Performance bonds are a familiar tool in the construction industry—particularly on public works and larger private projects. Their purpose is to provide an owner or upstream contractor with a guarantee that a contractor is not getting in over its proverbial head, and will actually complete the job at the cost originally contracted. The performance bond does this by having a surety issue a guaranty of credit in the amount of the contract. Thus, when the bond claim is properly made, the surety is obligated to perform one of several courses of action to complete the contract, one of which is to spend up to the contract amount (called the penal sum) to hire a replacement contractor to bring the project over the finish line. While many of these sureties are often affiliated with insurance companies, an appellate court, in the recent case of JDS Development LLC v Parkside Construction Builders Corp. and Allied World Insurance Company, reminds us that there are fundamental differences between the insurance and surety bond products, and that a performance bond cannot be converted into an insurance policy after the fact. 

Background

JDS Development is the developer of the supertall skyscraper at 111 West 57^th Street in Manhattan, known as the Steinway Tower (which, as of the time of this writing, is the 4^th tallest building in the United States, and the 29^th tallest in the world).  In 2015, JDS entered into a contract with Parkside Construction Builders for Parkside to undertake the construction of the superstructure of the building. This single subcontract was for the entire 85 floor superstructure, and the initial contract sum was $39.7 million. The subcontract also required Parkside to obtain a performance bond “on request”, with a penal sum equal to the subcontract price. 

In 2016, JDS did request a performance bond, and Parkside attempted to obtain that bond from Allied World Insurance Company. However, Allied World balked because it could not write a bond with a penal sum in excess of $25 million. To get around that issue, JDS and Parkside executed a modified subcontract whereby Parkside would take the superstructure through the 36^th floor for just under the $25 million cap. The new subcontract had a substantial completion date of October 13, 2016. 

With the subcontract price reduced, Allied World wrote the bond on the form of an American Institute of Architects A312 bond. The A312 form of bond provides that the surety’s liability only arises after three conditions have been met, as follows: 1) the owner notifies the contractor and surety that the Owner is considering declaring a default, and requests a pre-default meeting; 2) the owner declares a default and formally terminates the contract; and 3) the owner agrees to pay over the remaining contract balance to the surety for use in the completion of the project.  

Shortly after the contract modification, JDS began to complain about Parkside’s work, particularly it’s lagging behind the project schedule (and it even began to contemplate terminating Parkside’s subcontract). Ultimately, JDS decided against a termination because it would have had a greater scheduling impact than simply dragging Parkside across the finish line. Parkside was over a year late, finishing the 36^th floor in October of 2017. JDS paid Parkside in full under the 36-floor subcontract (plus an additional $16 million via a price adjustment). Parkside continued the construction above the 36^th floor under the original subcontract, and it worked through May of 2018, when its principals were indicted for wage theft and worker’s compensation fraud. Parkside’s work had only reached the 60^th floor by this time, and JDS retained a replacement contractor to complete the project. 

In June of 2018—six months after the 36-floor subcontract had been completed—JDS sent Parkside and Allied World a letter advising that it was “considering declaring a contract default”, and requesting a meeting. When JDS received no response to this letter, on August 9, 2018, it declared Parkside “in default under the subcontract”, without specifying whether this was the 36-floor subcontract or the original 85-floor subcontract. A week later, JDS formally terminated Parkside from the project (again, without noting which contract was terminated). Two weeks after that, JDS placed a claim under Parkside’s bond, claiming that its damages totaled $89 million ($78 million of which were delay damages) and, accordingly, demanding that the surety tender the penal sum of the bond. Allied World responded by demanding documentation, alleging that what had been provided was not sufficient to establish liability under the bond.

In response to Allied World’s demand, JDS commenced a lawsuit against it and Parkside (in which Parkside defaulted). After discovery, both parties moved for summary judgment, with JDS arguing that it had established Allied World’s liability under the bond, and Allied World arguing that JDS failed to comply with the conditions precedent to the surety’s liability in that it failed to properly send the letter advising that it was considering declaring a contract default, the notice of contractor default, and the notice of termination. 

Decision

The motion court held in favor of Allied World, finding that JDS failed to properly comply with the conditions precedent of sending a letter advising the surety and the contractor that it was considering declaring a contract default, providing a notice of contractor default, and terminating the contract. JDS appealed, arguing that the conditions precedent had been complied with as it sent the requisite correspondence. JDS also argued that while these conditions may be precedent to requiring the surety to complete the contract, they were not conditions precedent to a delay claim. Allied World argued in opposition that the mere sending of this correspondence was insufficient as its liability would not arise until the conditions precedent were met, and all of JDS’s claimed damages arose beforehand. Allied World also (correctly) noted that this correspondence was sent over six months after Parkside had reached the 36^th floor (the limit of its bonded contract) and been paid in full for that work, and thus there was no default to declare—and the fact that Parkside walked off the job nearly 60 floors into the project could not be used to create a default prior to that time.

The appellate court affirmed, holding that the conditions in Section 3 of the A312 bond are well settled conditions precedent that must be met before the surety’s liability will arise. As to the correspondence which was sent to the surety by JDS, the appellate court held that the claim was barred because JDS “fail[ed] to have complied, at any time before the bonded work had been completed, with the condition precedent of the notice and termination procedures specified in paragraph 3 of the bond”. The appellate court noted the importance of this fact, holding that “a performance bond is not insurance against the cost of any breach by the principal, but, rather, a guarantee of the principal’s performance that is triggered only upon the termination of the principal from the project for a breach sufficiently egregious to constitute a default warranting termination”. Thus, the court held that the after-the-fact correspondence was insufficient to comply with the express conditions precedent.

Comment

As the appellate court reminds us in JDS Development, the function of a performance bond is not to insure against any breach of the contract by the principal, but to guarantee the completion of the project. While there are insurance products that will insure against a contractor or subcontractor default (with their own pros and cons), the appellate court properly declined to permit JDS to use its after-the-fact correspondence to transform the bond into such a policy. As was evident here, many factors go into the decision to terminate a contractor, not the least of which are the ultimate economics (as noted by JDS, the delays which would have resulted from changing contractors made it cheaper to drag Parkside across the finish line than to terminate its contract and bring a replacement contractor on board). 

