Mechanic’s liens, if available, can be useful tools for unpaid contractors, subcontractors and suppliers to get paid for their work. Like any tool, it is subject to abuse; such as by the filing of an unwarranted, or exaggerated, lien.  While there is a statutory remedy in those cases where the lien is shown to be willfully exaggerated, such remedy is only available where the lienor actually seeks to foreclose on the lien in court.

Where there is no lien foreclosure action, what is a contractor-lienee, aggrieved by the filing of an allegedly exaggerated lien, to do? In the recent case of Centrifugal Associates Group LLC v Newell Contracting, Inc., a court showed us what cannot be done: extend liability for the claimed misuse of a mechanic’s lien to the principal of the subcontractor-lienor on a theory of defamation.

Background

Centrifugal Associates Group LLC, was hired by the Durst Organization to serve as the general contractor on a construction project on 26^th Avenue in Queens. Centrifugal, in turn, hired Newell Contracting, Inc. as a subcontractor to perform certain mechanical work. Newell performed work under the contract and claimed that it wasn’t being paid. On September 17, 2018, Newell filed a mechanic’s lien against Durst’s property in the amount of $320,000, claiming that it was owed that amount by Centrifugal, as GC. Newell, however, never sought to foreclose the lien.  Centrifugal disputed the debt.

On November 26, 2018, Centrifugal commenced a lawsuit against Newell and its president, Krzysztof Bielak. Centrifugal’s claims against Newell were for the claimed breach of the subcontract, for which Centrifugal sought damages in excess of $8 million. As to Bielak, Centrifugal claimed that his statements made in the mechanic’s liens were false because no money was owed to Newell, and that Bielak caused the mechanic’s lien to be filed solely to cause harm to Centrifugal (and that the resulting harm was the removal of Centrifugal from Durst’s approved contractors list).

Both Newell and Bielak failed to answer the complaint, and Centrifugal sought a default judgment against both. Newell did not oppose the motion, but Bielak did—and also cross moved to dismiss the claims against him. In support of his motion, Bielak argued that he could not be held liable for acts undertaken in his corporate capacity and, regardless, the statements made in a mechanic’s lien are not actionable as defamation, as a matter of law.

Decision

The court first dispatched Bielak’s corporate capacity argument, citing to well established case law providing that an individual can be personally liable for a tort committed in a corporate capacity (as opposed to a breach of contract, which would not support personal liability). However, the court was more receptive to Bielak’s argument that he did not commit defamation as a result of filing the mechanic’s lien. New York recognizes certain privileged situations where a person can undertake what may otherwise be considered defamation with impunity. One such privilege involves statements made in the course of a judicial proceeding. As a mechanic’s lien is pertinent to a lien foreclosure action, the court held, the statements could not be considered defamation, as a matter of law. In that regard, the court granted Bielak’s motion and dismissed the defamation claim against him.

Comment

As can be seen from the court’s holding in Centrifugal, the remedies against a lienor whose lien is exaggerated are limited, outside of the foreclosure context. However, as the court tangentially referenced, those remedies are not nonexistent and may include claims for fraud, disparagement of title, interference with contract, interference with prospective business advantage, extortion, malicious prosecution and malicious abuse of process. Accordingly, although Centrifugal stands for the proposition that a lienor’s principal cannot be held liable on a defamation theory, there is other recourse available to the target of the improper mechanic’s lien—even if the lienor refrains from foreclosing. In that regard, contractors should take away the importance of always being accurate and truthful when filing a mechanic’s lien.

Prime contractors are generally aware that by statute, bids submitted on public works projects are, absent narrow circumstances, firm and must be honored. Accordingly, upon being notified that its bid was the lowest bid (and upon being awarded the project), the low bidding contractor must enter into a contract with the municipality for the project. The form of contract is usually included in the bid form documents. So, if the contractor sees something objectionable in the contract, it can simply decline to submit a bid (but not negotiate the terms).

Bids on private jobs, on the other hand, are not necessarily firm. One tool that can be used to make a private bid firm is the quasi-contractual theory of promissory estoppel, which provides that a party who is the recipient of a promise and relies on that promise to its detriment can sue for damages arising out of a breach of that promise. In the recent case of Andrew R. Mancini Associates, Inc. v. Murphy Excavating Corp., an appellate court held that there were questions of fact as to whether a bid submitted to a general contractor by a subcontractor was firm—and whether the subcontractor could be held liable for the difference between its bid and the higher cost actually incurred by the general contractor to retain a different subcontractor after the original subcontractor refused to enter into a contract upon its bid.

