In the world of today’s lightning speed communications, it is easy to fire off an intemperate slapshot response to an email without thinking about the ramifications. While often the result is merely some egg on one’s face (and perhaps the need for an apology, or an explanation), the result can include the waiver of the attorney/client privilege. While a court, in the recent case of Dworkin Construction Corp. (USA) v Kelly’s Sheet Metal, Inc., saved a contractor from a finding that the privilege was waived, it serves as a lesson that one should take a deep breath before hitting the send button on any email.

Background

In May of 2019, Dworkin Construction Corp. and Kelly’s Sheet Metal entered into a subcontract for Kelly’s to perform all heating, ventilation and air-conditioning work in connection with a construction project at 2162 Broadway in Manhattan. Kelly’s was alleged to have breached the subcontract by, amongst other things, failing to: timely submit required technical data and shop drawings; adhere to the overall job schedule; send a sufficient number of employees to the job site; follow construction plans and specifications; correct defective work timely; and complete its contractual scope of work as scheduled. Accordingly, Dworkin commenced a breach of contract lawsuit against Kelly’s seeking to recover delay damages, as well as the expenses it incurred in attempting to bring the project back on schedule. Kelly’s denied the claims, and the parties engaged in discovery.

During the course of discovery, Dworkin’s counsel blind-copied Dworkin’s president on an email to counsel for Kelly’s regarding a discovery schedule. Dworkin’s president sent an email to that counsel inquiring about the merits of the lawsuit (and a related action in New York City Civil Court) by using “reply-all” to that unrelated email—which included counsel for Kelly’s—rather than simply reply, or draft a whole new email. Moments later, Dworkin’s counsel sent an email to counsel for Kelly’s advising of his client’s inadvertent email, and demanded that counsel for Kelly’s confirm the deletion of the email. Rather than delete the email, counsel for Kelly’s responded that the “reply-all” email waived the attorney/client privilege, and demanded that Dworkin’s counsel preserve all communications between him and Dworkin client because counsel for Kelly’s reserved the right to “seek other communications between you and your client”.

Upon counsel’s refusal to destroy the inadvertently produced email—and upon his claim of a right to seek other communications between Dworkin and its counsel—Dworkin moved for an order of protection clawing back the privileged email, and protecting Dworkin against the disclosure of other attorney/client privileged emails. Kelly’s opposed, contending that the use of a blind-copy email negligently heightened the chances of precisely what occurred here (broadcasting a privileged response to a non-privileged email) such that the use of the blind-copy should be deemed a waiver of the privilege. Kelly’s also contended that regardless of the use of the blind-copy by Dworkin’s counsel, the sending of the privileged email by Dworkin’s president formed an independent waiver of the privilege such that Kelly’s was required to disclose other attorney/client communications.

Decision

The court granted Dworkin’s motion and directed that counsel for Kelly’s destroy the privileged email, holding that the circumstances of the inadvertent disclosure—and counsel’s notification, moments later, of the inadvertent disclosure and attempt to claw the communication back—evidenced that the disclosure was never intended to waive the attorney/client privilege. The court held that to deny the motion would produce a Draconian result and countenance what the court described as “gotcha litigation tactics”, rather than deciding cases on their merits.

Comment

While this matter arose out of a typical construction dispute, its lesson is not limited to those in the construction industry: before communicating on an instant medium such as email, one should pause a moment to ascertain that the recipients are only those who are intended. Such a pause will also give the sender the benefit of one last review to be sure that what is in the email is what is intended—with the ancillary benefit that the sender will be afforded one last opportunity to tone down anything intemperate, or anything else that the sender may come to regret later on. While the court here noted “bcc’ing a client is not a good idea” because it opens the door to just such an inadvertent “reply-all” response, it saved Dworkin’s president from the effects of a waiver by noting the speed of its counsel in acting “just 15 minutes after the inadvertent communication”.

The lesson to be taken from this case is not that the court saved Dworkin’s attorney/client privilege, but what should be done to prevent someone from having to scramble in order to do so. Here, aside from the fortuity of Dworkin’s counsel immediately seeing the email and having the ability to immediately respond, it was only directed to counsel for both Dworkin and Kelly’s—so Dworkin’s counsel was able to immediately spot the problem. However, what about situations where counsel may not immediately see the email (which encompasses not only the obvious vacation/illness out of office, but also periods when counsel may be busy such as being on trial, in a series of depositions, or otherwise committed and unable to be alerted to emails in real time), or where the unintended recipient’s email address is buried in with a group of 20, 30, or more intended recipients such that the inclusion of the unintended recipient is not readily apparent? There are other situations that may also come to mind where the speed standard referenced by the court here may not be able to be met, even though the communication is clearly inadvertent. Those situations, we would posit, are more common than the one here, where the error was immediately apparent and able to be responded to in real time. Accordingly, the best advice is to take that moment to double check not only the content of the email, but who it is going to before hitting the send button—and only use “reply all” where you truly want the reply to go to more than one recipient.

