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The Corona Virus Pandemic: The Importance of Proper Notice

Written by Michael E. Greenblatt on . Posted in Legal Alerts.

The Corona Virus Pandemic (“Pandemic”) has dashed the global economy sending shockwaves through virtually every industry;  New York has now become the epicenter of the Pandemic, not just in the United States, but possibly the World. In order to combat the Pandemic, Governor Cuomo issued Executive Order 202 on March 7th, 2020, declaring a State of Emergency in New York. Not only did this unlock funding to combat the Pandemic, but this also provided Governor Cuomo with broad ranging authority to “issue any directive during a disaster emergency to cope with the disaster” (Executive Law; Article 2-B (Section 29-a)), this includes the authority to heavily regulate both public and private business in New York.

In situations such as this, providing proper notice of delays/impacts and requests for extension of time under the respective contract is very important. However, what is commonly known as a “force majeure” clause will also be at issue. Force majeure (“superior force” in French), is a contract provision that relieves the parties from performing their respective contractual obligations when certain circumstances beyond their control arise, such as the Pandemic, make performance inadvisable, commercially impracticable, illegal, or impossible.

The purpose of this Legal Alert is to highlight the importance of proper notice, whether that be in a private or public context.

The Importance of Proper Notice: Private v. Public Contracts

Virtually every construction contract contains notice provisions that should be adhered to by the contractor in the event of a delay/impact, request for an extension of time or invocation of force majeure; if available, however, depending on whether the contract is private or public, there is an enormous difference between the way these notice provisions are construed by New York Courts. Many of these distinctions, which are dictated by public policy, are discussed in further detail in Huff Enterprises, Inc. v. Triborough Bridge & Tunnel Auth., 191 A.D.2d 314, 316–17, 595 N.Y.S.2d 178 (1st Dep’t 1993).

1. Notice in a Private Context 

In a private context, the contractor should put the owner or upstream contractor on notice of delays/impacts, requests for an extension of time or invocation of force majeure pursuant to the terms and conditions of the contract; however, under Barsotti’s, Inc. v. Consol. Edison Co. of New York, 254 A.D.2d 211, 212, 680 N.Y.S.2d 88 (1st Dept 1998), among other authority, the general course of conduct between the parties can modify the terms and conditions of the private contract. So, as is incredibly common, if not thestatus quo, modern construction administration is generally performed via email. Depending on the facts and circumstances, emailing notice should be enough to preserve the contractor’s entitlement to an extension of time, claims for delay/impact costs or invocation of force majeure, if applicable.

2. Notice in a Public Works Context

    Under the landmark New York Court of Appeals Decision in A.H.A. Gen. Const., Inc. v. New York City Hous. Auth., 92 N.Y.2d 20, 31, 699 N.E.2d 368, 374 (1998), providing notice in strict conformance with the terms and conditions of the respective public works contract is a condition precedent to recovery. Generally, a condition precedent is an act or event which must occur before a duty to perform a promise in the agreement even arises. So, a public entity’s promise to give the contractor an extension of time, additional funding for delays/impacts or not to assess liquidated damages due to unforeseen circumstances (i.e. the Pandemic), does not even come into fruition unless the contractor stringently conforms to the respective notice provision in the public works contract.

    In essence, if a contractor does not strictly conform to the public contract’s notice provisions, to the letter, the contractor risks forfeiting its entitlement to an extension of time, delay/impact damages and even invocation of force majeure. Even worse, if the contractor is not issued an extension of time for failure to strictly comply with notice provisions, liquidated damages can be assessed for the contractor’s failure to deliver the public works project on time.

    Conclusion

    Disaster can shape a generation; the Pandemic is unique in that it has impacted the entire World and New York appears to be hit the hardest so far. It is absolutely essential for contractors to provide proper notice. Reliable legal advice from experienced construction litigators can help contractors avoid these potential pitfalls and exposure to liability stemming from the Pandemic. As always, Welby, Brady & Greenblatt, LLP remains available to answer questions you may have as the legal landscape evolves during this Pandemic. 