What JDS apparently lost sight of here is that the decision to terminate the contractor is not analogous with the decision to advise the surety that it was considering such a termination, and requesting a conference to discuss how to proceed. These conferences—termed “3.1 meetings” after the section of the bond which requires such a meeting—usually result in some sort of surety involvement to get the project back on (or keep it on) track for a timely completion. This involvement can range from paying suppliers to release needed goods, to assisting the contractor in the completion of the contract. Had JDS sent this correspondence before Parkside had completed its contract, the parties could have explored ways to both complete the project earlier (thus mitigating JDS’s delay damages), and to provide JDS with some form of compensation for the damages it was incurring. 

Consultation with experienced construction counsel throughout the process can best protect the rights of all involved; from the consideration of the types of protections available to redress a potential default (from contractor/subcontractor default insurance to performance and payment bonds); to managing the events surrounding the default and the response, including insuring that all proper notifications are timely made such that the option to proceed is still available—and not foreclosed, as it was in JDS Development, because they were made after the contract was completed. The performance bond is only a useful tool for an owner or contractor who understands how it works.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

This column has often written about important provisions to include in construction contracts. Thorough indemnification clauses, dispute resolution provisions, and adequate insurance provisions are just a few examples that come to mind; there are many others. However, a court, in the recent case of Providence Construction Corp. v Silverite Construction Co., Inc., in denying a motion for summary judgment on what should have been a straightforward contract claim (and now requiring those parties to endure a trial), reminds us that there is one thing that is more important to include in a contract than anything else: clarity.

Background

In October of 2010, the New York City Transit Authority entered into a design-build contract with Silverite Construction for the construction of a bus depot on Lenox Avenue in Manhattan. In April of 2012, Silverite entered into a subcontract with Providence Construction for Providence to perform the masonry work at the project and lay 120k square feet of regular concrete masonry units (“CMU”) at $41 per square foot, and 70k square feet of glazed CMUs at $30.25 per square foot, for a “total lump sum price” of $6.55 million. The contract provided that this “lump sum” price was subject to addition or reduction from that price, at the indicated unit prices, based on actual job quantities. Providence, being a certified MBE, had its contract utilized in Silverite’s W/MBE utilization plan for the full contract value.

Providence worked on the project between May of 2012 and September of 2013, and Providence’s records indicated that it installed 198k square feet of CMUs, which was 5,700 more than was contracted for. Silverite’s records did not agree, so it hired an independent 3-D modeling company to determine the quantity actually installed; the 3-D modeling showed only 172k square feet installed. Providence sought payment for the extra quantity, while Sliverite wanted a credit for the uninstalled quantity (and withheld the last couple of Providence’s payment requisitions to secure this credit). The difference was $1.1 million.

Providence sued Silverite to recover for the additional materials and unpaid requisitions, and Silverite counterclaimed for the remainder of the sought credit. After a lengthy litigation, both Providence and Silverite moved for summary judgment. In support of its motion, Providence argued that the contract was a lump sum based on the language (and the specific use of those words), thus negating Silverite’s ability to claim a credit based on actual square footage. Providence also argued that evidence of the lump sum nature of the contract was that Silverite never modified its W/MBE utilization plan to reflect any changes from the lump sum number. Silverite, in opposition and in support of its competing motion, argued that the inclusion of the unit prices, and the language that the price was subject to adjustment based on the quantity installed, compelled the conclusion that this was a unit price contract. Accordingly, Silverite argued, Providence was not entitled to any additional funds, and Silverite was entitled to a credit for the uninstalled quantity. 

Decision

The court denied both motions, finding numerous issues of fact which needed to resolved by a jury. The first issue of fact was with regard to the contract itself. While the court acknowledged the presence of the term “lump sum” in the contract, it noted that in a traditional lump sum agreement, there is no adjustment for the quantity installed. Because this contract contained such a provision, it was not clear that it was actually a lump sum agreement. Conversely, because the contract contained the “lump sum” language, it was not clear that it was a unit price agreement, either. Accordingly, this dispute had to be resolved by a jury. Similarly, the issue of how much CMU square footage was installed (the 198k claimed by Providence, or the 172k claimed by Silverite) also had to be resolved by the jury.

Comment

Because of the conflicting language in the contract, what should have been something that was resolvable as a matter of simple math (and likely would not have even been the subject of a lawsuit) engendered eleven years of litigation—so far, with more to come (including a trial). Truly, a waste of resources when all that was needed here was language clearly indicating either that the contract was a unit price agreement, or a lump sum agreement. 

Last month we wrote about the average construction subcontract now being over 30 pages (and, ironically, advocated for a longer document there because it would have clarified what provisions were incorporated into that contract by reference). With longer and more complicated construction contracts becoming the norm, it is easier for ambiguous language to creep into the document. What the parties may think is clear may only be clear from their perspective, and could be the subject of reasonable disagreement—or, in legalese, a triable issue of fact sufficient to deny summary judgment to a party and require a (very expensive) trial. Unfortunately, this is not the first time we have come across a contract where the parties disagreed as to whether it was Lump Sum or Unit Price. We have even seen this where a standard AIA A101 Lump Sum form was used because of careless modifications to the form. While the facts of Providence are rather dramatic, it is easy for less stark, but equally ambiguous language to creep into a contract document. In order to avoid the consequences of ambiguities such as these, and in order to ensure that the words of the contract truly express the terms agreed to by the parties in the clearest fashion, contracting parties would be advised to consult with experienced construction counsel.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

While most contractors strive for excellence in their construction—after all, it’s the product of that construction which potentially will be around for generations afterwards—not everyone holds the same belief with regard to the paperwork required on a construction project. In fact, the paperwork is often treated as just the nuisance which is required as an incidence of the construction, and not a part and parcel of the construction itself. The mindset is that a well constructed product speaks for itself (and is the best way to avoid litigation). However, in the recent case of Hudson Meridian Construction Group, LLC v Bayport Construction Corp. and Senator Construction Group Inc., an appellate court reminds us that the paperwork on a project is just as important to getting paid as the quality of the construction itself. 

