Question. Where the Owner hires an Architect to design and draw the plans and specifications for the project, including the roof construction and the Contractors then contracted with the Subcontractors for roofing materials and provided written specifications on how to install those materials and the Owner sues the Contractors and the Subcontractors for breach of contract and warranty, alleging that the roof was defective can the Contractors assert a claim against the Subcontractors for implied indemnification?

Answer. No. There could be no cause of action for implied indemnification because the responsibility for constructing and installing the roofing system was shared by the Contractors, the Subcontractors, and the Architect. Consequently, the Contractors did not state a cause of action for implied indemnification against the Subcontractors.

Question. Is a mandatory arbitration clause in an agreement between property owners and a contractor engaged by them to manage and direct renovation of their residence enforceable?

USUALLY. Although the Courts of New York favor alternative dispute resolution clauses, generally few things in the law are black and white. This is especially true in matters involving consumers.

In the case in question, the home owners entered into a Construction Management Agreement with construction manager, in which construction manager agreed to manage and direct the renovation of home owners’ residence. The Construction Management Agreement provided that:

Any disagreement, dispute, controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof.

The home owners terminated the construction manager. Prior to receiving notice of termination the construction manager had sent home owners several invoices, some of which remain unpaid. The construction manager, in accordance with his contract, served home owners with a Demand for Arbitration and Notice of Intention to Arbitrate. Home owners in turn, served and filed their Answering Statement to the construction manager’s Demand for Arbitration.

Home owners now seek a permanent stay of the arbitration.

General Business Law Section 399-c(2)(a) provides, in relevant part, that: “no written contract for the sale or purchase of consumer goods, entered into on or after the effective date of this section [September 5, 1984], to which a consumer is a party, shall contain a mandatory arbitration clause.” General Business Law Section 399-c(2)(b) further provides that: “the provisions of a mandatory arbitration clause shall be null and void.”

At first glance, therefore, it would seem that General Business Law Section 399-c bars enforcement of a mandatory arbitration clause in a residential construction agreement with the property owners. It would follow therefore that the mandatory arbitration clause in the agreements between homeowners and construction manager herein would be similarly unenforceable.

However, it may be argued that, General Business Law Section 399-c is pre-empted by the Federal Arbitration Act.

Section 2 of the Federal Arbitration Act makes enforceable a written arbitration provision in “a contract evidencing a transaction involving commerce.” In order for the Federal Arbitration Act to apply, the transaction at issue must “involve interstate commerce,” which the US Supreme Court has defined to be the equivalent of “affect commerce.”

InNew York, the Court of Appeals, (the highest appellate court in the state system) recently addressed the issue of the applicability of the Federal Arbitration Act to a construction contract performed in New York, which contained a mandatory arbitration provision. In that case, the Court of Appeals concluded that the project “affected interstate commerce, “triggering application of the Federal Arbitration Act. Among the factors cited by the Court were the following: the project manual and engineer’s drawings were created in a joint effort with a structural engineering firm headquartered in Illinois; petitioner’s largest supplier of materials for the project was a New Jersey company; project meetings and visits were often scheduled at the New Jersey supplier’s offices; the largest supplier of equipment for the project was a Massachusetts company; and further additional materials, equipment and services for the project were obtained from Oklahoma, Maryland and Kansas.

The construction manager in our case may argue that its agreements to renovate the house “affect commerce” because certain materials used during the course of the home improvements came from out of state. The counterargument would be that, if the use of any out of state materials triggers the applicability of the Federal Arbitration Act, then General Business Law Section 399-c would be eviscerated and pre-empted in most cases.

While the Federal Arbitration Act may in some cases pre-empt a state statute such as Section 399-c, it may only do so in transactions “affecting commerce.” The agreement herein, when measured against the standards set by applicable caselaw, may not be found to “affect commerce.” Indeed, too liberal an application of the Federal Arbitration Act would render General Business Law Section 399-c a virtual nullity.

The mandatory arbitration clause contained in the Construction Management Agreements may be declared null and void, pursuant to General Business Law Section 399-c even if the home owners’ application for a stay of arbitration is untimely. Pursuant to CPLR 7503(c), which provides, in relevant part, that “an application to stay arbitration must be made by the party served within twenty days after service upon him of the notice or demand, or he shall be so preclude.” an untimely application to stay arbitration may, be granted if the agreement for which arbitration is sought is facially illegal or if upon facial examination of the agreement, a court may conclude that it would be against public policy to permit arbitration of the issue sought to be arbitrated.

Because the arbitration clauses contained in the Construction Management Agreement may be declared null and void pursuant to General Business Law Section 399-c the untimeliness of their application to stay the arbitrations should not be a bar due to the public policy issue involved.