    If you would like more information regarding this topic please contact Michael E. Greenblatt at mgreenblatt@wbgllp.com or call (914) 607-6420

    Failure To Define “Cost” in a Change Order Provision Leads to the Admission of Parol Evidence Resulting in the Exclusion of Any Markup For the Contractor

    Written by Michael Irwin Silverstein on . Posted in Legal Alerts.

    Contractors should be aware that the failure to define material terms in their construction contracts, such as the term “costs” in a change order provision, can lead to the admission of “parol evidence” (extrinsic evidence outside of the contract) to clarify the ambiguity. For example, in Vivir of L I, Inc. v. Ehrenkranz, 127 A.D.3d 962 (2nd Dept. 2015), the Appellate Division held that the contract at issue there failed to define the term “costs” in the change order provision, which failure rendered that provision ambiguous. The Appellate Division, therefore, affirmed the lower court’s admission of parol evidence (an e-mail from the contractor’s principal) to clarify the meaning of change order costs, which excluded any markup.

    In Vivir of L I, Inc. v. Ehrenkranz, the defendants entered into a contract to purchase real property which was improved with a partially constructed residence. At the same time, the defendants entered into a construction contract with the plaintiff, who agreed to complete the construction for $1.4 million. The construction contract provided that “[n]ecessary or desired” changes during the construction process, also referred to as change orders, would be at “the additional cost to Owner,” i.e., the defendants. Approximately 36 change orders were approved during the construction of the residence, which ultimately came to a halt, uncompleted, in December 2008. Shortly thereafter, the plaintiff ceased doing business and advised the defendants it could not complete the construction due to an alleged “cash flow” problem.

    The plaintiff commenced an action against the defendants seeking to recover allegedly outstanding monies due under the construction contract and change orders. The defendants counterclaimed, alleging that the plaintiff materially breached the construction contract in a number of ways, and overcharged them with respect to the change orders by adding a markup to the total amount of each change order. The defendants alleged, and argued at trial, that the construction contract did not provide for markups, and that, during the negotiation process, the plaintiff’s principal stated in an email that any changes following execution of the construction contract would be at “cost,” without “mark up.” The plaintiff contended that change order markups were always contemplated by the parties, and that they did not need to be listed as a separate item on the change orders. Following a jury trial limited to the issue of the parties’ respective breach of contract claims—at which parol evidence with respect to the change order markup issue was admitted into evidence—the jury returned a verdict in favor of the defendants awarding them damages in the principal sum of $2,211,000.

    The plaintiff contended on appeal that the jury verdict must be set aside because parol evidence with respect to the change order markup issue was incorrectly admitted into evidence. The Appellate Division disagreed. It said that a written agreement that is complete, clear, and unambiguous on its face must be enforced to give effect to the meaning of its terms and the reasonable expectations of the parties, and the court should determine the intent of the parties from within the four corners of the contract without looking to extrinsic evidence to create ambiguities. A contract is considered to be clear and unambiguous where the language used has “a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion”. Where a contract is clear and unambiguous, the parol evidence rule operates to preclude evidence of a prior or contemporaneous communication during negotiations of the agreement that contradicts, varies, or explains a written agreement which expresses the parties’ entire agreement and intentions.

    In this case, because the contract was found to be ambiguous (because of the undefined term), parol evidence was properly admitted to explain the ambiguous phrase “cost to Owner” in the change order provision of the construction contract. Specifically, as the term “cost” was not defined, it could have had various meanings, including one limited to labor and material costs without an additional markup. Accordingly, parol evidence, such as the email from the plaintiff’s principal, stating that change orders would not include markups, which does not otherwise vary or contradict the construction contract, was properly permitted by the lower court.