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 advised that a mechanic’s lien is a powerful tool to help unpaid contractors get paid. Private liens have the benefits of attaching to the title of the land which was improved, and permitting the contractor to recover from the owner of the property—even though there may be no contractual relationship between the unpaid contractor and that property owner. However, the countervailing consideration given to property owners is that the owner cannot be made to pay twice for the same improvement. In that regard, as a court reminded us in Tri-Crete, Inc. v Forthill Construction Corp., where the owner has already fully paid for the improvement, there is no “lien fund” which would support recovery on a mechanic’s lien.

Background

In mid-2016, Gilbane Building Company entered into a contract to perform construction work at 1010 Park Avenue in Manhattan. Gilbane subsequently entered into a subcontract with Forthill Construction to perform certain concrete work on the project. Forthill, in turn, subcontracted some of its work to Tri-Crete. Tri-Crete performed $550,000 worth of work on the project, for which it was not paid. Tri-Crete filed a mechanic’s lien to secure its payment (and ultimately sued to foreclose the lien).

In late-2017, issues arose with Forthill’s work, including improper concrete strength, weak and unconsolidated concrete, improper clearances, incorrect sizing, unlevel concrete, and other examples of improper placement. Further, Forthill did not undertake a crucial pour as scheduled, causing delays. Accordingly, on December 22, 2017, Gilbane served Forthill with a Notice of Default and Demand to Cure. Forthill’s response was to walk off the job and abandon the project. Consequently, Gilbane terminated Forthill’s contract, and undertook to complete Forthill’s work (at added expense, the amount of which exceeded any funds held by Gilbane).

After discovery in the lien foreclosure action, Gilbane and its lien discharge bond surety moved for summary judgment dismissing Tri-Crete’s complaint. In doing so, Gilbane noted that Forthill breached the contract and abandoned the project, and argued that as the cost to complete exceeded the funds still held on Forthill’s contract, no money could be left owing to Forthill sufficient to form a lien fund from which lienors could recover.

Decision

The motion court granted Gilbane’s motion. In doing so, it cited to well settled law that the rights of a mechanic’s lienor are dependent on the existence of a lien fund (the sums due and owing, or to become due and owing, at the tier(s) above the lienor). Forthill’s breach of its contract with Gilbane necessarily negated the possibility of any monies being owed to Forthill, and therefore precluded the existence of any lien fund. Accordingly, the lien was discharged, and Tri-Crete’s lawsuit dismissed.

Comment

As the court noted, a lien fund is that sum of money remaining between the amount of the upstream contract, and what has been paid on that contract. Where the entire sum has been paid to the upstream contractor, there can be no lien fund. Aside from actual payment, another way for the contract sum to be “paid” is for it to be utilized to satisfy any backcharges accrued by the upstream contractor. Once those monies are completely spent, the lien fund is depleted. Any recovery above those amounts would result in the owner having to pay for the improvement twice—an outcome which was specifically rejected at the time the first mechanic’s lien statutes were enacted.

While the depletion of the lien fund necessarily precludes any recovery on the mechanic’s lien, there are other potential routes of recovery: a claim on a labor and materials payment bond, a breach of contract claim against the non-paying contractor, or perhaps a trust fund diversion action against the principals of the non-paying contractor. While filing a mechanic’s lien is always a good first step to obtaining payment (particularly given the tight deadlines involved in such a filing, which may run out earlier than the allotted-for eight months if the lien fund is dissipated), an unpaid contractor would be well advised to consult with experienced construction counsel to discuss all avenues for obtaining payment may be available.

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 counseled that “if it’s not in writing, it didn’t happen”. While that is very simplified advice, the core lesson that we seek to impart is that where an oral contract, or oral modification of a written contract, is permitted to happen, the facts are often relegated to a “he said, she said” dispute. Unfortunately, such disputes must ultimately be resolved by a jury (which, needless to say, is an expensive process—even if you win). In order to avoid this eventuality, when negotiating contracts, many parties include “agreement to agree” provisions, which specifically negate the enforceability of anything other than a fully prepared and executed contract. As a court held in the recent case of Permasteelisa North America Corp. v JDS Construction Group, LLC, when such a provision is present, courts will not find an enforceable agreement based on mere oral assertions, fragments of writings, or even handshakes.