Background

Hudson Meridian Construction Group was the general contractor for the construction of a 33 story building at 1059 Third Avenue in Manhattan. In September of 2017, Hudson Meridian subcontracted with Senator Construction Group for Senator to provide hoists, overhead protection, sidewalk sheds, and other equipment for the project. Nine months later, Senator assigned its subcontract to Bayport Construction Group. Two months after that, Hudson Meridian terminated the Senator/Bayport subcontract, claiming that the project suffered delays from the outset because Senator and Bayport could not pay their own sub-subcontractors and consultants, and that Hudson Meridian was forced to pay these sub-subcontractors and consultants directly in order to keep the project moving forward. After the termination, and pursuant to the subcontract, Hudson Meridian proceeded to utilize the Senator/Bayport equipment. 

In October of 2018, Hudson Meridian sued Senator and Bayport to recover the costs associated with the delays. When Senator and Bayport answered, they included counterclaims alleging that the termination was pretextual and done in order to go around Senator and Bayport and obtain direct pricing from their subcontractors and suppliers, at a discount, by cutting out the proverbial middleman. The counterclaims sought to recover the cost of the equipment provided, and also had claims for conversion and to recover the equipment itself. 

After discovery, Hudson Meridian moved for partial summary judgment dismissing Senator’s and Bayport’s breach of contract counterclaims, arguing (to the extent relevant here) that a large part of these claims were based upon unsigned change orders and unexecuted payment requisitions. Senator and Bayport opposed, arguing that the equipment was actually provided by Senator and Bayport, and used by Hudson Meridian, and such paperwork issues were not fatal in light of that fact. 

Decision

The motion court granted Hudson Meridian’s motion to the extent of dismissing so much of Senator’s and Bayport’s claims as were based on unsigned change orders and unexecuted payment requisitions, and the appellate court affirmed. In doing so, the court cited well settled law that contractual conditions precedent must be strictly complied with, and found that the submission of signed and notarized payment requisitions was a condition precedent to payment. The court also found that the change orders were similarly non-compliant in that they were not “written instrument[s] prepared and signed by [Hudson Meridian] and signed by [Senator/Bayport]”. Without these contractual conditions precedent to payment having been met, Hudson Meridian’s liability to make those payments never arose. 

Comment

Hudson Meridian v Bayport provides a warning to contractors that providing solid paperwork is often just as crucial as performing solid work. If the provision of certain paperwork is specifically set forth in a contract (here, signed and notarized payment requisitions, and change orders signed and executed on a certain form), it can be characterized as a condition precedent to payment. As was demonstrated in Hudson Meridian, upon Senator’s and Bayport’s failure to meet the conditions precedent in the contract, Hudson Meridian’s obligation to make payment never arose—despite that the equipment was actually provided to, and used by Hudson Meridian. 

Should a contractor have any questions about what documents will be strictly required, and what documents may be ancillary, a consultation with experienced construction counsel can help sort things out and ensure that you’re not inadvertently waiving any right to payment for services actually provided.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

This column has often written about issues that affect contractor/subcontractor relations because subcontracting is ubiquitous in the industry. One of the most important aspects of subcontracting is to ensure that all responsibilities and potential liabilities are properly flowed up or down so that an intermediate contractor is not left holding the proverbial bag. A shorthand way of doing this is for the subcontract to incorporate other contractual documents (including an upstream, or prime, contract) by reference. An appellate court reminds us in the recent case of Cobleskill Stone Products v Merchants National Bonding that a simple shorthand incorporation by reference may not accomplish the flow up/flow down intended.

Background

In May of 2018, JBS Dirt, Inc. entered into a contract to construct taxiways at the Sidney Municipal Airport in Delaware County. Defendant Merchants National Bonding issued a payment bond to JBS to guarantee payment to JBS’s subcontractors. Thirteen months later, JBS entered into a subcontract with Cobleskill Stone Products for Cobleskill to perform the paving scope of work for the Project. The subcontract included, as an exhibit, a quote from Cobleskill indicating that its pricing was based on prevailing wage rates, and it provided the specifics of the formula upon which any increase was to be based. The subcontract also incorporated JBS’s prime contract in its entirety.

In July and August of 2019, Cobleskill submitted payment requisitions to JBS which included increases from the initial quote, as per the formula set forth in the estimate. JBS rejected those requisitions based on the language in the incorporated prime contract which prohibited escalation clauses on projects overseen by the Federal Aviation Administration. Back and forth between Cobleskill and JBS did not resolve the issue, and Cobleskill made a claim against Merchants under JBS’s payment bond—which it ultimately put into suit.

After discovery in the lawsuit, Cobleskill moved for summary judgment on its bond claim, arguing that it was entitled to the escalated price under the subcontract. Merchants opposed, citing the prohibition against escalation clauses contained in the prime contract. The motion court granted the motion, and Merchants appealed.

Decision

The appellate court affirmed the motion court’s granting of Cobleskill’s motion for summary judgment. In doing so, the appellate court noted that Cobleskill’s quote with the escalation formula was included with the subcontract as one of the listed contract documents, and that the price increase it sought was in line with that formula. With Cobleskill’s burden met, the appellate court turned to whether Merchants introduced any evidence which could create an issue of fact sufficient to deny the motion. While Merchants did introduce evidence of the FAA’s prohibition against escalation clauses in the incorporated prime contract, the appellate court, citing well settled case law, held that this was insufficient to create an issue of fact sufficient to deny the motion because a subcontractor is only bound to the terms of such an incorporated prime contract which “relat[e] to the scope, quality, character and manner of the work to be performed by the subcontractor”, and not its pricing.

