The “no-damage-for-delay” clause by which a party denies liability when it is responsible for delays has been the subject of much litigation. The clause is found in both private construction contracts and public works contracts and is generally upheld as valid by the courts. There are exceptions, however, to the enforceability of this clause.

In the recent case of Premier-New York Inc. v. Travelers Property Casualty Corp., a court ruled on the enforceability of a no-damage-for-delay provision contained in a subcontract.

Background

Trataros Construction, Inc., a prime contractor, subcontracted with Premier-New York, Inc. to perform the roofing work at Baruch College located in Manhattan. The project was significantly delayed and the subcontractor sued the prime contractor for its delay damages.

The subcontractor argued that as a result of changes to the project schedule and re-sequencing of the work, it was entitled to reimbursement for its additional costs since it was forced to: a) work in winter conditions; b) perform additional and extra work as a result of the installation of the curtain wall prior to the start of roofing work; c) stop and start work as other trades had material stored on the roof or were working in areas needed for the sucontractor’s work; d) move materials by elevator rather than by the hoist; e) have inadequate storage area for its materials; f) work in an inefficient and disrupted fashion; and g.) work for a prolonged period of time during which time there were prevailing wage increases mandated for its workforce.

The prime contractor moved to dismiss the claims for delay damages. The prime contractor did not dispute that the subcontractor incurred extra costs as a result of project delays. Rather, the prime contractor argued that the subcontract’s no-damage-for-delay clause barred the delay damage claims against the prime contractor. The provision stated, “should the Subcontractor’s performance of this Subcontract be delayed‚Ķthe Subcontractor‚Ķshall not be entitled to any increase in the Subcontract Price or to damages or additional compensation‚Ķ”

The subcontract further required the subcontractor to waive any claim for additional compensation arising from any of the following site conditions: (1) the work was hindered by delays or accelerations of the project schedule; (2) the work was rescheduled; (3) the work was re-sequenced; and (4) the work was interrupted and re-started.

The subcontractor argued that the no-damage-for-delay provision was not enforceable because it fell within the four recognized exceptions to a no-damage-for delay clause. These exceptions are: (1) delays caused by the prime contractor’s bad faith or its willful, malicious, or grossly negligent conduct; (2) uncontemplated delays; (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the prime contractor; and (4) delays resulting from the prime contractor’s breach of a fundamental obligation of the contract.

Decision

The trial court dismissed the delay claims against the prime contractor. The court held that all damages claimed by the subcontractor were a result of project delays, which were expressly waived under the plain language of the subcontract’s no-damage-for-delay clause.

The court relied heavily on established case law upholding the validity of no-damage-for-delay clauses. The court addressed the four exceptions to the enforceability of a no-damage-for delay clause, and held that none of them applied in this case.

With respect to the subcontractor’s claim that the delays were caused by the prime contractor’s bad faith, willful, malicious, or grossly negligent conduct, the court found no evidence to suggest that the prime contractor made intentional misleading representations or withheld material information from the subcontractor before submitting its bid. The court further relied on the subcontract provisions which obligated the bidder to inspect site conditions and investigate the requirements of its work.

In rejecting the subcontractor’s further argument that the delays were uncontemplated, the court noted that “the uncontemplated delay exception only applies if the claimant can demonstrate that the delays were wholly unanticipated.” The court stated that “if the alleged delays were foreseeable under a project’s particular circumstances, or were discussed in the contract, damages arising from those delays are barred.” In relying upon prior case law, the court held that slow or poor performance by other project subcontractors is foreseeable, and that the general contractor’s inept administration of its contract is also foreseeable. According to the court, the subcontractor’s allegations fell within these categories, and therefore the delays were foreseeable risks of construction. Since the delays were anticipated at the time the subcontract was signed, the court ruled that they did not fall within the “uncontemplated delay” exception to the no-damage-for-delay clause.

The court also found no evidence regarding the subcontractor’s claim that the delays were so unreasonable that they constitute an intentional abandonment of the contract.