    The Expansion of the New York State Harassment Statute: Third-Party Claims Against General Contractors

    Written by Austin S. Brown on . Posted in Legal Alerts.

    Recently, Governor Cuomo signed Bill S. 6577/A. 8421 (the “Harassment Statute”) into law. The Harassment Statute will significantly expand potential liability for all New York employers for any form of unlawful harassment—not just sexual harassment. If you are an employer in New York, it is strongly recommended that you thoroughly review the Harassment Statute in detail.

    In the construction context, upstream contractors generally do not have extensive control over their subcontractors’ means and methods of construction, nor direct control over their subcontractors’ employees. As is inherent in the name itself, subcontractors are not employees, but independent contractors. Now, with the passing of the newly expanded Harassment Statute, upstream contractors will have increased exposure to liability because they can now be held liable for third-party harassment claims for any form of unlawful harassment whatsoever—despite having very little control over their subcontractors.

    The Harassment Statute

    First, it is important to note that the Harassment Statute is now applicable to all employers; previously, it generally only applied to employers with four or more employees. Further,  unlawful harassment is now considered harassment based on any protected characteristic, such as age, race, creed, color, national origin, sexual orientation, military status, sex, disability, marital status, domestic violence victim status, gender identity, and even criminal history. Lastly, and most importantly, the Harassment Statute permits non-employees, such as the employees of a subcontractor or supplier, to bring a claim for any unlawful discriminatory practice against non-employers, such as an upstream contractor on a construction project, as long as the upstream contractor, its agents or supervisors knew or should have known that the non-employee was being subjected to an unlawful discriminatory practice in the workplace, and the defendant failed to take immediate and appropriate corrective action.

    This significant expansion of the Harassment Statute will have a significant impact on the amount of harassment claims filed against employers in New York. We can anticipate that this will include upstream contractors on construction projects.

    An Example: Third-Party Claims Against General Contractors

    Previously, the Harassment Statute was only applicable to sexual harassment. Accordingly, such claims on a construction site were few-and-far-between. Now, with the expansion of the Harassment Statute to any form of unlawful discrimination, it substantially increases an upstream contractor’s potential exposure to third-party liability on construction projects in New York. For example, the following hypothetical set of facts and circumstances could now subject an upstream contractor to a third-party harassment claim:

    1. An upstream contractor is working on the construction of a large project, with many different subcontractors simultaneously working on the project at any given time;
    2. The upstream contractor and the subcontractor enter into a lump sum contract whereby the subcontractor agrees to lay the foundation for the project;
    3. The subcontractor, in turn, enters into a lump sum contract with a supplier to deliver the concrete to the project;
    4. For one month, the supplier’s employee delivers concrete to the project for the subcontractor. The supplier’s employee, a disabled veteran, is continuously subjected to anti-war rhetoric from an employee of the subcontractor when he is onsite delivering the concrete;
    5. At the food truck during the lunch break, the supplier’s employee verbally complains to the subcontractor in the presence of the upstream contractor’s superintendent, but the upstream contractor took no action against subcontractor; and
    6. After the supplier completes its work, its employee makes a claim against the supplier, the subcontractor and the upstream contractor for unlawful discrimination based on his protected status as a disabled veteran.

    Unlike many other industries, there can be several degrees of separation between an upstream contractor and a supplier on a construction project. An upstream contractor cannot possibly be responsible for the subcontractor’s hiring, firing and workforce; this would make the subcontractor an employee, not a contractor. However, under the newly expanded Harassment Statute, this type of harassment claim would likely survive as long as the supplier alleges that the upstream contractor knew or should have known about the subcontractor’s unlawful harassment. While the Harassment Statute has not yet been construed by the courts, it would appear that this type of claim, even when the alleged notice is verbal, would survive a pre-answer motion to dismiss.