Background

In mid- to late-2016, Permasteelisa North America and JDS Construction Group were in the process of negotiating for Permasteelisa to perform certain curtain wall and façade work on a construction project on DeKalb Avenue in Brooklyn. Towards that end, the parties exchanged several proposals and discussed scope of work and pricing. On March 30, 2017, JDS sent Permasteelisa a letter of award for the curtain wall scope of work. In the letter, however, Permasteelisa included a provision stating that “The parties expect to finalize the Subcontract on the project no later than April 30, 2017 * * * Notwithstanding this Letter of Award, this letter does not bind either party to the performance of any obligation, or confer any rights, upon either party unless and until the parties actually execute the Subcontract.” In anticipation of entering into a nearly $50 million subcontract, Permasteelisa performed some preliminary work, which it claimed had a value of $1.9 million. The parties continued to negotiate a subcontract, with the scope and pricing changing several times. Ultimately, however, the parties never executed the anticipated subcontract.

When Permasteelisa was not paid for its claimed work, it filed, and ultimately commenced a lawsuit to foreclose a mechanic’s lien. This lawsuit also included claims for breach of contract, for unjust enrichment, and to recover on an account stated. After discovery, JDS moved to dismiss the lawsuit and discharge the mechanic’s lien, citing the “agreement to agree” provision in the award, and noting Permasteelisa’s deposition testimony conceding that a written subcontract was never executed. Permasteelisa opposed, conceding that the anticipated contract was never executed, but proffering what it termed was a “handshake agreement” to perform in anticipation of the execution of the contract.

Decision

The motion court granted JDS’s motion. In doing so, it cited to well settled law that there is a “strong presumption against finding a binding and enforceable obligation” where a proposed agreement contains an “agreement to agree” provision, and noted that JDS did nothing to lead Permasteelisa to believe that a contract had been entered into. Similarly, as to the unjust enrichment claim, the court held that without Permasteelisa having consented to the performance of the work, unjust enrichment was unavailable. The court also cited case law holding that unjust enrichment “is not an appropriate remedy for recovery of the expenses of a failed negotiation”. Likewise, as to the account stated claim, such was similarly dismissed because such a claim “cannot be used to create liability where none otherwise exists”.

As to the mechanic’s lien, the court held that in the light of the dismissal of Permasteelisa’s other claims, the lien had to be discharged and the foreclosure claim dismissed. The court also addressed the willful exaggeration claim, holding that while the items which were the subject of the lien had no basis, they could not be said to have been willfully exaggerated as a matter of law sufficient for a summary disposition.

Comment

The first thing that comes to mind when one uses the term “oral contract” is a verbal conversation where one party says “do X for me, and I’ll pay you $Y”, and the other party agrees. However, another form of oral contract is the oral agreement supported by some written evidence of its terms (which may even be an unsigned version of a contract). The problem with this type of oral contract, similar to the truly verbal agreement, is the he said, she said nature of the dispute as to what is included, and what is not included, in the oral agreement. While the one party will rely on the confirmatory writings (or even the unsigned agreement), the other will undoubtedly claim that the writing or writings are not complete, and there is more to the agreement than those writings (which, again, must be proven with he said, she said testimony). As the Permasteelisa Court reminds us, one way to avoid this eventuality is to use an “agreement to agree” clause, which will preclude either party from relying on anything less complete than the fully negotiated, signed contract. Contractors and others who are parties to construction contracts would be well advised to consult with experienced construction counsel to determine what provisions can be put into these contracts to clarify parties’ desires as to what is to be enforceable (and other subjects) so that courts do not ultimately err in setting forth what the parties may, or may not, have intended.

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

On a construction project, the term “general contractor” is often thrown around rather loosely to refer to the one contractor at the top of the contractor pyramid; the contractor working most closely with the owner. However, those familiar with the industry know that construction managers often sit on top of that pyramid. The chief difference is that construction managers typically work closely with the owner from the design stage, where general contractors are brought in after the project is more or less fully designed. While there are other differences, it is generally acknowledged that CMs have their own obligations to the owner above and beyond the build obligation.

On a related note, there are generally two types of CM arrangements, the “CM at Risk”, and the “CM as Agent”. The CM at Risk resembles a typical owner/GC arrangement in that the CM hires the subcontractors, or “trade contractors”, directly, and assumes payment (and other contractual) responsibilities to those subcontractors. A CM as Agent, on the other hand, enters into contracts with subcontractors as agent for the owner, and it is the owner, and not the CM, who has the payment and other contractual obligations towards the subcontractors. However, as an appellate court found in Matter of Sciame Construction, LLC v Accurate Specialty Metal Fabricators, Inc., the fact that a CM entered into a contract as a disclosed agent for an owner may not prevent that CM from itself being brought into an arbitration proceeding relating to the project.