Comment

While the shorthand of general incorporation by reference provisions are seductive (they are short, easy to include, and purportedly all-encompassing), contractors must be warned that these provisions are ineffective to incorporate many of the provisions that are the most important to incorporate, such as the pricing provisions at issue here. Other provisions which will not flow down through a general incorporation by reference provision are the dispute resolution provisions; insurance provisions; specific record keeping requirements (such as certified payrolls); indemnification requirements; and termination provisions, amongst others. Rather, specific references must be made for these provisions in order for them to carry over.

While subcontracts currently average well over 30 pages, and nobody relishes the thought of that number increasing to over 40 pages, the Cobleskill court reminds us that the shorthand of incorporating a prime contract by reference is not the way to keep that number down. In subsequent contract disputes, contractors’ claims will stand or fall based on the documents they sign. In that regard, contractors would be well advised to consult with experienced construction counsel when drafting or negotiating contracts so that they can be sure that the provisions that they wish to incorporate will actually make it over to the downstream contract. Otherwise, a contractor risks a gap in the obligations which are flowed down, and may end up holding the proverbial bag.

P.S. – Before signing any contract, obtain (and read!) all incorporated documents.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

The ostensible purpose of contractor licensing statutes is to ensure that the public’s health and welfare is protected by permitting only qualified contractors to work in their respective trades. Whether these statutes accomplish this purpose, or are simply a stream of revenue for a municipality, is the subject of debate. However, given the stated purpose of these statutes, they are strictly construed, and proving compliance with these statutes is required in order to recover for such work under either a breach of contract or unjust enrichment theory. In the recent case of Electrical Contracting Solutions Corp. v Trump Village Section 4, Inc., an appellate court reminds us that the failure to comply with these statutes is fatal to a contractor’s ability to recover monies owed (and also creates confusion about a time honored business arrangement).

Background

In October of 2012, the Trump Village Cooperative Apartments in Brighton Beach, Brooklyn, sustained damage as a result of Hurricane Sandy. Section 4 of the co-op suffered damage to the underground electrical distribution feeders, and in 2014 it entered into a series of contracts with Electrical Contracting Solutions to replace the damaged feeders. ECS’ principal, Joseph Kashinsky, held the required master electrician’s license, but such license was “parked” with Kashinsky’s other company, QNCC Electrical Contracting Corp. Kashinsky supervised all of the work performed at the project by ECS’s employees, but ECS remained unpaid after that work and filed a mechanic’s lien in the amount of $345,199.29 to secure its right to payment. ECS ultimately sued to foreclose the lien, and Section 4 asserted an affirmative defense that ECS was prohibited from seeking recovery because it did not have the requisite electrical contractor’s license.

The matter was tried to the court without a jury, and the court found in favor of ECS and granted it a judgment (after interest) in the amount of $458,584.84. As to ECS’ lack of an electrical contractor’s license, the court found, such was an “insubstantial and nominal” breach as a licensed electrical contractor (Kashinsky) performed the work, and that the use of the different entity “relates more to the Kashinsky ongoing divorce proceedings rather than anything of relevance to this litigation”.

Section 4 took an appeal, arguing that the lack of an electrical contractor’s license was fatal to ECS’ claims, and it is barred from recovery on these claims by operation of Section 27-3017(a) of New York City’s Administrative Code. In opposition, ECS argued that QNCC’s status as a duly licensed subcontractor (where Kashinsky “parked” his license) could not salvage the claim since the contract was entered into with ECS, and not Kashinsky or QNCC.

Decision

The appellate court reversed the trial court’s judgment, and dismissed the complaint in its entirety. In doing so, that court found that ECS’ lack of an electrical license was fatal to its claims because “the purpose of the regulatory scheme is to protect the public health and safety”. However, the case law cited was in the context of unlicensed subcontractors attempting to collect payment even though it performed its work for, and under the supervision of, a duly licensed upstream/general contractor. In such context, courts are uniform that unlicensed subcontractors cannot rely upon their upstream contractors’ licensure status to remedy their own failure to comply with the licensing mandates of Section 27-3017(a) (and similar ordinances of other municipalities).
Here, the court failed to cite any case law for the converse proposition that an unlicensed upstream/general contractor cannot subcontract work to an appropriately licensed subcontractor.

Comment

Given the ostensible purposes of the trade contractor licensing statutes, it makes sense that an unlicensed subcontractor cannot use the upstream contractor’s own license to shield it from the prohibition against recovery for unlicensed work. In that regard, the cases cited by the appellate court stand for that exact proposition. However, that was not the situation here; the unlicensed contractor was the upstream/general contractor, who (granted, rather informally) subcontracted the work to a licensed entity (QNCC) under the supervision of a master electrician (Kashinsky). The case law cited does not serve as a prohibition against such an arrangement. In fact, carried to its logical conclusion, the holding of Electrical Contracting Solutions provides a general contractor cannot contract to undertake a scope of work that requires a license without having its own license for that trade—regardless if it subcontracts that work to a licensed subcontractor. Given the number of trade and similar licenses required (plumbers, electricians, mechanical contractors, asbestos abatement contractors, riggers, fire suppression contractors, elevator contractors, and sign contractors, just to name a few), there will be little work that the upstream/general contractor can either perform with its own forces or subcontract directly; such will have to be accomplished by having multiple prime contractors on a project managed by a construction manager as agent.

