Question. Are Subcontractors' claims time barred despite the issuance of HUD reports providing that GC ceased work on the project a year earlier but it was undisputed that GC continued to oversee, and the subcontractors continued to perform, work on the project?

Answer. Maybe.

The instant actions arise from a general contractor's alleged failure to pay two subcontractors, Subcontractor1 and Subcontractor2 (collectively, the "Subcontractors"), for work that they performed on a multifamily housing project. Subcontractors seek to collect the unpaid amount from the general contractor, as well as Surety which issued a payment bond in connection with the underlying project.

Surety contends that Subcontractors' claims are time-barred because they failed to commence these actions within one year of the date of completion of the contracted-for work, the limitations period set forth in the payment bond.

The Construction Contract defined "[t]he date of final completion" as "the date the HUD representative signs the final HUD Trip Report provided that the Trip Report is subsequently endorsed by the Chief Architect." The Construction Contract also required GC to "correct any defects due to faulty materials or workmanship which appear within one year from the date of final completion."

Finally, the Construction Contract indicates that "the Contractor shall furnish to the Owner assurance of completion of the work in the form of…100 percent Performance and Payment Bond.".

Pursuant to written subcontract agreements GC hired Subcontractors as subcontractors to assist with carpentry related services for the Project.

Surety, issued a payment bond on behalf of GC, as principal, in favor of the owner of the Project, the Owner, as obligee (the "Bond"). The Bond was issued for the "use and benefit" of claimants supplying labor and materials for the Project; in essence, the Bond ensures that GC properly pays its subcontractors and suppliers. The Bond defines a "claimant" as "one having a direct contract with the Principal or with a subcontractor of the Principal for labor…used or reasonably required for use in the performance of the contract."  Pursuant to the Bond, every claimant "who has not been paid in full before the expiration of a period of ninety (90) days after the date on which the last of such claimant's work or labor was done or performed…may sue on this bond for the use of such claimant."  Importantly, the Bond requires that all claims brought thereunder must be initiated within one year after GC, the Principal, "ceased work" on the Construction Contract.

On December 9, 2010, it is undisputed that, HUD issued the "HUD Representative's Trip Report" (the "Trip Report"), which states as follows:

CONTRACTED WORK IS 100 percent COMPLETE WITH NO PUNCH LIST ITEMS.

THERE ARE NO ITEMS OF DELAYED COMPLETION.

WORK PERFORMED IN A SATISFACTORY WORK-LIKE MANOR [sic].

ALL UTILITIES ARE COMPLETELY INSTALLED, CONNECTED, OPERABLE AND SAFE. ALL FACILITIES FOR INGRESS AND EGRESS ARE IN PLACE.

The "scheduled progress" and "actual progress" boxes on the Trip Report form contain the value "100 percent."

On December 10, 2010, the Project Architect, issued a Certificate of Substantial Completion. The Certificate of Substantial Completion defines "Substantial Completion" as the stage when the contracted-for work "is sufficiently complete in accordance with the Contract documents so that the Owner can occupy or utilize the Work for its intended use." On its face, the Certificate of Substantial Completion covers the "Full Project," and states that the "applicable warranties required by the [Construction] Contract Documents" commence on the date of its execution. The Certificate of Substantial Completion further states that:

“A list of items to be completed or corrected is attached hereto. The failure to include any items on such list does not alter the responsibility of the Contractor to complete all Work in accordance with the Contract Documents. Unless otherwise agreed to in writing, the date of commencement of warranties for items on the attached list will be the date of issuance of the final Certificate of Payment or the date of final payment.

Cost estimate of Work that is incomplete or defective: $0.00.

The Contractor will complete or correct the Work on the list of items attached hereto within Zero (0) days from the above date of Substantial Completion.”

The Certificate of Substantial Completion has no attachments. Finally, the Owner signed the Certificate of Substantial Completion, thereby "accept[ing] the Work or designated portion as substantially complete." Id.

According to GC, as of December 2010, GC was entitled to payment of the entire Contract balance, save for a five percent retainage that the lender was holding because HUD had not finally endorsed the Owner's mortgage loan.

It is uncontested that Subcontractors performed work on the Project in 2011. The critical dispute between the parties concerns the nature of the work performed after December 2010: Surety characterizes such work as entirely remedial, and maintains that the work called for by the Construction Contract was "100 percent complete" as of December 2010, whereas Subcontractors contend that work performed after December 10 was work called for under the contract and subcontract, including "punch list work."

"'[P]unch list' work" is "work called for by the original contract (or subcontract) which the contractor (or subcontractor) has not satisfactorily completed."

Surety bears the burden of showing that the limitations period had expired before Subcontractors filed their action. New York courts construe bonds like any other contract in order to determine the parties' rights and obligations thereunder

Here, the Bond provides that the applicable limitations period starts the moment when GC, the principal, "cease[s] work on said Contract," i.e., the Construction Contract. In this context, New York courts define cease work according to its plain and ordinary meaning — when labor ceases. Given that the Bond defines claimants to include subcontractors — i.e., the subcontractors are third-party beneficiaries of the Bond — and given that the subcontract work on the Project was derivative of work called for by the Construction Contract, the phrase "work under said Contract" includes work called for by the Construction Contract as well as the subcontracts entered by GC.