Background

In September of 2014, Sciame entered into a construction management agreement with the owner of a construction project within Hudson Yards for the construction of a culture center. In April of 2017, Sciame, as disclosed agent for that owner, entered into a subcontract with Accurate Specialty whereby Accurate Specialty was to perform the ornamental steel work on the project for $2,709,298, which was subsequently increased to $4,455,458. This contract provided for dispute resolution by arbitration.

Disputes arose regarding the quality and timeliness of Accurate Specialty’s work. Sciame, as agent for the owner, ultimately commenced an arbitration proceeding against Accurate Specialty to recover damages on behalf of the owner. Accurate Specialty filed an answer in the arbitration denying those allegations, and also filed a claim in the arbitration proceeding directly against Sciame, itself, alleging that Sciame undertook obligations to Accurate Specialty to maintain and facilitate the progress of the project and its schedule, and that Sciame’s stacking of trades, dilution of supervision, chaotic work site, failure to timely approve change orders, and interference with Accurate Specialty’s remediation efforts proximately caused it to incur damages in the performance of its work. Sciame commenced a proceeding to permanently stay Accurate Specialty’s arbitration claim, arguing that as there was no contract between Sciame and Accurate Specialty, Sciame could not be compelled to submit to arbitration. Accurate Specialty noted that although its subcontract was ostensibly between it and the owner, Sciame undertook numerous obligations directly to Accurate Specialty, and Accurate Specialty could assert claims against Sciame for its breach of these obligations.

Decision

The motion court denied Sciame’s application to stay Accurate Specialty’s arbitration, holding that even if Sciame was not in privity with Accurate Specialty due to it’s having entered into the subcontract as an agent of the owner, Sciame received direct benefits from the contract. Citing well settled case law holding that where a party benefits from a contract which contains an arbitration agreement it may be held to that arbitration agreement itself, the motion court held that that Sciame was estopped to deny that it was bound by the arbitration agreement. Accordingly, the court held that Sciame was compelled to utilize arbitration as the method of dispute resolution.

Sciame appealed, but fared no better before the appellate court. Although noting that generally an agent who signs a contract on behalf of a known principal does not bind itself individually, the appellate court held that the language of the contract documents evinced Sciame’s intent that all disputes arising out of Accurate Specialty’s subcontract, including those involving Sciame itself, would be resolved through arbitration. In that regard, the appellate court affirmed the motion court’s direction that Sciame proceed to arbitrate Accurate Specialty’s claims.

Comment

Although arbitration is generally a faster (you can easily have a decision in under a year from commencement), better (you can have a knowledgeable construction professional as your decision maker), and cheaper (discovery, the expensive part of a lawsuit, is curtailed in an arbitration proceeding) way to resolve disputes, it is technically a denial of one’s right to a trial by jury, as enshrined in the Sixth Amendment to the U.S. Constitution. Accordingly, before a party will be compelled to arbitrate, a court must find that the party either explicitly, or implicitly, consented to forego its constitutional right to a trial by jury, and affirmatively opted for the arbitration proceeding. Explicit consent is easy to determine; either a party signed an agreement to arbitrate, or it did not. Implicit consent, on the other hand, will ultimately require a court to determine what the parties’ intent was at the time the contract was signed. Contractors and others who are parties to construction contracts would be well advised to consult with experienced construction counsel to determine what provisions can be put into contracts to clarify parties’ desires as to arbitration (and other subjects) so that courts do not ultimately err in setting forth what the parties may, or may not, have intended.

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 warned many times 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. There are instances where lienors try to have their proverbial cake and eat it too by asserting an exaggerated lien, and then withdrawing the foreclosure claim in the face of the exaggeration counterclaim. In Adria Infrastructure, LLC v Henick-Lane, Inc., an appellate court recently demonstrated the lengths that courts will go to prevent such chicanery, going so far as to not only deny a motion to amend a complaint to remove a lien foreclosure cause of action, but actually ordering the reinstatement of the lien—at a value of $0—so that it existed at the time of trial, as was required in order to pursue the exaggeration counterclaim.