    Very importantly, even if the upstream contractor took timely action against the subcontractor, the question remains as to what would be appropriate? The subcontractor in this example is laying the foundation on the project. Terminating the subcontractor in the middle of its work would cause extensive delays to the critical path, resulting in additional costs and expenses related to retaining a replacement contractor.

    However, despite the significant expansion of the Harassment Statute, there was some attempt to scale back some of the issues described above by including the following language in the law:

    “In reviewing such cases involving non-employees, the extent of the employer's control and any other legal responsibility which the employer may have with respect to the conduct of the person who engaged in the unlawful discriminatory practice shall be considered.”

    Of course, this language may help to shield an upstream contractor from liability from to the supplier’s employee in our example. However, until this language is construed by a court, it is anyone’s guess as to how much protection this actually affords. Notably, even if a harassment claim is bogus, the upstream contractor would still have to defend against the claim.

    It is absolutely vital for all employers, not just contractors, to review the newly expanded Harassment Statute in detail. Contractors should be cognizant of statutory requirements and amend their construction contracts accordingly.  Reliable legal advice from experienced construction litigators can help contractors avoid these potential pitfalls and exposure to liability stemming from the Harassment Statute.

    Contractor and Bank Accused of Trust Fund Diversion – Contractors Take Heed

    Written by WB&G on . Posted in Legal Alerts.

    Article 3-A of the New York Lien Law contains some of the most perilous legal requirements a construction contractor can face. Section 13 of the Lien Law makes it clear that the funds received on a construction project are trust funds held for the benefit of subcontractors and suppliers. If those funds are not used exclusively to satisfy claims of subcontractors and suppliers for work performed on the project, contractors, as statutory trustees, may be liable for trust fund diversion. Contractors have often heard of the obligations imposed by Article 3-A of the Lien Law, but may lack a sufficient understanding of those obligations to avoid the serious penalties that can arise from diverting trust funds (even inadvertently). New York’s construction trust fund statutes are primarily intended to ensure payment for labor and material furnished to a particular project.

    In Price Trucking Corp. et al. v AAA Environmental, Inc. et al., (111 AD3d 1315 [4th Dept 2013]), a subcontractor brought suit alleging, among other things, that both the general contractor and its bank diverted trust funds. The general contractor, AAA Environmental, entered into a contract with the project owner, Norampac, to perform certain environmental remediation services. In furtherance of its general contract with Norampac, AAA Environmental entered into subcontracts with various entities, including Price Trucking. AAA Environmental had in place with First Niagara Bank an automatic transfer of funds from its operational account to pay down amounts owed on its line of credit. When funds earned on a particular project were deposited, they would be transferred that same night to reduce what was owed on the line of credit. Plaintiff, on behalf of itself and all similarly situated subcontractors on the project, sued AAA Environmental and First Niagara Bank for diversion of trust funds created by this financial arrangement. As alleged, by utilizing funds received from Norampac to satisfy a line of credit, both AAA Environmental and First Niagara Bank diverted trust funds. The Supreme Court, Erie County, upon Plaintiff’s motion for summary judgment, agreed and granted the motion as to the trust fund diversion claims against First Niagara Bank. On appeal, the Appellate Division, Fourth Department, determined that the bank was not a “statutory trustee” within the meaning of New York State Lien Law and, therefore, could not be held liable for trust fund diversion under that theory.

    Contractors often rely on their relationship with local banks in order to ensure that they can receive continued financing and weather “slow periods” where payment is delayed. While First Niagara Bank was determined to not be a statutory trustee on the motion for summary judgment, the suit nevertheless was permitted to continue so that if the subcontractor could prove First Niagara Bank knew that it was receiving trust funds from a construction project, the subcontractor would be permitted to recover on its trust fund diversion claims as against First Niagara. Importantly, the trust fund diversion claims as against the contractor continued. While the Appellate Division determined that the Bank was not liable for trust fund diversion, the relationship between the contractor and its bank was clearly strained.