Finally, the court rejected the subcontractor’s argument that the prime contractor’s conduct constituted a fundamental breach of the contract that would render the no-damage-for-delay clause unenforceable. In support of this argument, the subcontractor claimed that the “sample CPM schedule” provided by the prime contractor with the bid package had been changed and the work was re-sequenced without notice to the subcontractor, forcing the subcontractor to incur additional costs. The court held that the subcontractor’s reliance on the sample CPM schedule was unreasonable, pointing out that the subcontract clearly identified the document as being only a “sample” schedule.

Comment

In New York, the no-damage-for-delay clause is generally enforceable, unless it falls within the four recognized exceptions to its enforcement. The courts are not permitted to rewrite the contract; they will ordinarily enforce the plain language of the no-damage-for-delay clause as written. Contractors and subcontractors should be wary of this clause when negotiating contract terms and conditions.

Construction contracts often include a “pay-when-paid” provision where a contractor is not obligated to pay his subcontractors until he has been paid by the owner. This language attempts to shield a contractor from his payment obligations no matter why the owner has not paid him.

New York courts, however, have interpreted the contingent payment clause as one which fixes a reasonable time within which the subcontractor may be expected to wait for payment from the general contractor, rather than making payment by the owner to the general contractor a condition of payment to the subcontractor.

In the recent case of Otis Elevator Company vs. Hunt Construction Group, Inc., the pay-when-paid clause in the subcontract was raised as a defense by the general contractor.

Background

Hunt Construction Group, Inc., a general contractor, subcontracted with Otis Elevator Company for the elevator and escalator work at the Turning Stone Casino and Resort Project in Oneida County, New York. The subcontractor sued the general contractor for breach of the subcontract, and moved for summary judgment.

The general contractor argued that it had not received payment from the owner for the subcontractor’s work and that in accordance with the subcontract’s pay-when-paid provision, payment was not yet due the subcontractor. The general contractor also argued that sums were presently withheld by the owner for defective work attributable to the subcontractor. Finally, the contractor argued that the subcontractor failed to comply with the contractual notice of claim requirements of the subcontract.

The subcontractor argued that summary judgment was warranted because the general contractor had approved the subcontractor’s performance of the work. In its payment application to the owner, the general contractor had certified the subcontractor’s work as complete. Additionally, the subcontractor submitted evidence establishing that the owner had reduced the general contractor’s retainage from 10% to 5%, thereby entitling the subcontractor to a release of 5% retainage as well. Given that there was no dispute as to approval of the work or release of retainage, the subcontractor argued that summary judgment was appropriate.

The trial court awarded the subcontractor judgment in the amount of $367,003 and the general contractor appealed.

Decision

The appellate court affirmed the trial court’s decision, relying on well established case law holding that a pay-when-paid clause in its subcontract merely regulates the time of payment and does not shift the risk of owner nonpayment to the subcontractor. Accordingly, the appellate court held that the general contractor’s obligation to pay its subcontractor was not contingent on the general contractor’s receipt of payment from the owner. The court also rejected the contractor’s argument that the monies withheld by the owner for defective work was attributable to the subcontractor. The defense of the subcontractor’s alleged failure to comply with the contractual notice of claim requirements was also rejected by the court.

Comment

In New York, a pay-when-paid provision or a pay-if-paid provision will not indefinitely extend a contractor’s obligation to pay its subcontractors pending the receipt of payment from the owner. Here, the general contractor relied on the pay-when-paid provision to argue that since it had not received payment in full from the owner, it was not required to pay its subcontractor in full. Since the argument was contrary to the controlling law, and the general contractor had certified in its payment application that the subcontractor’s work as fully performed, no question of fact existed and the grant of summary judgment to the subcontractor was appropriate.

Construction contracts often contain a much-litigated provision that bidders satisfy themselves by personal examination of the location, conditions and requirements of the work and the accuracy of the information furnished for bidding purposes. Under this exculpatory clause, the contractor generally assumes the risk of unforeseen conditions which may be encountered. The contractor will be excused from unforeseen conditions if it can be shown that the nature of the unanticipated condition is so well hidden as to prevent discovery by reasonable prebid site investigation and examination of available contract information.

In the recent case of Rapid Demolition Company, Inc. v. State of New York, the court applied this exculpatory language in the contract to the contractor’s claim for extra work.