Background

In December of 2016, in preparing to submit its own bid to serve as the general contractor on a reconstruction project, Andrew R. Mancini Associates solicited bids from subcontractors to perform, amongst other tasks, the excavation and landscaping scopes of work. Murphy Excavating Corp. submitted a bid to Mancini for such work, and Mancini confirmed both Murphy’s price and the scopes of work to be performed. Murphy was aware that its bid was being incorporated into Mancini’s own bid to the project’s owner.

The following month, Mancini informed Murphy that Mancini had been awarded the project, and both parties began to negotiate the form of the subcontract. Ultimately, these negotiations broke down over what Murphy characterized as “unreasonable” terms in Mancini’s proposed subcontract, and Murphy refused to enter into an agreement with Mancini. In light of Murphy’s refusal, Mancini procured the required services from another subcontractor, but at a higher cost. Mancini sued Murphy on the theory of promissory estoppel to recoup the difference between Murphy’s bid price and the higher price it ultimately paid for the work. Murphy moved for summary judgment, asking the court to dismiss the claim.

Decision

The trial court denied Murphy’s motion, and the appellate court affirmed the trial court’s decision. In doing so, the appellate court cited to well established case law holding that a claim for promissory estoppel is stated when a plaintiff alleges that a defendant made a clear and unambiguous promise, that the plaintiff relied upon that promise to its detriment, and that the plaintiff was harmed as a result of the breach of the promise. Relying upon that case law, the appellate court affirmed the trial court’s finding that there were questions of fact as to whether Murphy’s promise was unambiguous, and whether Mancini’s proposed contract was reasonable. The court also cited to case law providing that what occurred during the failed negotiation of the subcontract—which could determine whether the promise was actually breached—is similarly an issue of fact for a jury.

Comment

The ramifications of submitting a bid as a prime contractor in the public works context are well known. In the private context, however, the effects are less well settled. Under some circumstances, courts have indicated willingness to use the doctrine of promissory estoppel to make those bids firm. Courts have also indicated that where the circumstances are not clear, such as in Murphy Excavating, the parties will have to proceed through expensive discovery to an (even more) expensive trial. In order to avoid such vagaries, contractors submitting private bids would be well advised to indicate clearly what conditions those bids are subject to, and under what terms and conditions the bid will—or will not—be honored. Better yet, contractors can make the form of the subcontract part of their bid packages so that such an argument over the exact terms of that subcontract can be had before the bid, and not after.

A subcontractor has no direct contractual relationship with a project owner; that relationship is between the general contractor and the owner.  Accordingly, the sub cannot sue the owner directly, even if it sustains monetary damages caused by the owner.  Consequently, in response to this lack of contractual privity, the sub and the GC may enter into a liquidating, or pass-through, agreement, where the sub assigns its claim to the GC. The GC, in turn, prosecutes the sub’s passed-through claim against the owner, and then gives the sub any recovery.

Generally, a liquidating agreement is designed to limit, or liquidate, the GC’s liability to the sub to the amount the GC recovers from the owner. However, in order for the GC to limit that liability, it must pursue the sub’s claim in good faith. In the recent decision in the case of Rad and D’Aprile, Inc. v. Arnell Construction Corp., which was rendered by the trial court after remand from the appellate court decision discussed in the May, 2018, Attorneys’ Column, the court found that the GC had breached its duty of good faith and fair dealing under its liquidating agreement and, therefore, was directly liable to the sub for claims that ought to have been pursued against the owner.

Background

In June of 2001, the New York City Department of Sanitation entered into a contract with Arnell Construction Corp., as GC, to construct two new sanitation garages in Brooklyn. Arnell’s contract with the City required that any claims against the City be brought within six months of the City’s issuance of the certificate of substantial completion. In August of 2001, Arnell subcontracted with Rad & D’Aprile, Inc., for Rad to perform masonry work on the project.

In August of 2010, pursuant to a liquidating agreement it had entered into with Rad, Arnell filed a notice of claim with the City seeking damages on behalf of Rad for additional costs that Rad incurred due to various delays caused by the City. In December of 2010, Arnell sued the City on those claims.  The City moved to dismiss the lawsuit on the ground that it was untimely under the six-month limitations period provided for in Arnell’s contract. In May of 2012, the court dismissed Arnell’s lawsuit, finding that the City had notified Arnell in December of 2007 that the project was substantially complete, and that any lawsuit had to be commenced no later than June of 2008. Arnell filed an appeal and also moved to reargue the motion. Unbeknownst to Rad, while the appeal and motion to reargue were pending, Arnell settled with the City for $3,638,495.69. None of the settlement money was apportioned on account of Rad’s claim, but Arnell nonetheless released Rad’s claim in the settlement.

