitted to maintain a direct claim for nonpayment against an architect. The prudent contractor will require extra work approvals to be in writing before the work begins to help ensure that it will be paid for that work. 

A corporation has an existence separate and distinct from that of its individual officers, directors and stockholders. The general rule is that individual owners of a corporation are insulated from personal liability for corporate debts, and that individuals may incorporate for the purpose of limiting their liability. 

In certain circumstances however, owners may be liable for some underlying corporate obligations. In an appropriate case, a court will disregard the corporate entity or “pierce the veil” of the corporate entity and hold a corporate officer or shareholder personally liable for corporate debt. In the recent case of East Hampton Union Free School District v. Sandpebble Builders, Inc., the court addressed the issue of piercing the corporate veil and imposing personal liability against the corporation’s president and principal owner. 

Background 

In June 2006 the East Hampton Union Free School District negotiated a construction management agreement with Sandpebble Builders, Inc. The agreement was negotiated in principle and was subject to signature by the construction manager’s owner and president, Victor Canseco. Although Mr. Canseco indicated that he would sign the contract, he later refused and additional negotiations were held, but again, Mr. Canseco refused to sign the agreement. This sequence of re-negotiation, agreement in principle, and refusal to execute was repeated twice more until, by letter dated September 15, 2006, the construction manager terminated negotiations, and stated that it was “ready, willing and able to perform”, but only under the terms of an abandoned 2002 agreement between the school district and the construction manager, which contained more favorable terms. The school district contracted with a different construction manager and sued Sandpebble Builders, Inc. and Victor Canseco, personally for breach of contract. 

In support of the school district’s direct claim against Mr. Canseco, the district argued that Mr. Canseco was the president and owner of Sandpebble, that he exercised “complete dominion and control” over Sandpebble, and that Mr. Canseco used such power to commit a wrong against the school district. According to the school district, Mr. Canseco never intended to perform the work as negotiated under the contracts. Rather, Mr. Canseco engaged in bad faith and unfair negotiating tactics by repeated demands for new terms, after having reached an agreement in principle, which were designed to delay progress of the project in order to pressure the district to offer more favorable terms. 

Mr. Canseco moved to dismiss the claims against him personally on the ground that in his dealings with the district he acted solely in his capacity as president and principal owner of Sandpebble. Additionally, Mr. Canseco argued that the allegations contained in the complaint were insufficient to maintain an action against him personally. The trial court denied Mr. Canseco’s motion to dismiss and he appealed. 

Decision

The appellate court reversed the trial court, and dismissed the school district’s direct claims against Mr. Canseco. In so doing, the appellate court relied heavily on prior case law, which states, “The general rule, of course, is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability. The concept of piercing the corporate veil is an exception to this general rule, permitting, in certain circumstances, the imposition of personal liability on owners for the obligations of their corporation. A plaintiff seeking to pierce the corporate veil must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over it in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff.” 

According to the court, the factors to be considered in determining whether the owner has “abused the privilege of doing business in the corporate form” include whether there was a failure to adhere to corporate formalities, inadequate capitalization of the corporation, personal and corporate commingling of accounts, and use of corporate funds for personal use. Although the school district alleged in its complaint that Mr. Canseco exercised “domination and control” over the corporation, it did not allege the factors necessary to find that Mr. Canseco “abused the privilege of doing business in the corporate form.” Accordingly, the appellate court granted Mr. Canseco’s motion to dismiss the claims against him personally. 

Comment 

The analysis of whether a corporate principal can be held personally liable requires a detailed review of the relevant facts and the allegations contained in the complaint. However, even after a thorough review of the facts and allegations, judges and juries can still arrive at different conclusions. In this case, three of the five appellate judges agreed that the claims against Mr. Canseco should be dismissed, while two appellate judges would have let the claims remain. 

The majority of the judges held that an allegation in the complaint of “domination and control” is not standing alone, sufficient to state a cause of action for personal liability against the corporate owner. The two dissenting judges, however, held that the complaint states a cause of action against Mr. Canseco under the “piercing the corporate veil” theory because the complaint alleges Mr. Canseco’s bad faith conduct, consisting of his “repeated negotiations of contract terms with the school district, to which he would orally agree on multiple occasions while never intending to execute written contract documents, all in a deliberate effort to delay the construction project as a means of leveraging a greater percentage of completion from the school district.” 

An appeal of this decision to New York’s highest court remains possible, and would finally determine whether Mr. Canseco can be sued personally for corporate debt under the “piercing the corporate veil” theory.

Where a contractor has not been paid he can sue for a breach of contract, for which he can recover the amount due on the contract. If there is no contract in existence between the parties, the contractor can sue for the reasonable value of the work he had performed. This legal theory is called quantum meruit. To determine the amount the contractor should be awarded in quantum meruit, the court will focus on the fair and reasonable value of the work provided by the contractor. 

It is important that the contractor understand the distinction between the two remedies because the contractor’s amount of recovery may vary significantly depending on whether he is allowed to sue for breach of contract or recover on quantum meruit for the reasonable value of the work he has performed.

In the recent case of ADCO Electrical Corporation v. HRH Construction, LLC, the subcontractor elected to sue to recover damages in quantum meruit rather than for breach for contract.

Background 

HRH Construction, LLC, as construction manager, sent a notice of intent to ADCO Electrical Corporation, an electrical subcontractor, in connection with the construction of the Performing Arts Center in White Plains, New York. The notice of intent stated in part: “This will constitute a notice of our intent to award you a contract for the Electrical Work at the [Performing Arts Center] for the total sum of ‚Ķ$685,000. This agreement is in accordance with drawings‚Ķ dated 6/10/03 as prepared by Enviro Design, Inc.” The notice of intent also clearly stated that it was “subject to the execution of a formal contract by [general contractor], to follow”. Though the construction manager sent the subcontractor a $685,000 fixed-price subcontract, it was never signed by the general contractor, the construction manager or the subcontractor. 