The Construction Contract defines its "date of final completion" as the date on which the HUD Representative signs the final Trip Report, provided that the Chief Architect endorses it thereafter. It is undisputed that the HUD Representative signed, and the Chief Architect endorsed, the Trip Report by December 10, 2010. It is also undisputed that the Trip Report specifies "100 percent completion" of contract work with "no punch-list items" and "no items of delayed completion.” The December 2010 Certificate of Substantial Completion similarly indicates the absence of punch list items, and certifies that the Owner could occupy the premises for their "intended use."

However, it is likewise undisputed that GC continued to oversee, and subcontractors continued to perform, work in 2011. Surety argues that the work performed on the Project in 2011 was entirely remedial, and therefore does not affect the limitations period, which started running in December 2010.  Subcontractors contend they were still performing contract work.

As there is a question of fact a determination if Subcontractors’ claims are time barred cannot be made.

Question.        Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct, and acted in good faith on the corporation's behalf, is he entitled to advance of litigation expenses, including attorney fees?

Answer. Yes.

The Director founded the Corporation in 1964 and continued to be the president until 2009.  The Director also owned two adjacent commercial properties, Property A and Property B, where the Corporation operated its business.  It is alleged that The Director, as president of The Corporation, signed two leases for The Corporation's continued use of Property A and Property B. In both lease agreements, the Director signed the Lease as both the President of The Corporation, the tenant, and as a co-landlord.  The co-owners of the properties and current president of the Corporation are the Director’s children.

The Leases give the Corporation the exclusive and irrevocable option to buy the properties during the terms of the Leases, and the right of first refusal in the event of a bona fide offer to purchase by a third party.  Disputes have arisen amongst the tenant and the property owners as to rental payments, and the right of first refusal in a bid by the Corporation to purchase the property.  Allegations have been made against the Director involving breach of fiduciary duty.

The Director has requested reimbursement and the advancement of attorney's fees and costs in defending this action, pursuant to BCL §724(c), on the grounds that he is entitled to indemnification as a former officer and director of The Corporation.

The Director argues that he has denied any wrongdoing and raised issues of fact regarding whether his actions as president of The Corporation were in good faith pursuant to BCL 724(c). The Corporation argues that The Director is not entitled to indemnification and advanced legal fees because The Director admitted that his actions were not in the best interest of The Corporation and that he was balancing the interests of his son and his daughters pursuant to his personal "asset allocation" plan. Accordingly, plaintiff argues that pursuant to BCL 722(c), his actions were not in good faith or in the best interests of the Corporation.

Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct and acted in good faith on behalf of the corporation, courts have generally permitted the relief of advanced litigation expenses, including attorney's fees, subject to reallocation at the end of the action pursuant to BCL 725(a).

The Director has defended this action and is requesting the advancement of legal fees pursuant to BCL 724. Accordingly, the Director is entitled to the advancement of attorney's fees pursuant to BCL 724(c).

Question.        Does an employer have a claim that employee breached the non-compete agreement based upon nothing more than an allegation that Employee is working for a competitor?

Answer. Yes.

Building Supply Company, alleges that its former Employee, breached a non-compete agreement when he began working for Building Supply Company's Competitor. Whether the non-compete agreement at issue is enforceable will ultimately depend on whether the agreement is "reasonable." This requires a fact-intensive analysis however, by alleging that Employee is working for Building Supply Company's competitor, Building Supply Company has adequately stated a claim that Employee breached the non-compete agreement.

Building Supply Company has over eighty locations around the country from which it is engaged in the business of selling, marketing and installing a wide range of building products, including, but not limited to: wall insulation; attic insulation; spray fiberglass; spray foam; masonry insulation; seamless gutters and leaf protection; metal roofs; soffit and fascia; vinyl shutters, shower doors and bath hardware; shelving and mirrors; custom closets; garage doors; acoustical ceilings; fireplaces and firestopping.

In November 2010, as a term and condition of his continued employment with Building Supply Company, Employee signed the non-compete agreement that is central to the parties' dispute in this case.  As consideration for $12,500.01, paid in three annual installments, Employee agreed to a number of terms, including, as is relevant to the present dispute, the following:

First, an "acknowledgment" by Employee that during his employment with Building Supply Company he had "been given, and will continue to be given, training in the Company's methodologies as well as access to certain confidential and proprietary information concerning the business and financial affairs of the Company…which constitutes trade secrets under state law, as well as certain other confidential and proprietary information concerning the business and financial affairs of the Company and its Affiliates that may not constitute trade secrets under state law, but are nonetheless confidential."