    The consequences of trust fund diversion can be dire. A Court may order that the trust funds be repaid by the general contractor. Further, a diversion of trust funds exposes the trustee to potential punitive damages and attorneys' fees awards. It is also important to remember that corporate officers may be liable personally for diverting trust funds. Further, liability is not dischargeable in bankruptcy and, in extreme cases, could result in criminal prosecution that can include fines and even jail. Contractors should be certain what they can and cannot use trust funds for on a project. It is advisable to discuss with an attorney how monies received on a construction project can be disbursed consistently with the requirements of Article 3-A of the New York Lien Law. Moreover, contractors can further safeguard against accusations of trust fund diversion by keeping accurate books and records for every project.

    An Alternative to a Two Family House

    Written by Alan Singer on . Posted in Legal Alerts.

    Many municipalities allow for two, three or four family homes in a multi-family zone. Traditionally, these consist of a single structure with two or more units, owned by a single person or entity who rents out one or more of the apartment units. There is a growing trend for cities to expand the multi-family zone. By way of example, the city of Minneapolis has recently eliminated all single family zoning in favor of multi units. If this trend continues, construction of two, three or four family units will only increase.

    In many instances a given lot may not have sufficient side yard or front yard setbacks or frontage to accommodate more than one structure in a two family zone. For a developer, that means selling the completed house to a single buyer, who would then be able to take advantage of the rental income from the second unit. An alternative is to create a two (or three of four, depending on the zoning) unit condominium, which obviates the problem of lack of setback, frontage of FAR.

    In that way each unit can be sold separately, thus increasing the sales prices. The cost of creating the condominium, although not inexpensive, should be far outweighed by the additional sales prices. Creating the condominium involves the same process as with larger multi-family projects, and the offering plan contains the same provisions, although creation of the condominium declaration, budget, common element percentages and common areas are much less complicated.

    If interested one should consult an attorney who is familiar with the Department of Law requirements for submission of an offering plan.

    New Jersey Expands P3 Law Paving the Way for New Infrastructure Projects: How to Prevent Opportunity From Becoming the Road to Ruin

    Written by WB&G on . Posted in Legal Alerts.

    Effective February 10, 2019, the New Jersey Legislature has greatly expanded the pool of public entities authorized to enter into Public-Private Partnerships (P3), including local governments, school districts and public authorities. The New Jersey Legislature, pursuant to N.J.S.A. 40A:11-52 (“P3 Law”), defines a P3 project as a contractual agreement between a public agency and a private entity in which the private entity designs, finances and builds a large-scale project “of, or for the benefit of” the public agency. After a P3 project is completed, the private entity operates and maintains the project for a period before turning it back over to the public agency. Prior to the new P3 Law, only state and county colleges, as well as the New Jersey Transit Authority could enter into P3s, but only under certain limited circumstances. With billions in upgrades needed throughout New Jersey, the new P3 Law is expected to generate a significant number of new projects throughout the Garden State.

    While many celebrate the potential benefits of the new P3 Law, contractors should not be lulled into complacency. Foremost, because a P3 project is not strictly a private or a public project but, rather, a sort of hybrid, the availability of long-established payment protections, such as the right to file a construction lien, are sometimes difficult to assess. A recent New Jersey case provides a clear warning to contractors to not sleep on their rights.