Background

Rapid Demolition Company, Inc. contracted with the State of New York to demolish a bridge. The work included the removal of the bridge’s concrete deck. Once demolition was commenced, the contractor determined that the concrete deck was substantially thicker than what was represented by the State in the plans provided to bidders. When the State refused to pay for the additional costs incurred, the contractor sued the State for breach of contract.

The State argued that the parties’ contract relieved it of liability for the increased thickness. The State relied on numerous contract clauses under which the contractor represented that its bid information was secured by personal investigation and research and not from the estimates, records, tests or representations of the State. The State also relied on contract language which stated that the dimensions shown on the project plans may vary from the actual field dimensions. In addition, the State provided testimony at trial that even a visual inspection of the concrete overlay would have revealed its true thickness.

The trial court awarded the contractor $772,250 on account of the contractor’s additional costs relating to the increased deck thickness. Both the State and the contractor appealed. On appeal, the State argued that the trial court ignored the plain exculpatory contract language. The contractor argued that the damages awarded were inadequate.

Decision

The appellate court reversed the trial court’s decision. In so doing, the appellate court strictly construed the parties’ contract, which assigned responsibility for the increased deck thickness to the contractor, not the State. In its ruling, the court relied heavily on prior case law, stating that “the ultimate guide in determining whether or not the contractor is to be paid for extra work is the contract itself.” The court also stated, “if the parties intended the contractor to rely upon its own investigation, no recovery for extra work may be had, absent a showing of fraud or misrepresentation as to existing conditions.”

Given the law, the court turned to the contract, which it found to be clear. The court noted that the contract stated that the contractor had carefully examined the site and was fully informed of all conditions affecting the work to be done and labor and materials to be furnished. The contract also stated that the contractor would make no claim against the State by reason of estimates, tests, or representations provided by the State. Lastly, the court noted that the contract clearly stated that the bid documents were not prepared based upon actual field conditions and that the dimensions shown on the plans may vary from the actual field dimensions. Given the contract language, the appellate court ruled that the contractor could not recover any additional compensation for unanticipated costs related to the thickness of the concrete deck.

Comment

The inclusion of exculpatory language in a contract relieving the owner of liability and requiring the contractor to inspect the site should warn the contractor that he must determine for himself what conditions he can reasonably expect to encounter. In light of such express cautionary language, the contractor would be well-advised to undertake an adequate pre-bid site inspection to ascertain the actual site conditions and to thoroughly familiarize himself with all available information regarding site conditions.

Statutes of limitations prescribe specific time periods by which a claimant must commence an action for breach of contract. If the lawsuit is not started within the statutory time after the right to bring the action accrues, the cause of action will be legally barred. Under New York’s statute of limitations, a breach of contract action must be brought within six years from the date the cause of action accrued. Claimants should be aware, however, that by contract agreement, the parties may legally reduce the six-year statute of limitations to a substantially shorter time period.

In addition, problems arise as to when the cause of action accrues to commence the limitation period. In the recent case of Mulvihille Electrical Contracting Corp. v. Nab Construction Corp., the court applied the shorter contractual statute of limitation and addressed the question of when a subcontractor’s claim accrued to trigger the contractual limitation period by which the subcontractor must start suit.

Background

Mulvihill Electrical Contracting Corp., an electrical subcontractor, contracted with Nab Construction Corporation, a general contractor, to perform certain electrical work. The parties’ subcontract contained a six-month time limitations period in which to commence suit. The limitation period was to begin running from the earlier of: (1.) acceptance of the subcontractor’s work as complete by the owner; (2.) acceptance of the subcontractor’s work as complete by the general contractor; or, (3.) the issuance of a certificate of occupancy. The subcontractor commenced suit in 2004, claiming that the general contractor failed to pay for certain subcontract work.

The general contractor moved for summary judgment dismissing the complaint as time-barred on account of the six-month limitation period. According to the general contractor, the contractual six-month limitation period had long since expired. The general contractor pointed out that the subcontractor submitted an application to the New York City Department of Transportation in 2000 for a certificate of compliance, which was approved. In addition, the general contractor argued that in 2002 it was paid in full by the project owner, so as to demonstrate that under the prime contract the subcontractor’s work was accepted as complete by the owner.