The subcontractor supplied labor, materials and equipment to the project, for which it claimed a portion was unpaid. According to the subcontractor, the actual fair value of the labor, materials and equipment it supplied was $1,267,675. Since the subcontractor was of the belief that the actual fair value of the labor, materials and equipment supplied by it to the project was greater than the $685,000 stated in the letter of intent, it chose to sue based on quantum meruit. 

The general contractor and construction manager argued that a binding obligation arose under the subcontract by virtue of the fact that the parties agreed to all of the subcontract’s terms and simply failed to sign the document. Alternatively, they argued that the letter of intent created a contract and established an agreed fixed price which was binding on the subcontractor. 

A trial was held and the jury awarded an additional $393,469.75 to the subcontractor in quantum meruit. The general contractor and construction manager appealed.

Decision

The appellate court affirmed the judgment in favor of the subcontractor. Relying on established case law, the court stated, “(i)f the parties to an agreement do not intend it to be binding upon them until it is reduced to writing and signed by both of them, they are not bound and may not be held liable until it has been written out and signed.” The court then looked to the plain language of the notice of intent, which contemplated a future written agreement that was never entered into. Since the written agreement was never entered into, the court held that both it and the letter of intent were not binding on the subcontractor. 

The court also found no merit to the argument that the parties had actually agreed to the subcontract’s terms, but simply failed to sign it. The court noted that rather than sign the subcontract, the subcontractor proposed several material modifications, which constituted its rejection of the proposed contract and a counteroffer that was never accepted by the general contractor or the construction manager. 

Since no binding contract governed the contractor’s work at the project, the appellate court agreed that the award for the fair and reasonable value of the work performed in quantum meruit was appropriate. 

Comment 

Quantum meruit is an equitable doctrine which seeks to make a contractor “whole” by compensating him for the fair and reasonable value of his work. Quantum meruit is not available where a valid and enforceable agreement exists. Though the damages recoverable in quantum meruit may often approximate the damages recoverable for breach of contract, the prudent contractor should be familiar with the principles of quantum meruit. The distinction between the two legal remedies is readily apparent in this case where the fair and reasonable value of the work performed far exceeded the contemplated price of the work. 

New York Labor Law Section 220 requires contractors to pay its workers the appropriate prevailing wages and benefits on public works projects. Collective bargaining agreements are used as a means of determining the prevailing wage rate, provided such agreements cover at least thirty percent of the workers in a particular trade. 

How is the prevailing rate determined where there are two unions covering the same work in a given locality? This question was answered in the recent case of Matter of International Union of Elevator Constructors Local No. 1 AFL-CIO v. Thompson, where the trade workers were represented by two unions, each of which had collective bargaining agreements containing different wage rates and benefits. 

Background 

In New York City, Local 1 and Local 3 are two main labor unions that represent elevator repair and maintenance workers. Local 1’s collective bargaining agreement provides for a higher rate of pay than that of Local 3. The Comptroller of the City of New York is responsible for establishing prevailing wage rates which must be paid to workers on public projects in New York City. This differs from projects outside of New York City, where it is the Commissioner of the New York State Department of Labor who is responsible for establishing prevailing wage rates. 

The City Comptroller used the rates set forth in Local 3’s collective bargaining agreement, rather than the higher rates set forth in Local 1’s collective bargaining agreement, in determining the prevailing wage rates for New York City elevator repair and maintenance workers for the period of July 1, 2008 through June 30, 2009.

The City Comptroller conducted a survey to determine which union had the most members. Mailings were sent to 78 contractors previously identified as employing Local 1 members and 27 contractors previously identified as employing Local 3 members. Only 12 of the Local 1 contractors responded, indicating 130 members performed elevator work. Of the 27 Local 3 contractors, 20 contractors responded, indicating 1,331 members performed elevator work. The City Comptroller concluded that Local 3 had more members and therefore its rates were the “prevailing” wage rates among elevator repair and maintenance workers.

Local 1 learned of the Comptroller’s determination and sued to annul the determination. According to Local 1, the Comptroller’s survey method and determination were arbitrary, capricious and not supported by substantial evidence. Local 1 argued that it actually had 1,608 members to Local 3’s 1,331 members. It was Local 1’s position that when more than one union represented a particular type of worker, it was the historical practice for the Comptroller to use the rates set forth in the collective bargaining agreement for the predominant union for the trade, with the predominant union to be measured by the number of each union’s members. Since Local 1 claimed to have more members performing elevator work than Local 3, Local 1 argued that its rates should apply and the Comptroller’s determination should be annulled. 

Decision

The court agreed with Local 1’s argument that the Comptroller’s reliance upon the survey data was based on flawed data since so few Local 1 contractors responded. The court held that the use of a survey with such a poor response from contractors identified by Local 1 resulted in a determination that “is without foundation in fact.” In evaluating the meaning of the term “prevailing”, the court relied on past judicial decisions interpreting the word to mean “commonly accepted or predominant” and “most frequent.” Based on its analysis of the term “prevailing”, the court held that the larger union’s collective bargaining agreement should establish the prevailing wage rate. However, the court stopped short of annulling the determination of the City Comptroller to use Local 3’s rates. With the limited evidence presented, it could not be sure of which union truly had the greater number of members. The court ordered that a hearing take place with the taking of testimony and submission of evidence to determine which union had more members performing elevator work. The predominant union’s collective bargaining agreement would establish the prevailing wage rate. 

Comment 

The prevailing wage statute does not set forth how the “prevailing rate” is to be determined where there is more than one union representing a particular type of work. This case shines a light on how the prevailing wage rate should be determined in such a case.