Second, for two years following Employee's departure from Building Supply Company and within a 100-mile radius of Building Supply Company's two specified locations, Employee agreed to not "directly or through others, engage or invest in the business of selling, marketing or installing the building products sold, marketed or installed by" Building Supply Company.. (The overlapping 100-mile radii shut Employee out of most of Western New York, a large portion of Northwestern Pennsylvania, and the Northeastern area of Ohio.) The agreement provides that Employee may not "solicit, call upon, or initiate communication or contact with any customer or prospective customer of Building Supply Company…with whom Employee had contact during the last twelve months of Employee's employment, with a view to selling, marketing or installing any service or product that is sold, marketed or installed by Building Supply Company."  It further provides that Employee may not "attempt to divert any customer, supplies or vendor of" Building Supply Company from doing business with Building Supply Company. The agreement also prohibits Employee, during the restrictive period, from "inducing or attempting to induce" Building Supply Company's employees to leave Building Supply Company.

Third, Employee agreed not to "disclose any of Building Supply Company's Confidential Information" and not to "use any of the Confidential Information for Employee's own purposes or benefit or for the purposes or benefit of any third party”. The agreement defines "Confidential Information" to include "information concerning the financial affairs of  Building Supply Company," as well as "information concerning…product specifications, processes, past, current and planned manufacturing, distribution, sales and installation methods and processes, customer lists, current and anticipated customer requirements, price lists and pricing information, market studies, business plans, computer software and database technologies, the names and backgrounds of key personnel, and any other similar information…whether or not a trade secret under the state trade secret law."

In December 2011, about a year after Employee signed the non-compete agreement, Building Supply Company closed one location, and Employee returned to Building Supply Company's original location where he became the "Insulation and Gutter Foreman and a Residential and Commercial Salesperson." In this role, Employee was the highest-ranking Building Supply Company employee at that location. However, slightly less than two years later, in September 2013, Building Supply Company terminated Employee's employment "because of unsatisfactory performance, including, but not limited to, selling work to one of Building Supply Company's customers at a below-market rate to Building Supply Company's detriment.". Less than one month after his termination, "Employee began employment with Building Supply Company's direct competitor, Competitor

The parties disagree about the nature of Employee's activities after he began his employment with Competitor. Nonetheless, Building Supply Company alleges that after his employment with Building Supply Company was terminated, Employee "will attempt to solicit customers of Building Supply Company with whom he had contact during his last twelve months of employment at Building Supply Company; that Employee "will attempt to induce employees of Building Supply Company" to leave Building Supply Company; and that Employee "is using Building Supply Company's confidential information to gain an unfair advantage, and has in his possession or control confidential information which belongs to Building Supply Company." Based on these beliefs, Building Supply Company sent Employee a letter "requesting that he cease and desist from further violating the noncompete agreement." However, Building Supply Company claims that "Employee has failed or refused to comply with Building Supply Company's request."

Building Supply Company raises six claims: (1) a claim for breach of contract against Employee; (2) a claim for misappropriation of trade secrets against Employee; (3) a claim for breach of the duty of loyalty against Employee; (4) a claim of tortious interference against Competitor as to Building Supply Company's "business and contractual relationships with its existing customers, suppliers, vendors, and employees"; (5) a claim of tortious interference against Competitor as to Building Supply Company's non-compete agreement with Employee; and (6) a claim of unjust enrichment against Employee and Competitor.

The heart of the Building Supply Company's complaint is its allegation that, by working for Competitor, Employee breached the non-compete agreement he signed with Building Supply Company. As discussed below, New York courts limit the extent to which non-compete agreements are enforceable. However, New York courts have not held that non-compete agreements are per se unenforceable. Instead, a non-compete agreement's enforceability generally turns on the fact-laden question of whether the agreement is "reasonable." We do not have enough facts to determine that the non-compete agreement at issue is unenforceable. However, Building Supply Company's allegations are sufficient to state a cause of action against Employee for breach of the non-compete agreement.

In New York, "agreements that restrict an employee from competing with his or her employer upon termination of employment are judicially disfavored because powerful considerations of public policy militate against sanctioning the loss of a person's livelihood.  However, despite New York's generally hostile attitude towards them, non-compete agreements may be enforceable, to at least some degree, when they are properly tailored to address legitimate business concerns. In other words, naked restraints are not enforceable, but restraints that are ancillary to a legitimate business purpose may be.

The New York Court of Appeals put this "reasonableness" standard into more concrete terms by holding that a non-compete agreement is reasonable "only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public." [citations omitted] Further, even if a non-compete agreement is reasonable in light of each of the three factors set forth above, a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area. Finally, New York law limits non-compete agreements in one other significant way. With respect to the first prong — i.e., whether the restraint "is no greater than is required for the protection of the legitimate interest of the employer — the New York Court of Appeals has limited the cognizable employer interests…to the protection 1 against misappropriation of the employer's trade secrets, or 2 of confidential customer lists, or 3 protection from competition by a former employer whose services are unique or extraordinary.” [citations omitted] If the non-compete agreement does not tie its restraint of the employee's activities to one of these three purposes, it is an unenforceable naked restraint on commerce.