There is a saying in the legal profession that bad facts make bad law, and it seems that the facts of the relationship between ECS, QNCC, and Kashinsky, and the informal subcontracting to get around divorce issues, may have been an application of this maxim in action. Accordingly, we do not necessarily agree with the appellate court’s holding, and will keep you advised of any changes in the case, statutory, or regulatory law resulting from the appellate court’s holding here. However, in the meantime, contractors would be well advised to make sure that any licensed work is directly undertaken by a licensed contractor (and the retention is formally documented with a subcontract, and not the type of alter-ego arrangement that was present here). Further, if you have any questions about how to tailor your business to operate in the context of the licensing regulations, a consultation with experienced construction counsel could prove helpful.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

One clause that is often overlooked as boilerplate when negotiating a construction contract is the arbitration or, more broadly, ADR (alternative dispute resolution) clause. There are definite benefits of using arbitration over litigation: a more streamlined procedure, typically lower cost, a faster resolution (particularly when some courts are still digging out from the covid backlog), and a more informed decision maker (typically a construction lawyer, an engineer or architect, or a construction manager). There are also negatives about agreeing to arbitration, such as the limited remedies if you believe that you are aggrieved by the decision (there is no right to appeal unless you specifically negotiate one into the arbitration clause, and the statutory grounds for overturning an arbitrator’s decision are very limited). However, because of the strong public policy favoring arbitration, an arbitration provision—even one that may leave important details open—will be enforced so long as there is a rational basis for finding that the parties agreed to arbitrate their dispute.

Background

In September of 2015, Y Levy Construction Corp. entered into a contract with Central Sutton, LLC, and its principals Moshe and Beth Weider, for Y Levy to renovate their home in Lawrence, NY, for $500,000. The parties, expressing optimism that the job would end well, but preparing for the eventuality that it might not, included the following clause:

With G-d’s help, all will go smoothly, and Client and Contractor will be satisfied at the completion of the project. However, if G-d forbid, there is any kind of misunderstanding between the parties that cannot be resolved amongst them, then both parties agree to settle their differences with legal arbitration within the city of New York.

Unfortunately, despite the parties’ prayer that all would go well, it did not. After change orders, etc., the adjusted contract sum exceeded $1.2 million, of which Y Levy claimed that it had not been paid $880,134 (and it filed a mechanic’s lien to secure payment therefor). The owners alleged that Y Levy’s work was incomplete and defective, and they were incurring excess completion costs of more than $500,000.

In April of 2023, Y Levy filed a demand with National Arbitration and Mediation (NAM) seeking to arbitrate the dispute under the contract. In May of 2023, the owners filed a reply to the demand (in effect, an answer) containing counterclaims. The following month, the owners filed a special proceeding in court seeking to permanently stay the arbitration. In support, the owners argued that the arbitration clause was not specific enough to enforce as it did not set forth a specific tribunal, and, as to the Wieders themselves, they were not personally signatories to the agreement and, therefore, could not be compelled to arbitrate the dispute. In opposition, Y Levy argued that the owners could not seek to stay an arbitration proceeding in which they had already participated. Further, as to the inclusion of the owners themselves as parties respondent in the arbitration, Y Levy noted that they were signatories to the construction contract, and they did not limit their signatures to their capacities as principals of the LLC.

Decision

The court denied the petition to stay the arbitration. First, the court found that the construction contract was not limited to the LLC and, therefore, the Wieders could be included in the arbitration proceeding. Further, as to the agreement to arbitrate, the court, citing well settled law, held that by participating in the arbitration—and going so far as to assert counterclaims—the owners waived any objection to proceeding in that forum. (Similarly, participating in litigation despite the existence of a valid arbitration agreement may waive a party’s right to arbitration should it change its mind midway through.)

Finally, as to the claimed ambiguity of the arbitration clause, the court held that it was sufficiently clear that the parties agreed to arbitration to be enforced. As to the specific tribunal, since no tribunal was designated, the contractor was free to choose any tribunal that met the contractual requirement of being in the City of New York, and since NAM has its main offices in midtown Manhattan, its selection was appropriate. (The legitimacy and enforceability of arbitration is New York is found in Article 75 of the CPLR, which can provide missing terms and procedures for vague arbitration clauses, such as the one here.)

Comment

Since resolving a dispute by arbitration constitutes a waiver of a party’s Sixth Amendment right to a trial by jury, such a party cannot be compelled to arbitrate a dispute absent clear consent to proceed in that alternate forum. One way to conclusively demonstrate your consent is to participate in the arbitration proceedings. Accordingly, if you are the subject of a demand for arbitration but do not believe that such is permitted under the contract, seek out experienced counsel immediately in order to seek to stay the proceeding. Participating in the arbitration in any substantive way (such as by asserting counterclaims, as the owners did here) demonstrates your consent to proceed in such fashion, and waives any argument that you cannot be compelled to proceed in that forum.

Further, and regardless of whether you agree or disagree that arbitration is the way to resolve construction disputes (based on the clear positives and negatives, which are always the subject of debate), it is important to tailor the ADR clause in your contract or subcontract to suit your own needs before signing the contract. Y Levy Contracting shows the dangers of treating an arbitration clause as mere boilerplate and not negotiating it like any other provision. Here, the owners were compelled to arbitrate before NAM, instead of, for instance, JAMS or the construction panel of the American Arbitration Association, because the only requirement was that the arbitration take place within New York City (which either of those alternate tribunals, and others, would have met the requirement). If your fears about an arbitration are, for instance, the limited review available, you can negotiate in some form of appellate review. However, before blindly signing such a provision—or any other provision—it would be prudent to seek the advice of experienced construction arbitration counsel to explain the positives and negatives of what is being presented, and to negotiate it so that it is more favorable to your cause.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

This column has consistenty warned that it is always a bad idea to exaggerate the amount of a mechanic’s lien. While the exaggerating lienor may succeed in getting the owner’s or upstream contractor’s attention, the negative boomerang effects—such as having the lien declared void, being prohibited any recovery on the contract, being forced to pay the costs and attorney’s fees associated with the discharge of the exaggerated lien and, most importantly, being subject to an award of damages against the lienor in the amount of the exaggeration—greatly outweigh the shock value of a big number on the lien. As a court, in the recent case of Borough Construction Group, LLC v Red Hook 160 LLC, demonstrated, another one of these boomerang effects is that the liens of innocent subcontractors can also be swept up and discharged along with the exaggerated lien.

Background

In September of 2016, Borough Construction Group and Red Hook 160 entered into a contract for Borough to construct a mixed-use commercial/retail property with over 70 units on Imlay Street in Brooklyn. The agreement was an AIA A133-2019 form of contract, which provided that the price of the construction was determined on a cost-plus basis, with a guaranteed maximum price. The contract provided that the markup for subcontractor work was limited to 15% of the cost of that subcontractor’s work.