Question. Is a “binder agreement” for the sale and purchase of real property owned by a husband and wife enforceable by purchaser if only the husband signed the agreement?

answer. YES. To be enforceable, the purchase deposit agreement or as it’s commonly called the “binder” must satisfy the statute of frauds. In other words, it must be in writing, identify the parties to the subject real estate sales transaction, described the realty to be sold with reasonable particularity, and state the purchase price of the realty, the down payment called for as well as its due date, and the balance due upon closing. In the case at hand the binder also provided for a closing date, and stated that the transaction was not subject to mortgage financing. The additional fact that the agreement stated that a more formal contract was to be signed does not render the purchase deposit agreement unenforceable

Generally, where spouses own real property as tenants by the entirety, an agreement of sale signed by only one spouse is ineffective to convey title. However, if it is shown that the wife was aware of and actively participated in the transaction, the wife will be stopped from denying the husband’s authority to execute the contract on behalf of the wife. The wife’s contention that she did not sign the purchase deposit agreement, while true, does necessarily mean that the binder is not enforceable. The same reasoning applies if the roles of the husband and wife are reversed.

That being said, the better practice is to have all title owners sign the binder thus eliminating any questions as to who is authorized to do what.

Question. Over the course of the job, Subcontractor submitted a number of invoices for completed work, including work changes, for which Contractor only made partial payments. When it did make a payment, Contractor required an “Affidavit of Release,” which acknowledged receipt of the progress payment and, in pertinent part, stated that such receipt released Contractor “from any liens or suits arising from non-payment on the above referenced job.” Contractor argues that the affidavits of release barred the Subcontractor from pursuing the unpaid balance. In response, Subcontractor reasserts that a balance is due and argues that the affidavits of release were never intended to serve as a release of claims for unpaid work. Did the Subcontractor waive his right to collect the unpaid balance?

The answer depends on the parties conduct and intent. The affidavits of release were all-encompassing releases executed without protest. Under normal circumstances the Courts will enforce those releases and deny the Subcontractor further payments.

However, the Subcontractor argues that the executed affidavits of release are ineffective to bar claims for additional payments where it was the Contractor’s practice to condition any partial payments due on the execution of the release and the terms of the release itself expressly so provided. Subcontractor further argues that, due to Contractor’s financial difficulties during the project, Contractor and Subcontractor orally agreed to a system of partial payments. According to Subcontractor, under this system, the Payment Forms reflected amounts that Contractor was able to pay at the time and Contractor agreed to pay Subcontractor the full amounts stated in the invoices. Contractor did in fact make some additional payments.

In such a case, the waiver form is construed as merely a receipt for the monies referenced in the waiver. Moreover, Contractor’s conduct in subsequently paying Subcontractor for work theoretically released by prior payments is completely inconsistent with its theory of general release. Where a waiver form purports to acknowledge that no further payments are owed, but the parties’ conduct indicates otherwise, the instrument will not be construed as a release.

New York case law directly on point supports this conclusion: “Where a waiver form [submitted by a subcontractor] purports to acknowledge that no further payments are owed, but the parties’ conduct indicates otherwise, the instrument will not be construed as a release.

The same analysis and results would apply as between an Owner and Contractor. The lesson to be learned is that while legal wrangling may save your hide you should not sign a release that does not reflect the reality of the situation. As a general rule, the payment releases should indicate that they are operative only to the extent that payment is actually received.

Question. Do you recommend the use of form contracts?

The answer is a qualified yes. Form contracts that have been intelligently prepared are a very useful tool and more than pay for themselves when you consider the future litigation dollars you may be able to avoid spending. By “intelligently prepared” I mean that the contract should (a) provide the appropriate and enforceable legal protections; (b) be customized to address the concerns of your particular business; and (c) be periodically updated to keep current with business customs and constantly emerging law. The use of old agreements, or general forms supplemented by “borrowed” provisions from competitors contracts is strongly discouraged and can often leave you with less protections or result in significantly increased legal fees in the event of litigation.

A good place to start is with the form agreements prepared by the American Institute of Architects (“AIA”) which are widely recognized as the industry standard. AIA Contract Documents comprise over 80 forms and contracts that define relationships and terms involved in design and construction projects. The forms and contracts are prepared with input from owners, contractors, attorneys, architects, engineers, and others and are periodically updated. These forms and contracts should however, be modified to suit your particular needs.

Preventative medicine is the key in the case of form agreements. Consultation with your attorney to review your current agreements or prepare new ones is well worth the time and effort. While you’re at it, why not have her prepare a few form letters addressing common events or situations that may arise to supplement and integrate with your new agreements?