The Employee argues that even if the non-compete agreement is enforceable, the Building Supply Company's complaint is nonetheless insufficient as the key allegations relating to the non- compete agreement are all made "upon information and belief." A complaint is not inadequate simply because it contains allegations made upon information and belief. Rather, a complaint may contain information and belief allegations and still be sufficient when the belief is based on factual information that makes the inference of culpability plausible. In other words, a complaint's information and belief allegations may be sufficient to state a claim when the complaint also contains factual content that allows the court to draw the reasonable inference that the Employee is liable for the misconduct alleged.

In this case, the complaint's only factual allegation that Employee is violating the non-compete agreement is its claim that on or about October 15, 2013, Building Supply Company learned that, following his separation from employment with Building Supply Company, Employee began employment with Building Supply Company's direct competitor, Competitor. However, taking this allegation, together with the complaint's description of Competitor as being in the business of selling and installing a wide range of building products, including insulation and assuming that both allegations are true — the reasonable inference may be drawn that that Employee is violating the non-compete agreement, which prevents him from "engaging or investing in the business of selling, marketing or installing the building products sold, marketed or installed by" Building Supply Company.

The Building Supply Company's Remaining Claims

Misappropriation Of Trade Secrets To state a claim for misappropriation of trade secrets under New York law, the Building Supply Company must allege (1) that it possessed a trade secret, and (2) that the Employees used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.

Duty of Loyalty Employees, as agents of their employers, must act in accordance with the highest and truest principles of morality and, as fiduciaries, are forbidden from engaging in many forms of conduct permissible in a workaday world for those acting at arm's length. Accordingly, an employee owes his or her employer undivided and unqualified loyalty and may not act in any manner contrary to the interests of the employer.

Tortious Interference The New York Court of Appeals has established two lines of analysis for tortious interference claims. The applicable standard depends on the nature of the plaintiff's enforceable legal rights.

First, in cases in which there is an existing, enforceable contract and a Employee's deliberate interference results in a breach of that contract, a plaintiff may recover for tortious interference with contractual relations even if the Employee was engaged in lawful behavior.

Where there has been no breach of an existing contract, but only interference with prospective contract rights, the Court of Appeals has established a higher standard to state a cause of action. In such cases, the plaintiff must show more culpable conduct on the part of the Employee. In the absence of conduct whose sole purpose is to inflict intentional harm on plaintiff, the only wrongful or culpable conduct that will support a claim for tortious interference with business relations are acts that would be criminal or independently tortious such as physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure; they do not, however, include persuasion alone

To state a claim for tortious interference with contract, the Building Supply Company must plead "(1) the existence of a valid contract between the plaintiff and a third party; (2) the Employee's knowledge of the contract; (3) the Employee's intentional procurement of the third-party's breach of the contract without justification; (4) actual breach of the contract; and (5) damages resulting therefrom.

Unjust Enrichment As the New York Court of Appeals recently noted, unjust enrichment is not a catchall cause of action to be used when others fail. It is available only in unusual situations when, though the Employee has not breached a contract nor committed a recognized tort, circumstances create an equitable obligation running from the Employee to the plaintiff. Typical cases are those in which the Employee, though guilty of no wrongdoing, has received money to which he or she is not entitled. To prevail on a claim for unjust enrichment, a plaintiff must show that (1) the other party was enriched, (2) at the plaintiff's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.

For the same reasons that one may infer that Employee is violating the non-compete agreement, one may also conclude that the Building Supply Company has stated a cause of action for the remaining claims.

President Obama has signed an Executive Order called "Fair Pay and Safe Workplaces," requiring covered federal contractors and subcontractors to publicly report labor violations, to forgo the use of mandatory arbitration agreements, and to ensure paycheck transparency.  The Executive Order takes effect immediately, although it directs the Federal Acquisition Regulatory (FAR) Council to propose regulations for public comment to carry out the Order. In addition, the White House announced that it expects the Executive Order to be implemented on new contracts in stages, on a prioritized basis, during 2016.

Labor Law Violations. For procurement contracts for goods and services, including construction contracts, where the estimated value exceeds $500,000, the Executive Order requires reporting of labor and employment law violations that occurred in the past three years. A violation is considered an administrative merits determination, arbitral award or decision, or civil judgment. The laws covered span 14 federal laws and equivalent state laws, including the Fair Labor Standards Act (FLSA), Occupational Safety and Health Act, National Labor Relations Act, Family and Medical Leave Act, Title VII of the Civil Rights Act (Title VII), Americans with Disabilities Act, Age Discrimination in Employment Act, and Executive Order 11246, among others.

Under the Executive Order, each contracting agency is to designate a senior official who will serve as the agency's Labor Compliance Advisor. In consultation with the agency's Labor Compliance Advisor, contracting officers shall consider the information provided in determining whether the contractor is a responsible source that has a satisfactory record of integrity and business ethics, after reviewing the guidelines set forth by the Department of Labor and consistent with any final rules issued by the Federal Acquisition Regulatory (FAR) Council

During the performance of the contract, each agency must require contractors to update the information provided every six months and to obtain updated information from subcontractors. If violations occur during the contract performance, the agency may require an agreement for appropriate remedial measures and may take additional measures, such as opting not to exercise an option on the contract, terminating the contract, or referring the contractor for suspension or debarment.