Background

Prior to 2010, Henick-Lane entered into a contract with DASNY to serve as the general contractor on a public works project for the refurbishing of the courthouse on Staten Island. In January of 2010, Henick-Lane contracted with Adria Infrastructure to provide needed plumbing, steamfitting, and like work for the project. In 2013, Adria filed a mechanic’s lien against the project in the amount of $742,651, and in 2015 it commenced a lawsuit to foreclose that lien. Shortly thereafter, Adria filed a second mechanic’s lien against the project in the amount of $4,180,706, and it amended its complaint in the existing lawsuit to foreclose that lien. In 2016, Adria successfully moved to reduce its lien to $2,949,538, based on a prior partial settlement. After discovery (in which it became readily apparent that the liens were willfully exaggerated), Adria released its liens and moved for leave to file an amended complaint to remove its cause of action to foreclose those liens. In response, Henick-Lane moved to void the release of lien, and reduce the amount of Adria’s lien to $0.

Decision

The court denied Adria’s motion to remove its foreclosure claims, and granted Henick-Lane’s motion to effectively reinstate Adria’s lien at $0 value. In doing so, the court cited well settled law that although amendments to claims should ordinarily be freely granted, the purpose of the proposed amendment here was to evade the willful exaggeration claim—a result which the court would not countenance. Further, because the predicate of a successful willful exaggeration claim is the existence of a valid mechanic’s lien, the court voided the release of lien and valued the lien at $0 so that the willful exaggeration claim could proceed. On Adria’s appeal, the Appellate Division affirmed, finding, like the motion court, that the drastic remedies set forth in the Lien Law for a willfully exaggerated lien were “available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action”, and that by releasing the lien, Adria attempted to deprive Henick-Lane of the ability to seek redress for the willful exaggeration.

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. While many exaggerating lienors try to avail themselves of the shock value of an exaggerated lien while later avoiding the ramifications, Adria Infrastructure is a reminder of the lengths to which courts will go to prevent such chicanery—even going so far as to reinstate a mechanic’s lien for $0 in order that a lien will be in effect at time of trial, as is necessary to allow the exaggeration claim to proceed.
Contractors should be forewarned of the bitter penalties that can be imposed if they exaggerate a lien. Those on the receiving end of an exaggerated lien should also fight back. Accordingly, one should consult with construction counsel to determine what legitimate methods are available to get an upstream contractor’s or owner’s attention, such as by also asserting a bond claim, by having a copy of the lien directed at the property’s lender, or the like; or, alternatively, learn how to counter-attack the exaggerating lienor. 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

It is generally known throughout the construction industry that a mechanic’s lien, once filed, is good for one year from the date of its filing. Under many circumstances, a lien extension cannot be obtained by a simple filing, and must be obtained by court order (which requires the commencement of a special proceeding). Because of the wording of the statute, most contractors (and construction lawyers) often bring the proceeding well before the one year anniversary so as to be sure that the order is entered before the lien expires. Because of the vagaries of court calendars, some extensions are granted well before the expiration of the lien, effectively reducing the overall time available for the lien to be active. In the recent case of ABS Construction v Pardus, a trial court granted the extension where the special proceeding was only commenced the day before the lien expired, and the order was not entered until well after that expiration.

Background

In July of 2020, ABS Construction, Inc. performed some bathroom and kitchen renovation work in the home of Drew and Frances Pardus in Manhattan. ABS alleged that it was not fully paid, and was still owed $18,502 for its work; on February 5, 2021, ABS filed a mechanic’s lien against the Pardus’ home in that amount.

Because the lien was filed against a single family home, it could not be extended through the filing of a simple extension. Rather, the Lien Law requires that the lienor obtain a court order continuing such lien. On February 4, 2022, the day before the lien expired, ABS commenced a special proceeding to extend the lien for a period of one year. Because the court order would not be obtained the next day, ABS also requested that the Court extend the lien retroactively, so as to cover any period between the natural expiration of the lien and the entry of the court’s order. In its petition in support of the extension, ABS alleged that it had not extended or foreclosed its lien because it was attempting to resolve the matter without incurring the costs associated with either a foreclosure or a special proceeding to extend the lien.

The Parduses opposed the application to extend the lien, arguing that ABS was required to show good cause for failing to obtain the order of extension within one year of the filing of the original lien, and that it failed to do so.

Decision

The court granted ABS’s application and extended the lien. In doing so, the court held that “[t]here is no dispute that this proceeding was commenced before the subject lien expired. It is of no moment that this application was not made returnable before that date. Therefore, the court has the power to extend petitioner’s lien nunc pro tunc. Contrary to respondents’ contention, petitioner does not need to demonstrate good cause when the proceeding was otherwise timely brought.”