The trial court granted the general contractor’s motion for summary judgment, and dismissed the subcontractor’s claims. The subcontractor appealed.

Decision

The appellate court reversed the trial court’s decision. In so doing, the appellate court strictly construed the parties’ subcontract. According to the court, the NYCDOT’s approval of the subcontractor’s application had no bearing on when the six-month limitations period began to run. This was so because the NYCDOT’s approval was not acceptance by the owner, acceptance by the general contractor, or the issuance of a certificate of occupancy, as was required to begin the contractual six-month limitation period.

The appellate court also rejected the general contractor’s argument that the owner accepted the subcontractor’s work because the general contractor was paid in full by the owner. The court held that there was insufficient documentary evidence to establish that the subcontractor was paid in full.

Comment

There is little else in the law that can destroy a case so quickly as a short time period for the bringing of an action. The courts do not have any discretion to extend the statutory or contractual time limitations periods no matter how good the reasons for delay in bringing the action may be. In this case, the subcontractor was fortunate to avoid the short six month contractual limitation period because of the general contractor’s failure to prove that the claim accrued more than six months before the suit.

New York courts will generally bar a contractor’s delay claim when the contract contains a so-called “no-damages-for-delay” clause. There are recognized exceptions, however, to the no-damages-for-delay clause. It will not be enforced where the delays were: (a) not contemplated by the parties at the time the contract was entered into; (b) caused by bad faith or willful, malicious or grossly negligent conduct; (c) so unreasonable that it constituted an intentional abandonment of the contract; or (d) resulted from breach of a fundamental obligation of the contract.

The same exceptions apply where there is a no-damages-for-delay clause in a contract between a general contractor and a subcontractor. In the recent case of Commercial Electrical Contractors, Inc. v. Pavarini Construction Co., Inc., the subcontractor sought to avoid the enforceability of the no-damages-for-delay clause by arguing the exceptions outlined above.

Background

Pavarini Construction Co., Inc., a general contractor, contracted with Commercial Electrical Contractors, Inc., an electrical subcontractor, to perform work at the Museum for American Folk Art. The prime contract was incorporated by reference into the parties’ subcontract, and both contained no-damages-for-delay clauses. Upon project completion, the electrical subcontractor sought to recover damages due to delays caused by the general contractor’s improper scheduling and organization of subcontractors, changes to the work, and failure to provide temporary heating. According to the electrical subcontractor, this conduct constituted gross negligence, was unanticipated, and delayed the project anywhere from 8 to 20 months.

After the general contractor refused to compensate the electrical subcontractor for the delay, the subcontractor sued. In moving for summary judgment, the general contractor argued that the damages sought for the delay were barred by the no-damages-for-delay clauses. The general contractor also noted that the owner clearly retained the right to make changes or modifications to the work, and the prime contract included a procedure to deal with delays. The trial court granted the general contractor’s motion for summary judgment, and dismissed the subcontractor’s claims for delay damages. The subcontractor appealed.

Decision

The appellate court affirmed the trial court’s decision. The appellate court held that no-damages-for-delay clauses are unenforceable if the delays were caused by the contractor’s bad faith or its willful, malicious, or grossly negligent conduct; were uncontemplated; were so unreasonable that they constitute intentional abandonment of the contract; or resulted from breach of a fundamental obligation under the contract. The court found no evidence to indicate that the conduct of the contractor was the result of gross negligence or willful misconduct. Instead, the court stated that the conduct amounted to nothing more than inept administration or poor planning, which falls within the contract’s exculpatory no-damage-for-delay clause.

The court also held that it was reasonably foreseeable that there would be changes to the work, such as changes to room dimensions, and delays of the types involved on this project. Lastly, the court stated that the delay was not long enough to qualify as abandonment of the contract.

Comment

No-damages-for-delay clauses are routinely upheld by the courts. Though usually just a short paragraph, the effect of the clause can be significant. Often, otherwise valid claims are completely barred. Contractors should be wary of this clause when negotiating contract terms and conditions. Inclusion of the clause quite likely will bar a contractor’s right to compensation for legitimate project delays.

New York’s competitive bidding statutes serve a dual purpose. The primary purpose is to benefit the taxpaying public by enabling government agencies to obtain the best price for public construction projects through open, competitive bidding. The secondary purpose is to assure that contractors are on an equal footing when bidding public works.