After that lawsuit was dismissed (and the secret settlement consummated), Rad sued Arnell directly for the same damages, alleging that Arnell had a duty to make a good-faith, diligent effort to prosecute Rad’s claim against the City, and that Arnell breached that duty by failing to commence the lawsuit against the City within the applicable six-month limitations period. Arnell moved to dismiss this claim but the trial court denied the motion, finding that the claim, as stated, was sufficient because Rad set forth facts which, if proven, would establish that Arnell had a duty of good faith and fair dealing independent of the subcontract, and that Arnell breached that duty by failing to commence the underlying action before the six-month limitations period expired. After the trial court’s order was upheld on appeal, Rad moved for summary judgment on its breach of the covenant of good faith and fair dealing claim, asserting that the facts of the undisclosed settlement, coupled with Arnell’s waiver of Rad’s claim in exchange for a recovery limited to its own claims, established that Arnell breached the covenant and should be held directly liable to Rad.

Decision

The trial court granted summary judgment to Rad, finding that the liquidating agreement was an express agreement for Arnell to be responsible for delays caused by the City, and that Arnell’s self-serving actions in failing to inform Rad of the settlement, and in releasing Rad’s claim in order to obtain payment on the contract-balance portions of its own claim, established that Arnell, in fact, breached the covenant of good faith and fair dealing, and that Arnell could not raise an issue of fact as to whether it diligently presented Rad’s claim sufficient to defeat summary judgment.

As to the extent of the claim, Arnell argued that as none of the monies recovered were on account of Rad’s claim, it could not be held liable to Rad under the liquidating agreement. The court dismissed such argument, finding that the fact that no money was recovered on Rad’s claim, together with Arnell’s failure to dispute that it would have received a substantially higher settlement on Rad’s (and its own) claim if it had been timely presented, was evidence that Arnell failed to take proper steps to preserve Rad’s claim. Accordingly, the court held that Rad’s recovery against Arnell could not be limited to the monies actually recovered from the City by Arnell, and that Rad was entitled to a trial on the issue of damages—a trial where it was free to introduce evidence of all damages that it incurred resulting from Arnell’s breach of the liquidating agreement.

Comment

Liquidating agreements are an effective way to address the problem of a sub’s lack of a contractual relationship with a GC by having that GC essentially admit the validity of the sub’s claims, confess liability on those claims, and then prosecute those claims on behalf of the sub with the promise that the recovery would be passed along to the aggrieved sub. The benefit to a sub is that claims which would otherwise be barred because of the lack of privity of contract with the owner can be adjudicated. The benefit to the GC is that its liability is limited to the amount it ultimately recovers on the liquidated claims. However, as we saw from the first Rad decision, in order to enjoy the protection of that limitation of liability, the GC must be diligent in prosecuting the sub’s liquidated claims. Further, as we saw from the second Rad decision, where it is established that a GC was not diligent in prosecuting its sub’s claims, the sub is not limited in the amount of damages it is entitled to prove to what ended up being recovered from the owner. Accordingly, GCs and prime contractors would be well advised to take their responsibilities under a liquidating agreement seriously or else be prepared to be held responsible for the entirety of the sub’s claims.

Contractual notice provisions are one of the biggest landmines that contractors face since the failure to strictly comply with such provisions can preclude recovery on otherwise valid claims. Further, notice provisions vary greatly from contract to contract. Additionally, contractors, being a practical lot, often focus on working to minimize or resolve the situation that led to the claim in the first place, sometimes to the detriment of complying with such notice requirements.

In the recent case of R-J Taylor General Contracting, Inc., v Fairport Central School District, an appellate court permitted a delay claim to survive despite the contractor’s clear failure to make its required notices under the contract.

Background

R-J Taylor General Contracting entered into two identical contracts with the Fairport Central School District for work at various schools within the district. These contracts included no-damages-for-delay provisions, and also provided specific time periods under which R-J Taylor had to notify the School District of any claims under the contract. R-J Taylor’s scope of work included, amongst other things, the removal of unsuitable soil. As to this work, R-J Taylor was to provide a unit price for such work undertaken above or below a set quantity.

During the course of its work, R-J Taylor exceeded the set quantity for soil removal. The School District refused to pay for the additional removal work, and R-J Taylor commenced a lawsuit to recover the amounts owed. In that lawsuit, R-J Taylor also sought damages related to the School District’s “unforeseeably excessive number of changes and corrections to the original contract documents.” It was agreed that these claims (one on each contract) actually sought damages for delay.

The School District moved for summary judgment dismissing R-J Taylor’s delay claims, arguing that they were barred by the no-damages-for-delay provisions. The School District also argued that regardless of the contractual bar, R-J Taylor failed to provide the requisite notice under the contracts.