Two years later, Borough alleged that it was owed over $2.5 million by the owner. Accordingly, Borough filed a mechanic’s lien against the property. Several of Borough’s subcontractors, also not being paid, filed their own mechanic’s liens against the property. The subcontractors’ liens, themselves, totaled nearly $1 million. Borough ultimately sued to foreclose its mechanic’s lien, and the lienor-subcontractors filed appropriate counter- and cross-claims to foreclose their own mechanic’s liens. The owner denied that any monies were owing, and asserted a counterclaim alleging that Borough’s mechanic’s lien was willfully exaggerated.

After five years of litigation—including 20 separate motions—the owner moved for summary judgment dismissing Borough’s complaint and mechanic’s lien, discharging the subcontractors’ mechanic’s liens, and for summary judgment on its breach of contract, fraud, and lien exaggeration counterclaims. In support of that motion, the owner provided evidence that the markup on the subcontractors’ invoices was well above the permitted 15%—and by as much as 230%, that after receiving permission to self-perform several scopes of work which were to have been subcontracted, Borough submitted false manpower logs to make it seem like Borough had more workers on site than were actually there (and submitted bills accordingly), and by performing defective work which was to be blamed on a prior contractor, thus enabling Borough to bill for the purported remedial work. Borough opposed, citing to case law which provides that questions relating to the willfulness of the exaggeration of a mechanic’s lien generally must be resolved at trial, and arguing that there were numerous issues of fact which precluded summary judgment.

Decision

The court granted the owner’s motion and dismissed Borough’s complaint in its entirety. In doing so, the Court acknowledged that the general rule is that questions relating to the exaggeration of a mechanic’s lien must await trial, but held that where the evidence of the exaggeration is “conclusive”, it may be determined on a motion for summary judgment. Here, that conclusive evidence consisted of the contracts of one of Borough’s subcontractors, and Borough’s bills showing the invoices on those lump sum contracts were marked up well in excess of the permitted 15% (and, as noted above, by as much as 230%). There was also ample evidence of the submission of falsified manpower logs and exaggerated bills based on those falsified logs, and of the intentional performance of defective work for the purpose of permitting Borough to bill for the repair.

In addition to dismissing Borough’s complaint, the court dismissed Borough’s mechanic’s lien, as well as the subcontractors’ liens. In doing so, the court cited to well settled law that no recovery can be had on an exaggerated mechanic’s lien. As a result, there was no lien fund to which the subcontractors’ liens could attach, and they had to be dismissed as well.

Comment

Mechanic’s liens are a powerful tool because they not only involve the upstream contractor who is not paying, but they also attach to either the title of the property itself, or the public funds held by the municipal owner. Accordingly, in order to prevent abuse of this powerful tool, the state legislature put in a safeguard in the form of an award against an exaggerating lienor of not only the attorney’s fees incurred in discharging the exaggerated lien, together with the interest on monies deposited to discharge the exaggerated lien (or the premium for any lien discharge bond), but an amount of money equal to the amount of the exaggeration itself. Of course, these harsh penalties are in addition to barring recovery on the exaggerated lien or the underlying contract. Unfortunately for innocent subcontractors, the statutory language that “no recovery shall be had thereon” negates the existence of a lien fund, which is necessary because subcontractors’ mechanic’s liens are derivative of any amounts owing to the general contractor. Accordingly, if the general contractor is barred from recovery because it willfully exaggerated a mechanic’s lien, there can be no lien fund, and innocent subcontractors’ mechanic’s liens fall like so many dominoes.

While many exaggerating lienors avail themselves of the shock value of an exaggerated lien while later trying to avoid the ramifications, Borough Construction is a reminder that innocent subcontractors can also get unwittingly caught up in such a scheme. (There were assertions in the motion papers that one of Borough’s subcontractors had been approached in order to participate in a kickback scheme, but nothing addressed one way or the other by the court; accordingly, at least one of the subcontractors may have had knowledge that Borough was up to no good.) If a subcontractor believes that it may be in a position similar to that of Borough’s subcontractors and their upstream contractor’s recovery is somehow endangered, they should consult with experienced construction counsel to determine what remedies may be available to salvage their right to payment. Regardless, contractors must keep in mind that exaggerating a mechanic’s lien is always a bad idea.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

When first deciding to undertake a construction project, regardless of whether public or private, contractors often first turn to the drawings. The reason for this is simple, the drawings are a graphic representation of what is to be built; or, to cite the old adage, a picture is worth a thousand words. However, a court, in Maric Mechanical, Inc. v New York City Housing Authority, reminds us that where that picture, itself, is accompanied by words—there, a disclaimer—those words can destroy a thousand pictures.

Background

In September of 2021, the New York City Housing Authority solicited bids to replace the boilers at the Ravenswood Housing project in Queens. As is typical, drawings were provided with this bid solicitation showing, amongst other items, 40 shoring towers supporting the temporary boilers that would be needed during the project. The drawings contained a disclaimer providing that the record drawings “may or may not truly reflect existing conditions” and that “such information is included on the assumption that it may be of interest to the Contractor, but the Engineer, Owner and their consultants do not assume responsibility for its accuracy or completeness”. The contract also provided that the contractor had an obligation to determine for itself the true nature of existing conditions. As to the specific work, the specifications provided that all shoring was to be included in the lump sum.

Maric Mechanical was awarded the contract on June 21, 2022, and it promptly discovered that over 160 towers would be required—a fourfold increase from the 40 depicted on the drawings. Maric submitted a change order for over $600,000 in additional costs for the extra towers, and such was promptly denied. Maric then commenced a lawsuit to recover for this claimed extra work. NYCHA moved to dismiss the lawsuit, citing both the disclaimer as to the accuracy of the drawings, and the specifications requiring that Maric take responsibility for “all shoring”, and not just the shoring shown on the drawings. Maric opposed, arguing that the drawings were inaccurate and, therefore, the requirement for additional towers was a change after the contract bid. Therefore, Maric argued, it was entitled to an equitable adjustment under the contract. 