These statutes are designed to reject a contractor who is unqualified or whose bid is not responsive to the invitation for bid. The award must be made to the lowest responsible and responsive bidder. The factor most likely to cause problems in the bid selection process is responsiveness, as shown in the recent case of Total Construction Corp. v. City of New York.

Background

The New York City Department and of Parks and Recreation solicited bids for two contracts. The bid documents relating to each contract required the submission of an original bid bond or bid deposit with a contractor’s bid. Total Construction bid on each contract, and submitted a bid bond for each. The bid bond submitted by the contractor was not an original but rather a faxed copy. Additionally, the bond itself was a reproduction which had the word “VOID” appearing throughout the face of the document. Also, much of the actual text on the document was difficult to read if not illegible. Upon receiving the bid bond, the Parks Department contacted the surety named on the bond. The surety representative confirmed that the bond copy, as presented, was invalid.

Based on the bid bond deficiencies, the Parks Department rejected the contractor’s bids as non-responsive. The contractor appealed the Department’s determination, arguing that on numerous prior occasions over the course of several years, the Department had accepted facsimile copies of bid bonds without objection. The contractor also stated that it would provide a letter from its surety attesting to the validity of the bid bond.

In denying the appeal, the Department again focused on the deficiencies of the bond. The Department also noted that the contractor failed to provide specific examples that in the past the Department accepted faxed copies of bid bonds from the contractor without objection. Additionally, the Department stated that even if faxed copies were accepted in the past, the Department did not waive the requirement of receiving an original bond in this particular instance. The Department also noted that despite the appeal, still no original bond was provided. Upon the denial of the contractor’s appeal, the contractor sued the Department.

Decision

The Court approved of the Department’s non-responsive determination. The Court noted that the bonds were not originals, could not be read, and that the word “VOID” appeared all over the bonds. The Court stated, “under these circumstances, where the bonds appeared invalid on their face, the Parks Department had a rational basis for rejecting petitioners bids as non-responsive, since petitioner failed to submit bonds in literal compliance with the bid specifications.” The Court further pointed out that “the court may not substitute its judgment for that of the agency responsible for making the determination, but must ascertain only whether there is a rational basis for the decision or whether it is arbitrary or capricious.”

The Court also noted that the agency has the right to determine whether a variance from bid specifications is material or should be waived as a mere irregularity, and that determination must be upheld by the court if supported by any rational basis. Here, the Court found that the Department had a rational basis for rejecting the contractor’s bids as non-responsive because of its failure to comply with the bond requirements of the bid specifications.

Comment

There is no conclusive formula for determining on a case by case basis what constitutes a mere irregularity or technical noncompliance with bid specifications as opposed to a material noncompliance with the bid requirements. The courts give broad direction to public authorities in determining whether a bid is responsive. Where the agency’s insistence upon strict compliance with the bid specifications has a rational basis, the courts will uphold the determination of non-responsiveness.

New York’s construction trust fund statutes are designed to ensure payment adownsfor labor and material furnished to a particular project. The statutes provide that monies received for a construction project by an owner, contractor or subcontractor are trust funds held by them as trustees for payment to those performing work or furnishing materials for the project. The statutes were intended to prevent owners, contractors and subcontractors from using the trust monies to pay creditors on other projects or keeping the monies for themselves.

In the recent case of Matter of SN Contracting, Inc. v. Bank of New York Mellon Corporation, a judgment creditor of a contractor sought to attach the contractor’s bank accounts for the purpose of satisfying the judgment. The bank accounts contained trust monies for the benefit of subcontractors and material suppliers.

Background

In May 2005 the Bank of New York obtained a judgment against SN Contracting, Inc. and its president, Solaman Mia, in the amount of $111,488.22. In July 2007, seeking to enforce the judgment, the Bank of New York served a restraining notice upon Washington Mutual Bank. Two Washington Mutual accounts were attached, one in the name of the contractor, and the other in the name of the corporate president, Solaman Mia. The total deposits in the two bank accounts was $72,630.87.