    In Morris County Improvement Authority v. Power Partners MasTec, LLC et al., 2014 WL 1125378 (App. Div. 2014), the New Jersey Appellate Division had occasion to review a series of mechanic’s lien filings on a hybrid project. The project involved the construction of seventy-one (71) solar facilities in three (3) counties to be constructed on publicly owned land. A private entity was listed as the “Developer” of the project, and the project was financed by a total of $88.8 million in municipal bonds issued by the three (3) counties. MasTec, as contractor, became embroiled in a dispute with the Developer and the “operator”, alleging that it performed more than $80 million worth of “construction services”, but was paid only $33 million. MasTec filed a series of Municipal Mechanic’s Liens totaling almost $50 million. The Morris Improvement Authority, acting on behalf of the public agencies, filed suit seeking to discharge the Municipal Mechanic’s Liens. The trial court determined the Municipal Mechanic’s Liens did not meet the requirements to file a lien on a public project. Thereafter, MasTec filed Construction Lien Claims but the trial court limited those private liens to the “Developer’s” interest in the real property—which effectively rendered the liens powerless to affect the disbursement of the project funds. On appeal, the New Jersey Appellate Division affirmed (on different grounds) the discharge of MasTec’s Municipal Mechanics’ Liens. Moreover, the Appellate Division was clear that a Construction Lien can only attach the “real property”, and not the public funds or funds generated by operation of the facilities. As such, MasTec was effectively left without any enforceable lien rights. As a result, unless the New Jersey Legislature amends the P3 Law, contractors performing work on a P3 project may not have enforceable lien rights.

    However, all hope is not lost for securing payment for labor and materials furnished on a P3 Project. One takeaway is that while a contractor/supplier on a P3 project may not have lien rights, they do have two (2) potential avenues of recovery. The first avenue for recovery, and perhaps anticipating this issue and in an proactive attempt to keep the finances on a P3 project above board, the New Jersey Legislature requires the private entity on a P3 project to appoint a “third-party financial institution” to “act as a collateral agent, and manage the construction account, and maintain a full accounting of the funds and instruments in the account”. The account is effectively held in trust for the benefit of the contractor, construction manager and design-build team. In that sense, on a P3 project the moment a payment issue arises, written notice should be delivered to the “collateral agent” to hopefully ensure funds are not improperly disbursed.

    The second avenue for recovery, and an even more important tool for ensuring payment is the potential ability to file a payment bond claim on a P3 project. In order to properly assert a payment bond claim you need to be knowledgeable of the many technical requirements and statutory loopholes in both the P3 Law and the Public Works Bond Act. For example, a contractor/supplier cannot recover against the bond for any “extra work” that is not the subject of a written change order between the Owner and General Contractor. Additionally, pursuant to the Public Works Bond Act, only “subcontractors or material suppliers in contract with the contractor” or “subcontractors or material suppliers in contract with a subcontractor to the contractor” may submit a payment bond claim. For P3 projects in New Jersey, a contractor would be advised to ensure the inclusion of key terms and conditions in its contract, and to provide proper written notices, which efforts culminate in the submission of a timely and proper payment bond claim immediately after a contractor defaults in its payment obligations. Given the risks, you should consult a competent construction attorney to assist with payment issues as early as possible on any P3 project.

    E0_192 and MTA Debarment Regulations

    Written by Thomas S. Tripodianos on . Posted in Legal Alerts.

    If being a public works contractor, consultant or supplier wasn’t already difficult enough things just got harder.  Public Authorities Law Section 1279-h, became law without public comment on April 12, 2019, when it was passed as part of the New York State budget bill.  The MTA provided the regulations called for under the law on June 5, 2019, which mandate retroactively that the MTA debar contractors (defined to include consultants, vendors and suppliers) if they: (1) fail to achieve substantial completion of their contractual obligations within 10% of the adjusted contract time; or (2) present claims (which includes change orders) for additional compensation that are denied in an amount that exceeds the total adjusted contract amount by 10% or more.

    While the MTA regulations provide that debarment by one is debarment by all of the agencies under the MTA umbrella things get even worse because Executive Order 192, issued on January 15, 2019, mandates debarment by all state agencies and authorities of contractors debarred by any state agency or authority forever [the MTA Regulations suggest the debarment in only for five years but EO 192 would override that] unless a court determines the debarment was in error, or a secure a waiver from the Counsel to the Governor.  Considering the weight given to past debarment in considering bid awards the detrimental effect could extend past New York.