Decision

The court granted the motion to dismiss, holding that the need for the additional towers was not a change in the scope of the work where the contract required Maric to provide “all shoring”. Further, the court, citing well settled case law, held that although recovery may be had where a contract contains affirmative representations amounting to a warranty as to existing conditions, the contract at issue not only contained no affirmative representations, it contained a specific disclaimer as to the accuracy of the drawings. In that regard, the court held that Maric was precluded from seeking an equitable adjustment for work that was included in the original scope, and of which Maric should have been aware.

Comment

It is quite tempting when bidding a project to rely heavily on the project’s drawings—particularly where those drawings can be imported into a CAD program and take offs can be so easily done. The bidding process is literally that which sparks everything else, and without the submission of bids or pricing all else grinds to a halt. Accordingly, in order to “feed the machine”, estimators are in a constant state of reviewing project plans and specifications, and putting dollar values to the work set forth. Accordingly, contractors welcome any efficiency, and digital scalable plans have generally contributed to that efficiency. However, often lost in the proverbial sauce are the details of what the drawings actually stand for. Here, with the disclaimer, the drawings were little more than basic guidelines for the more complete specifications.

Absent the existence of “positive representations as to conditions, substantially amounting to a warranty” referenced by the court, contractors would be well advised to not only review the specifications and other contract documents in detail, but to also investigate the site for themselves to verify what true onsite conditions are. In fact, this requirement is often specifically found in the specifications—which, unfortunately, often gets dismissed as “boilerplate”, although it is as enforceable as any other substantive provision. Surely, as found by the court, if Maric were to have visited the site it could have seen for itself the inaccuracies in the drawings, and then submitted a bid that would have accounted for a sufficient number of shoring towers. Failing that, a contractor is essentially gambling that the drawings are accurate, and taking the entirety of the risk that they may not be.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Anyone who has undertaken a construction project knows that there are many activities to be coordinated, with many different people performing these activities. It is also accepted that different trades generally have no duty (or right) to direct the work of other trades, and that ultimately all direction comes from the general contractor or construction manager. In a like vein, claims by and against trade contractors must flow in the same direction—up or down, to or from the GC/CM. In the recent case of Greg Beeche, Logistics, Inc. v Cross Country Construction, Inc., successfully argued by my co-author, Mr. Spaun, an appellate court reminds us that absent exceptional circumstances, differing trade contractors cannot assert claims directly against each other, and that all claims must be asserted by or through the GC/CM.

Background

In June of 2014, Cross Country Construction entered into a subcontract with Lendlease, as agent for an owner/developer, VNO 225 West 58th Street, LLC, to perform the concrete and superstructure work for the construction of a 69 story condominium in Manhattan. In conjunction with the preparation for that work, Cross Country was obligated to provide a schedule of its own activities to be incorporated into Lendlease’s master schedule. Cross Country provided such information, and Lendlease ultimately created a master schedule.
Around the same time, Lendlease entered into a similar subcontract with Enclos for it to furnish and install the curtain wall. Enclos, in turn, entered into a fixed term lease with Greg Beeche, Logistics, for Beeche to furnish the scaffolding that would permit Enclos to perform its work. In determining the length of the lease, Beeche referred to Lendlease’s master schedule, and built in a small cushion.
Like many projects, this one was beset with various delays. These delays required that Beeche’s equipment remain on site for 20 months longer than the extended lease term. Ultimately, the project was completed and Beeche’s equipment was removed. In order to obtain its final payment, Beeche executed standard releases and waivers of lien releasing the owner, Lendlease, and Enclos—the very parties against which Beeche may have had a delay claim (and two of which could have backcharged Cross Country, if such were justified).
With the proper targets of its claims released, Beeche commenced suit against Cross Country to recover for the extra time, alleging that it was an intended third-party beneficiary of Cross Country’s contract (which Beeche claimed was breached by Cross Country), and that Cross Country’s misrepresentations (its contribution to the master schedule) were negligent. Cross Country moved to dismiss, arguing that the beneficiaries to the contract were limited to the owner and the construction manager, and that there was no relationship between these two separately retained subcontractors that approached privity sufficient that Beeche was justified on relying on Cross Country’s contribution to Lendlease’s schedule (and assuming that a prediction of future scheduling was actually a statement of fact that could be relied upon at all). Beeche opposed, contending that without language limiting the beneficiaries to those contracting parties, it could also be construed as a beneficiary of the contract. As to the negligent misrepresentation claim, Beeche argued that as the superstructure contractor, Cross Country was the “premier subcontractor” and, thus, all other schedules were built from Cross Country’s and, as such, other subcontractors not in privity with Cross Country could nonetheless maintain claims against it.
The motion court granted the motion to dismiss, first noting that Beeche had released its claims against the parties with which it was in privity, and then finding that the language of the contract specifically precluded third party beneficiaries. As to the negligent misrepresentation claim, the court found that Cross Country had no greater or lesser relationship with Beeche than that of other subcontractors also not in privity of contract with Cross Country, and therefore Beeche could not recover from Cross Country because, to do otherwise, “would subject Cross Country to limitless liability for any project delays”.
Beeche appealed, and the appellate court affirmed. Citing well settled case law, the appellate court held that regardless of any prohibitory language in Cross Country’s contract, Beeche had not carried its burden to establish that Cross Country and the owner intended that Beeche be benefitted by the contract, or that Beeche had the right to enforce the terms of that contract. As to the negligent misrepresentation claim, the appellate court held that Beeche was not a known party to Cross Country. As a result, Cross Country had no duty to speak with care to Beech on the subject of scheduling (or any other subject). Importantly, similar to the motion court, the appellate court also noted that to permit a claim like this to proceed “would be to sanction limitless liability against contractors such as (Cross Country) for delays ubiquitous in construction”. Beeche moved before New York’s highest court, the Court of Appeals, for a further appeal; that motion was denied, leaving the appellate court’s dismissal of Beeche’s claims in place.