The contractor, through its attorney, requested that that the Bank of New York voluntarily release the attachment. The contractor claimed that since the two bank accounts held trust assets relating to two specific construction projects, the monies could not be used to satisfy the judgment obtained by the Bank of New York. According to the contractor, monies were owed to subcontractors and suppliers on both projects. The contractor stated that the restraining notice resulted in a refusal of Washington Mutual to honor checks drawn on the accounts, and that as a result, the contractor was unable to pay its subcontractors and suppliers on both jobs. When the Bank of New York refused to voluntarily release the attachment, the contractor sued for an order canceling and vacating the restraining notice and releasing the attachment.

Decision

The Court noted that Article 3-A of the Lien Law creates trust funds of certain construction payments or funds to ensure payment to subcontractors and suppliers. The Court further noted that the statutory provisions were intended to ensure that funds obtained as payment for the performance of construction contracts are in fact used to pay the cost of the labor and material furnished on those jobs. The Court went on to state that “the contractor must hold those trust assets for certain expenditures arising out of the improvement it incurred in the performance of its contract, including the payment of claims of subcontractors.” In this case, the Court determined that the subcontractors’ claims for work performed were trust claims and that the subcontractors were designated “beneficiaries” of the contractor’s “trust” under the Lien Law.

In determining whether the $72,630.87 contained in the bank accounts could be used to satisfy the judgment, the Court evaluated whether the monies were indeed trust funds. The Court noted that the contractor had received payments totaling $73,000.00 in connection with the two projects, and that the contractor had paid $32,600.00 to subcontractors and suppliers in connection with the two projects. Since $73,000.00 in trust assets were received and $32,600.00 of those trust assets were paid out, the Court held that the balance, i.e. $40,400.00, of the attached funds were trust assets which must be paid to subcontractors and suppliers on the two projects. The Court held that the remaining $32,230.87 in the two bank accounts were non-trust assets that could be levied upon by the Bank of New York and may be applied towards satisfying its May 2005 judgment in the amount of $111,488.22.

Comment

The construction trust-fund statutes are 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 are not available or the claimant is not protected under a labor and material payment bond. It is only fair that job claimants, who have provided the wherewithal that made possible the construction of the project should be the beneficiaries of the “trust funds” received by the owner, contractor or subcontractor.

Contractors and subcontractors should be mindful of contractual and statutory time limitations imposed on their claims. The most common limitation periods relate to providing notice of the claim and commencing suit. This article focuses on the second requirement, the timely commencement of an action.

On private construction, a six year statute of limitations covers breach of contract actions. This means the action must be brought within six years of the breach, or the claim is lost. The construction contract between the parties, however, may provide for a shorter time period than the six year statutory period.

On public projects, the statute of limitations varies, depending upon the nature of the public works involved. For example, for a breach of contract claim for monies due arising out of a school construction project, the New York Education Law provides for a relatively short statute of limitations of one year from the time of the breach.

In the recent case of Mainline Electric Corp. v. East Quogue Union Free School District, the court addressed the question of whether the contractor’s breach of contract claim was time-barred for failure to commence suit within the statutory one year time limitation.

Background

Mainline Electric Corp. was the prime electrical contractor on a project to renovate the East Quogue Elementary School for the sum of $667,735.00. Final payment, consisting of the entire unpaid balance of the contract, was to be made when the contract was fully performed and a final certificate for payment had been issued by the architect. The contract also provided that final payment was to be made by the School District not more than 30 days after the issuance of the architect’s final certificate for payment, “or as soon thereafter as is practicable.”

Most of the contractor’s work was completed by December 2000. However, punch list items continued through February 2003. The contractor’s efforts to close out the project and receive final payment were the subject of various discussions, meetings, and correspondence between the parties which extended through September 2003. On September 26, 2003 the contractor sent the District a letter entitled “Final Demand”, seeking payment of its final requisition. The District never responded to the final billing requisition and the contractor commenced an action against the District on November 18, 2004. The District moved to dismiss the contractor’s claim as time barred under the one year statute of limitations period. The trial court granted the District’s motion and dismissed the action. The contractor appealed.