Comment

As mentioned above, general conservative practice has been that where a court order extending a lien is necessary, counsel would bring the proceeding well in advance of the expiration of the lien so as to ensure that the order extending the lien was obtained within the one year. The net effect of this practice permitted courts with less-crowded dockets to effectively reduce the overall period available to lienors. For instance, if counsel brought the proceeding eight months after the filing of the lien, and the court entered the order two months thereafter, the new expiration date of the lien is two months before its anniversary date. This reduction gets magnified in following years since following extensions of lien also need to be obtained by court order (which would likely be accomplished on a similar schedule).

The pragmatic effect of ABS Construction is that lienors and their attorneys will have more flexibility in timing their applications to extend their liens so that they get the full period of time envisioned in the Lien Law—without having to make any sacrifice to the uncertainties of a court’s docket. While it would enhance the certainty of this proposition of law if this ruling were from an appellate court and not a trial-level court, the relatively low value of the lien in ABS may deprive us of that appellate decision here. However, it will likely not be very long before we do have that appellate-level holding on the issue. In the meantime, lienors would be cautioned to consult with experienced construction counsel about how to renew their liens to be sure that they are effectively extended, and not relying on another trial-level judge determining that a demonstration of good cause is actually necessary. Or, stated more simply, don’t press your luck with statutory deadlines.

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

One of the most ubiquitous documents in construction is the partial waiver and release of lien, which is invariably a condition precedent to a contractor or subcontractor receiving its progress payment. While the most common question contractors have is whether signing the document before receiving payment actually waives the contractor’s right to receive that payment (it doesn’t), these documents can be a trap for the unwary because they will operate to waive claims for monies that are not specifically recited as being excepted from the partial waiver and release of lien (such as unpaid change order claims, delay claims, etc.). An appellate court, in the recent case of Pizzarotti, LLC v X-Treme Concrete Inc., reminded us of this state of affairs when it dismissed a contractor’s counterclaim for delay damages based on its execution of such monthly waivers.

Background

In September of 2015, Pizzarotti entered into an agreement to perform construction services for a residential construction project on West 27^th Street in Manhattan. Pizzarotti subsequently entered into a subcontract with X-Treme Concrete for X-Treme to perform the concrete scope of work at the project. Of course, as part and parcel of the payment process, X-Treme signed partial waivers and releases of lien monthly, each one of which provided, in capital letters, that X-Treme “AGREES THAT THIS WAIVER OF LIEN AND RELEASE IS NEITHER A RECEIPT FOR PAYMENT NOR A CONDITION PRECEDENT TO PAYMENT, BUT A KNOWING AND WILLFUL ACKNOWLEDGEMENT THAT SUBCONTRACTOR HAS BEEN FULLY PAID . . . THROUGH THE ABOVE-REFERENCED DATE.”

Within months, disputes arose on both sides, with Pizzarotti alleging that X-Treme failed to remit payments to its subcontractors and suppliers, and X-Treme alleging that Pizzarotti failed to pay it promptly, and had delayed the job. Ultimately, X-Treme ceased working on the project (with X-Treme alleging that Pizzarotti improperly terminated it, and with Pizzarotti alleging that X-Treme abandoned the job), and X-Treme filed a mechanic’s lien against the project (as did several other of X-Treme’s subcontractors). Pizzarotti sued X-Treme for breaching the contract, alleging that it was going to incur excess completion costs as a result. X-Treme filed several counterclaims, each one of which alleged that X-Treme incurred significant damages as a result of Pizzaroti’s delays arising from its failure to provide complete project drawings, and that Pizzarotti improperly terminated X-Treme as a pretense to cover for its own delays, and in an effort to avoid liability for such actions.

After discovery, Pizzarotti moved for summary judgment dismissing X-Treme’s counterclaims, arguing that the partial releases and waivers of lien executed by X-Treme in exchange for monthly progress payments (eight, in total) barred its delay claim, which—unlike the recitation of unpaid retainage—was not excepted from the otherwise general release language. In opposition, X-Treme argued that the releases were only meant to document payments received to date (receipts, in essence), and not to release any unresolved change orders or delay claims.

Decision

The motion court dismissed X-Treme’s counterclaims, briefly citing the partial waiver and release of lien documents—and holding that X-Treme failed in its burden to demonstrate that the releases did not apply to its claim, or otherwise establish any equitable basis to vitiate their effect. The appellate court affirmed, citing the capitalized language of the partial waiver and release of lien in which X-Treme specifically acknowledged that the document was not a mere receipt but, rather, operated to release any claims not specifically preserved, including its delay claim (which existed prior to the execution of the latest release documents). The appellate court also noted the existence of a no-damages-for-delay provision of the contract, and found that as the incomplete drawings were specifically mentioned in the parties’ contract, they were contemplated and, therefore, not subject to one of the exceptions to the enforceability of such a clause.