Question. Does a general contractor’s postponement of the subcontractor’s start date for installation of concrete panels on a building to be constructed constitute a breach of the subcontract where the contract requires the subcontractor to perform work “in accordance with the project schedule” developed by the general contractor?

As is the case with most questions that I receive, the answer lies in the parties’ agreement and the surrounding facts. In this case, the contractor’s postponement of the start date did not constitute a breach of the subcontract.

The original start date for installation of the precast concrete panels was shown to have been May and the subcontractor seeks to recover the costs incurred for transportation and storage of the panels resulting from the general contractor’s postponement of the start date until September. The subcontract required the subcontractor to perform the work in accordance with the project schedule developed by the contractor. Although the initial planned start date was established as being in May, the date was changed after the subcontract was execute and the contractor had the right to make such changes and such changes were anticipated by the parties. Significantly, the subcontract gave the contractor the authority to set the schedule and placed no limits on its exercise of that authority.

Subcontractor failed to reserve the right to limit changes in the schedule and in fact complained about the start date “slipping away” in August. Subcontractor also failed to ask for a fixed start date. In addition, the minutes of job site meetings, at least one of which was provided to plaintiff before it began fabricating the panels, listed a September planned date for the precast installation.

The lesson to be learned here is that contractors and subcontractors alike must pay close attention to their agreements to ensure that they have the appropriate language to protect them and thereafter make sure their actions or inactions don’t dilute those protections.

Question. I have received a number of questions surrounding claims for delay damages from various sides of the issue. In order to provide even a cursory understanding of the issues surrounding delay damages I am devoting the November and December column. This month I will take the opportunity to explore how to value delay claims.

Total Cost Claims: The total cost claim approach is the least complex and most easily applied methodology used in calculating and presenting construction damages. It also tends to be the most frequently used general theory. In its basic form, damages are calculated by comparing the original bid to the actual costs incurred on the project. There are several disadvantages to the use of a total cost claim, including an extremely strict, legal standard of proof and the necessity to prove several underlying assumptions:

Modified Total Cost Claims: The modified total cost method quantifies damages by using the inherent simplicity of the total cost approach. Modifications are offered to demonstrate the cause-and effect relationships that exist between the costs and the events or transactions presented in the specific cost approach. The success of the approach often depends upon the extent of the modifications which demonstrate the cause and effect dynamics.

Quantum Meruit Claims: A final type of damage theory involves an analysis of the “reasonable value” of the work performed. Contractors and subcontractors are afforded protection under mechanic’s liens to recover the value of labor and materials used in improving property. The theory of quantum meruit is often used in damage claims when a subcontractor does not have a direct contractual relationship with an owner but the owner has been “unjustly enriched” by work performed by the subcontractor.

Specific Identification Claims: In this approach, the importance of each event is tied directly to the cost impact of that event, such as late material delivery and the impact of idle labor time, or the disruptive impact on productivity caused by over-inspection.

Jobsite Overhead Costs: Jobsite overhead, or general conditions, are generally charged as direct costs in the job cost report for the project. In the most common approach to pricing a claim for jobsite overhead costs, the costs are generally viewed as a “pool” of costs for the duration of the project. This pool of costs is then divided by the days of total performance of the project to establish a daily rate of jobsite overhead costs. This daily rate is then multiplied by the compensable days of delay to establish the cost of the delay. This approach is viewed as relatively conservative as it establishes one rate for the entire project, taking into account the “ramp up” and “ramp down” of the project.

Home Office Overhead Claims: A contractor’s home office includes the necessary costs required to run a construction business. When a project’s duration extends beyond the contract completion date, a contractor’s home office functions continue to support that project for a longer period than anticipated at bid time. Contractors often argue that during this delay the contract does not generate its share of gross margin, resulting in “unabsorbed” home office overhead, and/or the home office must support this project for a longer period of time, resulting in “extended” home office overhead. This unabsorbed or extended overhead is often a significant component of a deadly claim.

Equipment Costs: Time-related equipment costs consist of the fixed cost of rented equipment as well ownership costs for owned equipment. These ownership costs include the depreciation, the cost of the investment in the equipment, major repairs and overhaul, and insurance. The activity-related costs for equipment include fuel, oil, and grease, commonly referred to as FOG; tires and tracks; and minor repairs. As in other claim components, the equipment cost should be separately calculated for time-related and activity-related claim issues. Equipment rental costs. Contractors often rent a significant portion of their equipment. These rentals are often “dry.” In other words, the contractor supplies all FOG and other operating costs. The rental agreement for such equipment often provides for a fixed monthly charge, with an additional charge for operating hours over an established level.