Mandatory Arbitration Agreements. The Executive Order restricts contractors’ ability to use mandatory arbitration agreements for certain types of claims. For covered contractors or subcontractors, the Executive Order provides that the decision to arbitrate claims arising under Title VII or any tort related to or arising out of sexual assault or harassment only may be made with the voluntary consent of the employee or independent contractor after the dispute arises. Covered contracts are those where the estimated value of the supplies acquired and services required exceeds $1 million, excluding contracts and subcontracts for the acquisition of commercial items or commercially available off-the-shelf items.

This provision does not apply to employees covered by any type of collective bargaining agreement. 

Paycheck Transparency. The Executive Order further requires that, in each pay period, contractors provide all individuals performing work under the contract for whom they are required to maintain wage records under the Fair Labor Standards, the Davis-Bacon Act, the Service Contract Act or equivalent State laws, with a document with information concerning that individual's hours worked, overtime hours, pay, and any additions made to or deductions made from pay.  Agencies shall also require that contractors incorporate this same requirement into covered subcontracts.  The document provided to individuals exempt from the overtime compensation requirements of the Fair Labor Standards Act need not include a record of hours worked if the contractor informs the individuals of their overtime exempt status.  These requirements shall be deemed to be fulfilled if the contractor is complying with State or local requirements that the Secretary of Labor has determined are substantially similar to those required by this subsection.

If the contractor is treating an individual performing work under a contract or subcontract as an independent contractor, and not an employee, the contractor must provide a document informing the individual of this status.

Question.        Does a non-managing member of an LLC owe any duty of good faith or loyalty?

Answer. No.

Member A and Member B are the sole members of 123 Main Road, LLC ("LLC") with each having a 50 percent interest therein. The LLC owns a two-story building and ground lease for premises located at 123 Main Road in New York (the "premises"). The accounting firm, Member B, Company, LLC, in which Member B is a partner, is one of two principal subtenants in the building. The other principal subtenant was a separate business run by Member A.

Member A alleges Member B breached its fiduciary duty as a 50 percent member of the LLC. Specifically, the Plaintiffs seek to recover consequential and punitive damages flowing from: (1) Member B's failure to timely advise, and to instead affirmatively mislead, Plaintiffs regarding his intention to have his accounting firm not renew its sublease which expired on April 30, 2013; (2) refusing to allow Plaintiffs the opportunity to show the lease space to potential tenants; and (3) damaging the premises by replacing a set of glass doors with a single wooden door.

Here, Member A and Member B are members of the LLC with an equal interest in its profits and losses. However, the Operating Agreement of 123 Main Road LLC ("operating agreement") identifies Member A as the managing member. Specifically, paragraph 5 of the operating agreement, entitled "Powers", states that the "business and affairs of the Company shall be managed by Member A in his sole discretion. Member A shall have the power to do any and all acts necessary or convenient to or for the furtherance of the purposes described herein, including all power, statutory or otherwise possessed by the members under the LLCL"

The operating agreement specifically delineates Member A as the managing member of the LLC and omits any language granting management powers or duties to Member B. Member B, thus, is a non-managing member of the LLC.

New York case law is replete with cases demonstrating that a managing member of an LLC has a fiduciary duty to other members of the LLC

Pursuant to Limited Liability Company Law §409, "a manager shall perform his or her duties as a manager * * * in good faith and with a degree of care that an ordinary prudent person in a like position would use under similar circumstances." The acts of working in concert and managing a limited liability company clearly gives rise to a relationship among the members which is analogous to that of partners who, as fiduciaries of one another, owe a duty of undivided loyalty to the partnership's interests.

A partner, and by analogy, a [minority managing] member of a limited liability company, has a fiduciary obligation to others in the partnership or limited liability company which bars not only blatant self-dealing, but also requires avoidance of situations in which the fiduciary's personal interest might possibly conflict with the interests of those to whom the fiduciary owes a duty of loyalty.

It is noted that section 409(a) of New York's Limited Liability Company Law sets forth, inter alia, the duties of a limited liability company manager, as follows, "A manager shall perform his or her duties as a manager, including his or her duties as a member of any class of managers, in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances". Noticeably absent from the Limited Liability Company Law, which expressly imposes a duty of good faith upon managers of an LLC, is any concomitant duty on a non-managing member

Given the Legislature's intent to specifically omit any duty of good faith or loyalty on behalf of a non-managing member of an LLC, coupled with the fact that the operating agreement gives Member A the sole discretion to manage the business and affairs of the LLC, Member B, as a non-managing member, did not breach any duty to the LLC or to Member A.

Question.  What is the difference between a liquidating agreement and a “pay when paid” clause?