Comment

Clearly, contractors are in the construction business to make money. However, this case should caution contractors that they should not simply sign any document put in front of them to get some money flowing in their direction. Setting aside, for the moment, that X-Treme’s delay claim was also barred by specific contractual language, the partial waiver and release of lien documents here serve as clear evidence that simply signing required documents for the sake of getting some money flowing can result in the foreclosure of other claims which may (or, here, may not) have merit. Accordingly, contractors would be well advised to consult with experienced construction counsel as to how to best preserve their right to collect on all of their claims, and not just the ones that will result in an immediate payment. Have your attorney review the partial release and waiver of lien document at the time of the very first requisition—not 8 months into the job, when the damage has already been done.

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

Construction projects are often expensive undertakings, with the expense increasing with the duration of the project. For that reason, owners and upstream contractors do whatever they can to stave off delays. One way they can stave off such delays is to include a provision requiring downstream contractors involved in a change order dispute to continue working pending the resolution of the dispute. An appellate court, in the recent case of McCarthy Concrete, Inc. v Banton Construction Co., reminded us that the violation of this type of provision constitutes an independent breach of the contract, and supports the imposition of liability the same as a breach of any other substantive provision of the contract.

Background

In the early 2010s, Amtrak undertook to expand its Empire Corridor trackage between its Albany-Rensselaer and Schenectady train stations by adding a fourth track. In April of 2014, Amtrak hired Middlesex Corp. as its general contractor which, in turn, retained Banton Construction Company to perform a specified scope of work in connection with the project. In October of 2014, Banton hired McCarthy Concrete to complete the concrete work for the platform extensions. This work included the structural concrete for the pile caps and inspection pits, and the concrete overlay for the platforms. The lump sum subcontract had certain enumerated exclusions, including concrete pumping and tactile work, and included unit pricing for the actual quantity of concrete used. As to claimed changes, the subcontract also contained a provision requiring McCarthy to “immediately perform the work as changed without delay”, and “pending resolution of any claim, dispute or other controversy, nothing shall excuse McCarthy from proceeding with prosecution of the work”.

In the summer of 2015, Amtrak ordered a suspension of the project, and Banton directed McCarthy to demobilize. Banton and McCarthy worked to resolve some then-outstanding payment issues, which ultimately resulted in a lawsuit in Connecticut. That lawsuit was settled with the understanding that Banton would pay certain of McCarthy’s claims, and McCarthy would return to work when Amtrak lifted the suspension. As a part of the resumption of work, Amtrak changed the plans which, as far as McCarthy was concerned, included the use of concrete pumping and the installation of tactile warning strips. Banton requested proposals for the changed work from McCarthy, and the proposals ultimately provided by McCarthy were not acceptable to Banton. In September of 2016, Banton directed McCarthy to return to work, stating that it was “willing to fund the alleged added costs for concrete pumping and added reinforcing, under a reservation of rights”. Banton also warned McCarthy that if it did not return to work, it would terminate McCarthy and retain a completion contractor. Ultimately, McCarthy never returned to the job, citing the lack of assurances of payment for the new work. Banton followed through on the termination and the hiring of a replacement contractor.

McCarthy sued Banton for some unpaid rebar left at the site, and to recover its unpaid retainage. Importantly, McCarthy also sued for its lost profits; the money it claimed it would have made but for the allegedly improper termination of its contract. Banton asserted a counterclaim, alleging that McCarthy breached the subcontract by failing to return to the job on account of the payment dispute, in violation of the subcontract’s work directive provision. The matter was tried to a judge, who decided in favor of McCarthy on its principal claim. The trial court awarded McCarthy a judgment in the total amount of $92,582.98, which was the value of the unpaid rebar, the retainage, and $28,500 in lost profits. Banton appealed, arguing that McCarthy’s breach of the contract by failing to return to the site, where the contract language required continued performance despite the existence of a payment dispute, excused it from having to pay McCarthy (or, at a bare minimum, was an offset against McCarthy’s claim).