Escalation: Escalation is the price impact of providing goods or services in a later (and presumably higher cost) period than originally planned.

Measured Mile: The Measured Mile approach is a widely recognized and well received method of pricing inefficiencies related to specific events on a project. The Measured Mile approach compares the performance in the impacted period of the project to the performance in an unimpacted period of the same project. The performance measurement (e.g., work hours per linear foot) is calculated during the unimpacted or Measured Mile period.

Should Cost Estimates: In many disruption situations, the impacts are so pervasive that there are no unimpacted periods in the same project. In these cases, the so called should cost estimate methodology is one that compares actual labor costs incurred with an accurate estimate of what the labor costs should have been if no disruption had occurred.

Industry Standards: In this case, the contractor may develop a yardstick employing productivity rates that are contained in published industry sources.

Productivity Studies: Besides industry manuals, other published studies have attempted to quantify the impact of various factors such as change orders, weather crowding, and overtime on the construction process. These studies usually express this impact in terms of a percentage range.

Markup and Profit: In a claim situation, the contractor typically includes a percentage markup on the claimed costs for its markup or profit. What percentage to use is not always clear. Options include:

Question. I have received a number of questions surrounding claims for delay damages from various sides of the issue. In order to provide even a cursory understanding of the issues surrounding delay damages I am devoting the November and December column. This month I will take the opportunity to explore important concepts in delay claims.

The legal obligations and rights associated with the concept of delay arise from the obligation implied in every contract that one party will not delay, hinder, or interfere with the performance of the other party. If a party to a contract hinders or prevents performance by the other party or renders it impossible, it may not benefit from this wrong.

As with any other claim, the key elements to recovery on a delay claim are cause and effect. The aggrieved party must show that the other party is responsible for the event and that the event had the effect of delaying the job and increasing the claimant’s costs.

Duty to Coordinate: The implied duty to schedule and coordinate may impose an obligation upon the person responsible for scheduling to schedule the work in a reasonable sequence. Unreasonably interfering with work activities of contractors or subcontractors may violate this implied duty to schedule the work in a reasonable manner. Failure to schedule and supervise the work adequately might prevent a contractor from recovering damages from an owner.

Duty Not to Delay: The duty not to delay, hinder, or interfere with the performance of other parties to the contract is an implied term in most construction contracts. Various acts or omissions by a party can constitute interference with another party’s work and impact upon a project schedule. If an owner is responsible for furnishing materials, labor, or information to the contractor, the failure to do so in a timely manner may constitute interference with the contractor’s work.

Duty to Cooperate: The duty to cooperate is implied in every construction contract and the failure to do so may also have an impact on a project schedule. The duty usually applies in all phases of construction. It may require an owner to rectify problems in the drawings, and at the same time require a contractor to cooperate with a subcontractor in rectifying a problem during construction.

Duty to Extend Time: The duty to grant reasonable time extensions may impact a project schedule when the failure to do so results in further delay, By failing to grant a necessary time extension within a reasonable period of time, the owner may be held to have accelerated the contractor to finish earlier than it should have finished.

Compensable Delay: From a contractor’s perspective, compensable delays are those for which the owner is responsible in damages, because an owner-caused delay is a breach of the duty not to hinder or disrupt the contractor’s performance. Accordingly, the contractor is entitled to both compensatory damages and a time extension when such a compensable delay occurs. The same concept would apply as between a contractor and subcontractor.

Excusable Delay: An excusable, but non-compensable, delay entitles the contractor to a time extension but no more money. It is a delay for which neither party (contractor nor owner) is responsible. When unanticipated outside forces delay completion of the work, the delay is excusable under the terms of most contracts. The contractor is not entitled to compensation from the owner because no breach of contract is involved, but is entitled to an extension of performance time under the contract if it so provides.

Concurrent Delay: Concurrent delays are delays which occur, at least to some degree, during the same period of time. The term is used in construction law most frequently when a compensable delay and an unexcusable delay occur concurrently or in overlapping time periods.

Notice Clauses: Most construction contracts (and many statutory provisions) require that any claim for additional compensation or performance time be preceded by written notice to the owner or architect within a definite period of time. A notice requirement is imposed to protect the interest of the owner, who may be unaware of the causes of the particular delay and thereby precluded from taking immediate measures to rectify the situation. Failure to give prompt notice may cause the owner to deny the time extension request and result in time-consuming litigation over the issue of proper notice.

Formal notice may be held to be unnecessary when the owner has actual or constructive knowledge of the problem or when the lack of notice does not prejudice a legitimate owner interest. However, since some courts view notice as a condition precedent to recovery, the better practice is to provide the written notice required by the contract.