Answer. Subcontracts often contain provisions that govern different aspects of payment from the general contractor (GC) to its subcontractor (sub). Two of the most common, and perhaps most controversial, of these clauses are the “pay-when-paid” clause and the “liquidating agreement”.

Pay-when-paid clauses provide that the GC will make payment to the sub when payment has been made by the owner to the GC. In New York, pay-when-paid clauses have been the subject of much litigation because of their potential effect on the sub’s lien rights. In the case of West Fair Elec. Contractors v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 159, 661 N.E.2d 967, 972 (1995), the New York Court of Appeals held that a pay-if-paid clause which made payment from an owner to its GC a necessary occurrence before payment became due and owing to the sub was unenforceable because it would effectively destroy the lien rights that the sub has against the owner if the owner became unable to pay the GC. Thus, a pay-when-paid clause is only enforceable if it merely delineates a reasonable time for payment, and does not make payment to the GC a condition precedent to the sub’s right to payment.

A liquidating agreement provides that if a sub is owed money for completed work, the GC is responsible to pay the sum owed, but only to the extent that the GC recovers money, if any, for the subcontractor’s work through settlement or disposition of a claim against the owner. The liquidating agreement is so named because it liquidates the liability of the GC to the sub, whatever that amount may be, to the amount recoverable from other parties. In New York, a liquidating agreement is enforceable if it includes: (1) an imposition of liability on the GC for its subs damages, (2) a liquidation of that liability to the amount recovered by the GC from the at-fault party and (3) a provision for pass through of the recovery to the sub. See, N. Moore St. Developers, LLC v Meltzer/Mandl Architects, P.C., 23 A.D.3d 27, 31, 799 N.Y.S.2d 485, 489 (1st Dept. 2005). A properly drafted liquidating agreement imposes an enforceable condition precedent to the GC making payment to its sub. The agreement also binds the GC to act in good faith and take all reasonable steps to secure a recovery from the owner, the absence of which renders it liable, in full, for the subs damages.

While a pay-when-paid clause is enforceable if it simply sets a time for payment, it may not operate as a condition precedent to payment because to do so may constitute a waiver of the subs ultimate right to payment in violation of New York’s lien law. In contrast, a liquidating agreement assumes the sub’s ultimate right to payment from the GC but also sets the amount owed to the sub equal to any amount recoverable on the sub’s behalf in a claim by the GC against the owner. Since the latter agreement secures the subs right to payment, the condition precedent to payment that it imposes is enforceable. The duty of good faith and fair dealing also operates to protect a sub from a GC taking advantage of the liquidating agreement by not diligently pursuing its claim against the owner.

Still not clear on the difference?  It’s a subtle one.  Liquidating agreements are used for “pass through” claims.  A “pass-through” claim is where the subcontractor has asserted a claim related to some action or inaction on the part of the Owner.  The subcontractor cannot assert the claim directly against the Owner because it doesn’t have a contract with the Owner.  The Liquidating Agreement bridges that gap.  The “pay-when-paid” clause is simply a timing mechanism for direct claims of the subcontractor against the contractor.

Question.        My landscape contractor has included an automatic renewal provision in his contract is this allowable?

Answer. Yes, but there are limits. 

The Landscaper agreed to provide Home Owner with lawn maintenance services. The agreement initially for a single season commencing April 1, includes a provision that thereafter, the agreement shall be automatically renewed for additional seasons unless either party by written notice notifies the other at least ninety days before the end of any twelve month renewal period that it intends to terminate the services and such notification shall be effective one hundred and eighty (180) days thereafter.

Home Owner paid for the initial season. Landscaper did not provide Home Owner with any written notice that the agreement would not be automatically renewed for another 12 month term, nor did Home Owner notify Landscaper in writing that he did not intend to renew the agreement at that time.

When the next season came along Landscaper started providing services but Home Owner failed to make payment.

Although neither party provided written notice regarding the renewal or non-renewal of the agreement after the initial term ended, each side takes the position that it was under no obligation to do so. Home Owner relies on the requirements in General Obligations Law § 5-903 and Landscaper relies on the automatic renewal provision of the agreement. The only written notice regarding the agreement was made by Home Owner in April of season two, at which time he notified Landscaper that he was terminating the agreement effective September of the prior year, "consistent with my verbal termination of the agreement in September." Landscaper maintains that Home Owner never terminated the agreement, which automatically renewed and that Home Owner owes him for season two services.

The parties' dispute centers on whether the agreement is a contract for "service . . . to or for . . . personal property" under General Obligations Law § 5-903(2), which would render its automatic renewal provision (evergreen clause) unenforceable unless Landscaper provided timely prior written notice calling Home Owner's attention to it. If § 5-903(2) does not apply to the parties' agreement then Home Owner had the affirmative obligation to cancel before the automatic renewal period.