Decision

The motion court denied the School District’s motion for summary judgment, and the appellate court affirmed the lower court’s holding. In doing so, the appellate court cited to well settled case law that no-damages-for-delay clauses are generally enforceable, but that exceptions exist where: (1) the delays are caused by the owner's bad faith or its willful, malicious, or grossly negligent conduct, (2) there are uncontemplated delays, (3) the delays are so unreasonable that they constitute an intentional abandonment of the contract by the owner, and (4) the delays result from the owner's breach of a fundamental obligation of the contract. Both courts held that there were questions of fact at to whether R-J Taylor could establish that one of the exceptions to a no-damages-for-delay provision existed.

As to the failure to comply with the contractual notice provisions, the appellate court held that such a failure generally constitutes a waiver of such claims. However, in light of the no-damages-for-delay provisions of the contracts, the delay claims were held to be outside of the contracts. As such, the delay claims were not subject to the notice provisions contained within the contracts, and were permitted to survive.

Comment

While R-J Taylor’s delay claim, as an extra-contractual claim, was permitted to survive notwithstanding the contractor’s failure to comply with the contractual notice provisions, contractors should not take this as holding that they need not comply with those notice provisions. Rather, the fact that the appellate court described the claim as one seeking relief wholly outside of the contract should serve as a warning that such situations are the rare exception, rather than the general rule. Clearly, had the notice provision in the contract read that notice had to be provided for “all claims”, and not just “all claims under the contract”, the outcome would have been different, and R-J Taylor’s delay claims would have met their end. The prudent course of action would have been for R-J Taylor to have provided its notices in accordance with the contracts, thus saving it from having to make an argument at to why its failure needed to be excused.

Section 112 of New York’s State Finance Law provides that no contract with the State which exceeds $50,000.00 is considered effective prior to its approval by the State Comptroller. This statute was enacted to prevent state employees from making improvident or extravagant contracts and from creating liabilities for which there was no appropriation. Section 112 has been held to apply to a wide variety of contracts, including construction contracts.

In the recent case of C&L Electric, Inc. v City University of New York, an appellate court used Section 112 of the State Finance Law to deny a contractor a recovery on that portion of a delay claim which pre-dated the State Comptroller’s approval and filing of the contract.

Background

In 2001, C&L Electric, Inc., was notified that it was the successful bidder on a project to install a fire alarm system throughout four buildings of the City University of New York’s¹ New York City Technical College in Brooklyn. C&L went to work on the project at some time after May 3, 2002, the date on which C&L sent a notice to CUNY complaining of the long delay in awarding the contract. In 2007, C&L submitted a request for an extension of time from April 4, 2004 to December 31, 2007, citing, amongst other delays, the delay in the start of the project. This extension of time was approved, but with the caveat that CUNY was still evaluating the delay claim change order. Ultimately, C&L’s contract was terminated by CUNY for reasons unrelated to the delay claim, and C&L sued on its delay claim, among others.

Decision

The State moved for summary judgment dismissing C&L’s lawsuit on various grounds. As to the delay claim, the State argued that it was barred by the “no damages for delay” clause in the contract. The lower court denied the motion, finding that there were questions that had to be resolved by a jury as to whether the facts of this matter fit into one of the four categories where damages are permitted even in the face of a “no damages for delay” clause (delays resulting from bad faith or grossly negligent conduct on the part of the owner; uncontemplated delays; delays so unreasonable that they amount to an abandonment of the contract; and delays resulting from the breach of a fundamental obligation of the contract). The State appealed.

On appeal, the appellate court upheld the lower court’s finding that there was an issue to be resolved by a jury. However, that court modified the lower court’s order to apply Section 112 of the State Finance Law, holding that claims for any delays which arose prior to September 26, 2002, the date on which the contract was approved and filed by the State Comptroller, were subject to dismissal. The appellate court also rejected C&L’s argument that the parties’ course of conduct indicated a waiver of the statutory protection, citing to well established case law holding that “employees of a state agency cannot, through words or a course of conduct, bind the State to a contract that the Comptroller has not approved”.

Comment

As this case demonstrates, no rights exist under a contract which has not been approved by the State Comptroller, as that contract does not legally exist before such approval. While the State here did not make an issue of its obligation to make payment of the base contract balance for work performed prior to the contract’s acceptance date, there is case law that holds that because there is no legally existing contract, the State has no obligation to pay for such work either under a contract or an unjust enrichment theory.

While state agencies are often anxious to get their construction projects under way, and while they typically do not weaponize this statutory provision to disclaim the obligation to pay for work performed in good faith prior to the formal acceptance and filing of the contract, know that in the event that a litigated contract dispute arises this shield is available to the state. A contractor would be well advised to make inquiries with the state agency and the State Comptroller’s office as to the status of the Comptroller’s acceptance of the contract so that they can be sure that they are working under a valid and enforceable agreement.

¹ The City University of New York is a part of the State University of New York system and, thus, a State, not a City, entity.