The contractor who gives the owner prompt written notice of delays and disruptions that are the owner’s responsibility increases its opportunity to recover the costs generated by those problems. In the process, the contractor may also motivate the owner to alter existing costly contract administration procedures.

Question. With all the rain (and flooding) that has plagued the region recently I’ve received a number of inquiries as to what a builder’s liability is in connection with storm water damages. The good news (for builders at least) is there is no special liability for unusually high amounts of rain. This month I will take the opportunity to explore home warranties which may come in to play.

In the case of renovations a contractor has an obligation to comply with the plans and specifications which form a part of the contract. An inadvertent and insubstantial deviation from the specifications will not ordinarily be deemed a breach of the parties’ agreement. Any claim that work is inferior to that required by the specifications must be established by the owners.

The provisions of the General Business Law govern warranties on the sales of new homes. Except as otherwise provided by the statute concerning the exclusion or modification of warranties, other implied warranties may arise from the terms of the contract or agreement or from a course of dealing or usage of trade.

The “housing merchant implied warranty” created by these provisions is implied in the contract or agreement between builder and owner for the sale of a new home and becomes effective on the “warranty date.” The warranty that a home will be free from defects due to a failure to have been constructed in a skillful manner endures for one year from and after the warranty date. The warranty that a home will be free from defects due to a failure by the builder to have installed the plumbing, electrical, heating, cooling and ventilation systems in a skillful manner endures for two years from and after the warranty date. The warranty that the home will be free from material defects endures for six years from and after the warranty date. The warranty extends to the first person to whom the home is sold and, during the unexpired portion of that period, each successor in title to the home.

“Material defect” means actual physical damage to the load-bearing portions of the home caused by failure of such load-bearing portions which affects their load-bearing functions to the extent that the home becomes unsafe, unsanitary or otherwise unlivable. “Constructed in a skillful manner” means that workmanship and materials meet or exceed the specific standards of the applicable building code. When the applicable building code does not provide a relevant specific standard, such term means that workmanship and materials meet or exceed the standards of locally accepted building practices. Other defined terms are: “building code;” “plumbing systems;” “electrical systems;” and “heating, cooling and ventilation systems.”

Written notice of a warranty claim based upon a housing merchant implied warranty must be received by the builder prior to the commencement of any action for damages caused by the breach or for other relief, and no later than thirty days after the expiration of the applicable warranty period. Furthermore, the owner and occupant of the home must afford the builder reasonable opportunity to inspect, test and repair the portion of the home to which the warranty claim relates.

The measure of damages in an action for breach of a housing merchant implied warranty is the reasonable cost of repair or replacement and property damage to the home exclusive of the value of the land, unless the court finds that, under the circumstances, the diminution in value of the home caused by the defect is a more equitable measure of damages.

Question. What is the difference between a guaranty of payment and a guaranty of collection? Also, if the guaranty language does not specify the type of guaranty it is how will courts interpret it?

Generally, a guaranty is an agreement or promise to answer for the debt or default of another. A guaranty creates a secondary and not a primary liability, and is only meaningful in relation to, the independent obligation to pay of the primary obligor, and is contingent upon his default. In other words, in the case of a President of a Corporation giving a personal guaranty to a Supplier, it must be shown that the Corporation has failed to make payment before the Corporation’s President will incur any liability.

Thus using our example, a “guaranty of payment” is an unconditional undertaking that the Corporation will pay. On such a guaranty, the Supplier may, upon default, proceed directly against the President, without taking any steps to collect the amount due from the Corporation.

A “guaranty of collection” binds the President to pay only after all attempts to obtain payment from the Corporation have failed. To recover in the case of a guaranty of collection, the Supplier must have reduced its claim against the Corporation to judgment, and an execution returned unsatisfied, or insolvency or other circumstances make it apparent that it is useless to proceed against the Corporation. The exercise of due diligence by the Supplier to collect the debt is a further condition of the President’s obligation to pay under a guaranty of collection.

Whether a guaranty is one of payment or of collection depends upon the intention of the parties, as expressed in the agreement. If a guarantor binds himself to pay immediately upon default of the debtor, he becomes a guarantor of payment. A guaranty of “the prompt payment of all obligations of the debtor” and providing that the guaranty shall be a continuing, absolute, and unconditional guaranty of payment is, unequivocally, a guaranty of payment, not of collection.

The Uniform Commercial Code, in dealing with commercial paper, and in making provision for the contract of a guarantor, specifically declares that words of guaranty which do not otherwise specify are to be deemed to create a guarantee payment.