In its entirety, General Obligations Law § 5-903(2) provides that:

"No provision of a contract for service, maintenance or repair to or for any real or personal property which states that the term of the contract shall be deemed renewed for a specified additional period unless the person receiving the service, maintenance or repair gives notice to the person furnishing such contract service, maintenance or repair of his intention to terminate the contract at the expiration of such term, shall be enforceable against the person receiving the service, maintenance or repair, unless the person furnishing the service, maintenance or repair, at least fifteen days and not more than thirty days previous to the time specified for serving such notice upon him, shall give to the person receiving the service, maintenance or repair written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract."

The parties' agreement was "for service . . . to or for . . . real property" within the meaning of the General Obligations Law. The services provided were directly and inextricably related to the home.

Since the renewal clause was not timely brought to Home Owner's attention, the agreement did not automatically renew.  Home Owner had the right to cancel the agreement at any time thereafter but is obligated to pay for services rendered.

Question. Can a general contractor enforce a pay-when-paid policy when responding to a subcontractor’s claims for acceleration costs?

Answer. No. 

After a public bidding process, Public Owner contracted with General Contractor for the construction of a new high school in Manhattan. General Contractor subcontracted with Subcontractor for plumbing work on the project, by a written agreement.

Almost from the outset, extra work on the project arose. While these changes to the project usually resulted in changes to the schedule, Public Owner, at several junctures, also asked General Contractor to accelerate the work in order to maintain the contractual substantial completion date.  On several occasions, by email and letter, General Contractor directed Subcontractor to perform acceleration work, or reassured it that its acceleration work would be paid for.

General Contractor sent Public Owner a proposal for estimated acceleration costs to bring the project back on schedule.  A portion of that claim was earmarked for Subcontractor.

Public Owner responded to General Contractor's proposal and issued the acceleration change order.  General Contractor notified Subcontractor that General Contractor was going to "close" (accept) Public Owner's acceleration change order. Id. Ex. M. Subcontractor's share was reduced — allegedly due to Subcontractor's failure to provide certified payroll records to support its claim. General Contractor did in fact, sign off on Public Owner's acceleration change order.

Meanwhile, Subcontractor submitted multiple acceleration cost proposals to General Contractor for onsite labor costs and inefficiencies.

General Contractor in turn sent Public Owner a further revised acceleration proposal including Subcontractor's request.

At a meeting Public Owner informed Subcontractor that General Contractor had signed off on Public Owner's acceleration change order excluding Subcontractor's request.  This was reiterated by General Contractor in a letter to Subcontractor.

Subcontractor seeks payment of its acceleration claims from Surety and General Contractor.

General Contractor argues that Subcontractor may be compensated only for acceleration costs for which General Contractor was paid by Public Owner. Subcontractor contends, on the other hand, that it contracted with General Contractor and should be compensated by General Contractor for any work done at General Contractor's request. Several portions of the Contract are at the center of this dispute:

“The Subcontractor hereby waives and releases any and all claims, causes of action, and rights to additional payment and time extensions beyond the contract amount, except to the extent that General Contractor Construction Corp. may receive additional funds or extensions of time on Subcontractor's behalf for Change Orders and extra work from the Owner or Architect/Engineer."

Contract, ¶8.2.

It is expressly understood that the amount hereinabove stated for performance of the work herein represents the full consideration to be paid for said work and in no event shall there be any claims for 'extras' against General Contractor Construction Corp. unless General Contractor Construction Corp. agrees in writing to pay any extra amount. Any deviation from the foregoing provisions shall be null and void. Any changes, modifications or extensions of the work to be performed herein may only be done by written order specifically describing the work involved and executed by General Contractor Construction Corp. and the Subcontractor.

Id. ¶21.

General Contractor Construction Corp. may, upon written request of the Subcontractor, appeal or contest on behalf of the Subcontractor from any ruling or decision the Owner or Architect/Engineer, or institute any action or proceeding to recover damages by reason of any affirmative claim by the Subcontractor, or by reason of any deduction or refusal to pay by the Owner, for any reason, involving the work or performance of the Subcontractor.

Id. ¶8.

Corresponding to the Contract's three quoted paragraphs above, General Contractor contends that: (1) it did not get paid by Public Owner for the acceleration work claimed by Subcontractor; (2) General Contractor did not agree to pay for Subcontractor's acceleration work; and, (3) General Contractor was not asked by Subcontractor to contest Public Owner's rejection of payment for Subcontractor's acceleration work. General Contractor maintains that it paid Subcontractor for all work performed under the Contract, as General Contractor understands the Contract to mean, including two instances where acceleration work was indicated. General Contractor reads its Contract with Subcontractor to oblige payment to Subcontractor over and above the Contract amount only if agreed to in writing, pursuant to paragraph 21, and if paid for by Public Owner, pursuant to paragraph 8.2. Subcontractor reads the Contract to entitle it to get paid by General Contractor, even though Public Owner rejected the claims for Subcontractor's work put forth by General Contractor.