Decision

The appellate court overruled the lower court, holding that the contractor’s claim was not time barred. The court first noted that New York Education Law ¬ß3813 provides that no action can be maintained against the District more than one year after the cause of action arose. The court also noted that a cause of action to recover damages for breach of contract arises, and the statute of limitations begins to run, from the time of the breach. As to when a breach occurs, the court stated “a breach of contract can be said to occur when the claimant’s bill is expressly rejected, or when the party seeking payment should have viewed his claim as having been constructively rejected.”

The court said the District failed to establish that it either expressly or constructively rejected the contactor’s final billing requisition at any point prior to the commencement of the action in November 2004. The District argued that its refusal to respond to the contractor’s letter for final payment constituted constructive rejection. The court disagreed since the contractor’s letters did not impose a deadline for payment of the contractor’s final billing requisition.

The court also stated that the District’s failure to respond to the plaintiff’s final billing requisition within 30 days could not be deemed a constructive rejection, since the contract did not impose an unequivocal 30 day deadline in which final payment was to be made. Lastly, the court held that the District’s obligation to make payment was not triggered until the issuance of a final certificate of payment by the project’s architect and the District offered no evidence that such a certificate was ever issued.

In the absence of any evidence that the contractor’s final billing requisition was ever actually or constructively rejected, the court held that the contractor’s claim was not time barred.

Comment

The decision did not address whether the contractor provided notice of its claim within 3 months after its claim accrued, as required under the New York Education Law. A contractor may ultimately find itself unable to recover on his claim under the Education Law because of the relatively short 3 month statute of limitations period for filing the notice of claim and the one year limitation period for commencement of the action. The prudent contractor should closely monitor, and become familiar with, each project’s contractual and statutory time limitations. Otherwise, a contractor may find itself unable to recover on a claim because of its failure to comply with the applicable limitations period.

What is the proper measure of damages an owner can recover from the contractor as a result of defective work and failure to complete the work under a contract? As a general rule, the reasonable value of the cost to repair defective work and to complete the work required under a contract is the appropriate measure of damages. The reasonable cost to complete the contract work may be substantially higher than the actual contract price for that work, as demonstrated in the recent case of Caggianelli v. Son’s Masonry.

Background

A husband and wife, as homeowners, entered into a written agreement with a concrete contractor for the installation of a stamped concrete patio, associated walkways and ramps, together with planters and a retaining wall. The contract price was $16,600.00.

The contractor failed to properly perform the work required under the contract and the homeowners sued for breach of contract. In the lawsuit, the homeowners sought recovery for the costs of repairing the contractor’s defective work and for completing the work required under the contract.

A hearing was held, where the homeowners were required to prove the amount of their damages. The homeowners presented the testimony of a licensed contractor who stated that the total cost to repair and complete the work under the written contract was $52,100.00. The judge who presided over the hearing granted judgment in favor of the homeowners and against the contractor in the sum of $26,600.00, representing damages consisting of $10,000.00 as the reasonable value for the demolition and clean-up associated with the removal and remediation of the contractor’s defective work and $16,600.00 as the reasonable value of the uncompleted work under the written contract. The homeowners appealed.

Decision

The appellate court overruled the lower court, holding that the $26,600.00 award was inadequate. The court stated, “it is well settled that, in a case of defective construction, the appropriate measure of damages is the reasonable market cost to repair the defects, if the defects are reparable, less any amount still due under the contract.” The court also noted “this general rule does not impose a condition that precludes hiring a contractor to perform the necessary remediation at a cost greater than the original contract price, provided that the new contract terms are the reasonable market cost of the work to be performed.”

The court held that since the there was no evidence suggesting the $52,100.00 customarily charged by the licensed contractor for such work did not represent the reasonable market cost, the award of $52,100, less the amount unpaid on the original contract, was appropriate.

Comment

Calculating the measure of damages based on the reasonable market cost is a fair-minded remedy, aimed at making the owner “whole.” This reasoning insures that the owner would be in as good a position as if the contract was fully performed. Here, the homeowners contracted for the installation of specific items for a set price. Given the contractor’s failure to properly perform and complete the work, the court necessarily looked to the reasonable market costs of replacing the defective work and completing the contract.

It does not matter that the reasonable cost of completing the work was substantially higher than the price contracted for. When looking to make an owner whole, courts will focus on the reasonable market cost of repair and completion as the appropriate measure of damages.