Decision

While the trial court gave short shrift to the “continue working” provision, the appellate court found that the breach of this provision required reversal. The appellate court specifically noted that as “plaintiff had agreed, pursuant to the subcontract, to continue the work while pursing dispute resolution, its failure to perform the work amounted to a breach of the subcontract. Thus, we disagree with Supreme Court that Banton breached the contract based upon terminating the subcontract when plaintiff refused to perform absent an express agreement as to costs for the increased work. * * * Rather, we find that plaintiff breached the subcontract by refusing to perform the work as it was required to do under the subcontract and, as such, grant Banton’s counterclaim for breach of contract.” In doing so, the appellate court held that Banton was entitled to an affirmative recovery of $61,986.22 from McCarthy, which was Banton’s $106,068.22 cost to retain the replacement contractor, minus only the $44,081.93 in retainage owed to McCarthy; the appellate court held that McCarthy was not entitled to lost profits since it, not Banton, breached the contract (and also held that McCarthy had previously released the claim for the rebar).

Comment

This case is a reminder that those who live in glass houses should not throw stones; or, in the context of a breach of contract lawsuit, that the plaintiff must not first be in breach of contract itself. While, often, the withholding of work is the only leverage that an unpaid contractor has to ensure full payment, in the face of a prior agreement to continue working notwithstanding the existence of such a payment dispute, the tactic has been analogized to hostage taking—including by the appellate court here, noting that “Plaintiff’s refusal to perform the changed work without an express agreement as to increased costs had the effect of holding Banton hostage in that the work”. Accordingly, contractors would be well advised to consult with experienced construction counsel to determine what remedies they truly have, and what actions will only grasp defeat from the jaws of victory.

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 reminded those in the construction industry that the statutory remedy of a mechanic’s lien is a powerful tool that enables unpaid contractors, subcontractors, and suppliers to seek payment directly from property owners who may be strangers to the contractual relationship from which the payment obligation arises. Because of the power of this tool, there are also protections in the Lien Law for owners, such as the insulation from being made to pay for the same improvement twice (which is why it is necessary for a plaintiff in a lien foreclosure action to establish the pool of monies available to pay lien claimants [the “lien fund”]). A similar protection is that a property owner who has not yet been served with the mechanic’s lien cannot be held liable for making payments in good faith to other contractors before that owner receives notice of the lien. The converse of this protection is that an owner who has been served with a mechanic’s lien cannot use subsequent payments to deplete the lien fund, and will not have the “good faith payment” defense available upon the foreclosure of the lien. However, in the recent case of Crisafulli Bros. Plumbing & Heating Contractors, Inc. v Pirri Builders, LLC, when an inventive subcontractor sought to transform that defense into an affirmative claim in a lawsuit, an appellate court held that the legislature never intended to create yet another type of claim other than the lien foreclosure claim, and it rebuffed the attempt to invent the new one.

Background

In early 2017, Pearl Enterprises entered into a contract with Pirri Builders to serve as the general contractor for a renovation project in Albany. In March of 2017, Pirri entered into a subcontract with Crisafulli Brothers Plumbing and Heating Contractors for the HVAC and plumbing scopes of work. Crisafulli claimed that it performed its work without objection (but without payment), and as a result was owed a total of $164,708.19. Crisafulli filed two mechanic’s liens, one in October of 2018, and the other in January of 2019. After being served with these liens, Pearl made two payments, totaling $227,502.00, to Pirri—not Crisafulli.

Crisafulli sued both Pearl and Pirri. As against Pearl, it not only sued to foreclose the mechanic’s lien, but it also asserted a cause of action for “payment over mechanic’s lien”, based on Pearl’s two post-lien payments to Pirri. Pearl moved to dismiss the “payment over lien” claim, arguing that it did not exist under New York law.

Decision

The motion court dismissed the “payment over lien” claim, and the appellate court affirmed. In doing so, the court reviewed the plain language of the statute and found that, at best, it provided a safe harbor provision against liability for payments made before the property owner had notice of the mechanic’s lien, and not a separate claim. Under such a reading, the “payment over lien” theory could only be a contractor’s defense against an owner’s attempt to use the safe harbor provision to reduce the lien fund.

Comment

The mechanic’s lien provided for under the Lien Law is a powerful tool. However, as a remedy that was not available at common law, it is read strictly so as to not give greater rights than the legislature intended. Accordingly, because the legislature did not clearly provide for the additional claim for the “payment over lien”, the court properly declined to create the claim by judicial fiat.

As a practical matter, Crisafulli had already started a lien foreclosure action, which, upon the facts presented, appears sufficient to enforce Crisafulli’s rights to payment. The safe harbor provision of the lien law—which Pearl was well outside—already exposed Pearl for making the subject payments after having had knowledge of Crisafulli’s lien. While it is understandable for a contractor to want to bring every weapon to bear in order to collect monies owed, in an attempt to create a claim that did not exist, the only thing that this subcontractor did was to buy itself motion practice, and an expensive trip to the Appellate Division.

P.S.- If you are served with a lien, think twice before writing out any checks. Protect yourself.

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