Comment

This case reinforces that courts frown on claims asserted outside of a contractor’s own chain of contractual privity, such as those between distinct trade contractors. As the appellate court noted, while all contractors are generally performing for the benefit of the project as a whole, to permit these type of inter-trade claims would be to subject contractors to potentially limitless liability for the type of problems that are pervasive on a construction project. However, contractors are not without recourse and can assert such claims against the GC/CM and/or the owner (who can pass any claim on in the form of a backcharge)—provided that they do not blindly sign a release and waiver of lien for the sake of obtaining a quick payment. While many owners and general contractors will not release payment in the absence of a signed release and waiver of lien, there may still be ways to preserve your right to preserve your right to later pursue such claims. Consulting with experienced construction counsel can help you determine what your exact rights are under your contract, and how to best preserve such claims while still being paid your undisputed contract balance and retainage.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Anyone who has undertaken a construction project knows that there are many activities to be coordinated, with many different people performing these activities. It is also accepted that different trades generally have no duty (or right) to direct the work of other trades, and that ultimately all direction comes from the general contractor or construction manager. In a like vein, claims by and against trade contractors must flow in the same direction—up or down, to or from the GC/CM. In the recent case of Greg Beeche, Logistics, Inc. v Cross Country Construction, Inc., successfully argued by my co-author, Mr. Spaun, an appellate court reminds us that absent exceptional circumstances, differing trade contractors cannot assert claims directly against each other, and that all claims must be asserted by or through the GC/CM.

Background

In June of 2014, Cross Country Construction entered into a subcontract with Lendlease, as agent for an owner/developer, VNO 225 West 58th Street, LLC, to perform the concrete and superstructure work for the construction of a 69 story condominium in Manhattan. In conjunction with the preparation for that work, Cross Country was obligated to provide a schedule of its own activities to be incorporated into Lendlease’s master schedule. Cross Country provided such information, and Lendlease ultimately created a master schedule.

Around the same time, Lendlease entered into a similar subcontract with Enclos for it to furnish and install the curtain wall. Enclos, in turn, entered into a fixed term lease with Greg Beeche, Logistics, for Beeche to furnish the scaffolding that would permit Enclos to perform its work. In determining the length of the lease, Beeche referred to Lendlease’s master schedule, and built in a small cushion.

Like many projects, this one was beset with various delays. These delays required that Beeche’s equipment remain on site for 20 months longer than the extended lease term. Ultimately, the project was completed and Beeche’s equipment was removed. In order to obtain its final payment, Beeche executed standard releases and waivers of lien releasing the owner, Lendlease, and Enclos—the very parties against which Beeche may have had a delay claim (and two of which could have backcharged Cross Country, if such were justified).

With the proper targets of its claims released, Beeche commenced suit against Cross Country to recover for the extra time, alleging that it was an intended third-party beneficiary of Cross Country’s contract (which Beeche claimed was breached by Cross Country), and that Cross Country’s misrepresentations (its contribution to the master schedule) were negligent. Cross Country moved to dismiss, arguing that the beneficiaries to the contract were limited to the owner and the construction manager, and that there was no relationship between these two separately retained subcontractors that approached privity sufficient that Beeche was justified on relying on Cross Country’s contribution to Lendlease’s schedule (and assuming that a prediction of future scheduling was actually a statement of fact that could be relied upon at all). Beeche opposed, contending that without language limiting the beneficiaries to those contracting parties, it could also be construed as a beneficiary of the contract. As to the negligent misrepresentation claim, Beeche argued that as the superstructure contractor, Cross Country was the “premier subcontractor” and, thus, all other schedules were built from Cross Country’s and, as such, other subcontractors not in privity with Cross Country could nonetheless maintain claims against it.

The motion court granted the motion to dismiss, first noting that Beeche had released its claims against the parties with which it was in privity, and then finding that the language of the contract specifically precluded third party beneficiaries. As to the negligent misrepresentation claim, the court found that Cross Country had no greater or lesser relationship with Beeche than that of other subcontractors also not in privity of contract with Cross Country, and therefore Beeche could not recover from Cross Country because, to do otherwise, “would subject Cross Country to limitless liability for any project delays”.

Beeche appealed, and the appellate court affirmed. Citing well settled case law, the appellate court held that regardless of any prohibitory language in Cross Country’s contract, Beeche had not carried its burden to establish that Cross Country and the owner intended that Beeche be benefitted by the contract, or that Beeche had the right to enforce the terms of that contract. As to the negligent misrepresentation claim, the appellate court held that Beeche was not a known party to Cross Country. As a result, Cross Country had no duty to speak with care to Beech on the subject of scheduling (or any other subject). Importantly, similar to the motion court, the appellate court also noted that to permit a claim like this to proceed “would be to sanction limitless liability against contractors such as (Cross Country) for delays ubiquitous in construction”. Beeche moved before New York’s highest court, the Court of Appeals, for a further appeal; that motion was denied, leaving the appellate court’s dismissal of Beeche’s claims in place.

Comment

This case reinforces that courts frown on claims asserted outside of a contractor’s own chain of contractual privity, such as those between distinct trade contractors. As the appellate court noted, while all contractors are generally performing for the benefit of the project as a whole, to permit these type of inter-trade claims would be to subject contractors to potentially limitless liability for the type of problems that are pervasive on a construction project. However, contractors are not without recourse and can assert such claims against the GC/CM and/or the owner (who can pass any claim on in the form of a backcharge)—provided that they do not blindly sign a release and waiver of lien for the sake of obtaining a quick payment. While many owners and general contractors will not release payment in the absence of a signed release and waiver of lien, there may still be ways to preserve your right to preserve your right to later pursue such claims. Consulting with experienced construction counsel can help you determine what your exact rights are under your contract, and how to best preserve such claims while still being paid your undisputed contract balance and retainage.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100