General Contractor and Surety rely upon paragraph 8.2 as its primary shield against Subcontractor's claim. It is undisputed that Public Owner did not pay General Contractor for most of Subcontractor's alleged acceleration work throughout the project. Therefore, General Contractor, having not "receive[d] additional funds or extensions of time on Subcontractor's behalf for Change Orders and extra work from the Owner," insists that Subcontractor has "waive[d] and release[d] any and all claims, causes of action, and rights to additional payment and time extensions beyond the contract amount." Contract ¶8.2.

Subcontractor characterizes paragraph 8.2 as a "pay when paid clause," and argues that, as such, it has been held void as against public policy.  General Contractor and Surety maintain that the Contract does not involve "pay-when-paid," because Subcontractor "mistakenly conflates its waiver of claims for delay, acceleration, or other extras against General Contractor Construction with the assumption or transfer of payment risk."  General Contractor and Surety read the contract as barring Subcontractor "from recovering on claims on which it fails to establish entitlement." However, this is not the Contract's language at paragraph 8.2. Ultimately, Subcontractor did not get paid in full, as it calculated, because, in General Contractor's words, the Public Owner did not find that Subcontractor substantiated that it was entitled to any acceleration costs.

Under these circumstances, General Contractor and Surety cannot resort to the improper use of paragraph 8.2, that is by attempting to enforce a pay-when-paid policy.

Question.  Are there any issues with letting my employees use their smart phones to access work email?

Answer. Yes. 

Technology simultaneously makes life easier and more complicated.

Employers need to pay their non-exempt employees for checking and responding to e-mail (and texting and instant messaging, and also phone calls) during what would normally be the employee’s personal time.

Even if you have not requested the employee to do this if you allow it or if you know or have reason to believe that the employees are continuing to work and the employer is benefiting, proper wages must be paid.  That’s an easier argument to make when the employer is issuing the device or providing access to the employer’s servers and email after-hours.

This applies to all employees who are entitled to receive overtime.  Misclassification of an employee as exempt from overtime is a topic for another day.  Spoiler alert:  Misclassification does not turn out well for the employer.

It’s not enough anymore to simply have a policy that prohibits employees from working extra hours without permission. Be clear with employees that work includes e-mails and phone calls.  Establish clear rules about whether and when employees may work remotely.

The suits don’t just include time spent directly on email it includes booting up and shutting down the computer.  The time quickly adds up.

Aside from the wage issue consider security issues.  Mobile devices sync with your servers.  Emails are stored on them as well. Do any of those files contain sensitive or confidential information?  Do you think you can just remotely wipe the device’s memory if it’s lost or stolen?  Do you think the employee would be a little annoyed if you wipe their personal information as well from the device?  And what about the backups of those files that exist in the cloud or on the employee’s home computer?

These are all issues that the employer needs to speak to his IT consultant and lawyer about to formulate and implement a proper policy.

Question.       Can a general contractor assert claims against an engineer hired by a sub-subcontractor under theories of negligence or that he was an intended beneficiary of the sub-sub-subcontract for engineering services?

Answer. Yes. 

General Contractor, a, entered into a contract to produce a hotel. General Contractor hired subcontractor, Sub FP Inst., to design and install a fire protection system for the hotel. Sub FP Inst. hired sub-subcontractor, Sub FP Design., to design the system, and Sub FP Design. hired an engineer, FP Eng., to provide engineering services in conjunction with the design. FP Eng., a licensed engineer in New York, affixed his seal and stamp to the designs produced by Sub FP Design., which neither complied with relevant codes nor adequately accounted for General Contractor's specifications. The faulty design caused property damage to the hotel, resulting in injury to General Contractor.

Negligence

The elements of a cause of action alleging common-law negligence are a duty owed by the FP Eng. to the General Contractor, a breach of that duty, and a showing that the breach of that duty proximately caused injury to the General Contractor. In general, a tort claim for negligence does not arise when the duty that FP Eng. owes to a General Contractor arises solely out of a contractual relationship. In order to state a claim for negligence in a case of economic loss, there must generally be some non-contractual duty of FP Eng., contracting with Sub FP Inst., to the General Contractor. However, in suits against professionals, including engineers, for negligent misrepresentations, the standard is somewhat different. In Ossining Union Free Sch. Dist. v. Anderson LaRocca Anderson, the New York Court of Appeals allowed suits for negligent misrepresentation to proceed against two engineers who knew that the plans that they produced would be used by the general contractor for a particular purpose. Here, FP Eng. knew the plans that he approved would be used by General Contractor to install a fire protection system.

Third-Party Beneficiary Liability for Breach of Contract

A professional engineer or architect that provides services to produce construction plans is liable to the owner that undertakes such construction under a third-party beneficiary theory. Third-party beneficiary status is granted more broadly to a party in contractual privity with a contractor when that contractor hires a subcontractor, here Sub FP Inst., to do work necessary to the completion of the contract between the party and the contractor.

Thus, General Contractor has a colorable claim as a third-party beneficiary.

This is not to say that either of these claims will ultimately successful.  There are multiple questions of fact that need to be resolved by a judge or jury.  It does however, mean that the engineer will have to defend the lawsuit.