    It gets even worse.  The MTA cannot consider mitigating factors or whether claims have been made in good faith. Debarment is required once a final determination is made by the MTA that the regulations have been violated “and its contracting personnel have no discretion to excuse or justify violations of any provision.”

    But wait, there’s more.  Not only is the debarment hearing held and decided by the MTA itself the “ panel may, in its discretion, also debar any of (1) the contractor’s parent(s), subsidiaries and affiliates; (2) any joint venture (including its individual members) and any other form of partnership (including its individual members) that includes a contractor or a contractor’s parent(s), subsidiaries, or affiliates of a contractor, (3) a contractor’s directors, officers, principals, managerial employees, and any person or entity with a ten percent or more interest in a contractor; (4) any legal entity controlled, or ten percent or more of which is owned or controlled, by a contractor, or by any director, officer, principal, managerial employee of contractor, or by any person or entity with a 10 percent or greater interest in contractor, including without limitation any new entity created after the date of the notice of intent to debar”.

    A coalition of industry associations has been formed to challenge the validity of the law and regulations but, for the time being they are in full force and effect.  Anyone doing business on public work in New York and especially with the MTA is urged to consult with competent counsel as to how to mitigate the risks imposed by these new laws.

    N.Y. Labor Law §220: The Burden of the Prevailing Wage on Closely-Held Business Entities

    Written by Austin S. Brown on . Posted in Legal Alerts.

    Many construction contractors throughout the State of New York derive a substantial portion of their revenue from public construction projects. Contractors on these jobs need to be wary of what is known as N.Y. Labor Law §220(3)(a) (a/k/a the “Prevailing Wage”). The Prevailing Wage was enacted to ensure that workers on public works projects are properly classified and receive what the State determines to be the “prevailing wage” from their employers; however, what happens when one of these workers is also the owner of their own company? Must the Prevailing Wage still be paid and all of the associated taxes and expenses incurred?

    Here, we will be discussing the impact that the Prevailing Wage has on the principal of a contractor who is also the sole-owner (“principal”) of his own corporation or limited liability company (“LLC”) and is performing work on a public works project. However, before addressing this rather unique issue, it is first necessary to explain some background information.

    The Prevailing Wage

    An employer that fails to pay a worker the Prevailing Wage could face extensive criminal and civil liability, including debarment from being awarded future work on public works projects. Of course, with such serious repercussions for failure to comply with Prevailing Wave requirements, the paperwork necessary for contractors to prove that all of their employees (and, in some cases, the employees of their subcontractors) are in compliance is time-consuming, and the associated costs are expensive; for example, some expenses include, but aren’t limited to: a) taxes; b) payroll expenses; c) increased insurance premiums; and d) administrative expenses.

    Closely-Held Business Entities

    Corporations and LLC’s are separate legal entities that shield individuals from personal liability while they are operating their respective business. There are countless ways for a contractor to be sued within the State of New York, which is why contractors often form corporations or LLCs. Without the protections afforded by a business entity, doing business might not be worth the risk. When a business entity is only owned by a small number of members, or even one member, it is known as a closely-held corporation or LLC. So, in the eyes of the law, even if a business entity is owned and operated by a single principal, that business entity is still entirely separate-and-apart from the principal, even though the entire business runs through him or her. These closely-held business entities are often smaller construction contractors with a principal that is self-employed and is performing labor him or herself.

    The Issue

    When a principal performs work on a public works project without paying him or herself a wage, it would seem entirely fair because the principal owns and operates the company.Why should that principal have to pay him or herself a wage, and incur the correlating taxes and expenses, when the principal will be the party receiving the profits at the end of the day?

    For example, if the closely-held business entity is an excavation subcontractor on a public works project, a heavy equipment operator will likely be needed. Since a heavy equipment operator receives a higher average wage rate than a laborer, it would make perfect sense that the principal would want to operate the heavy machinery him or herself – thereby reducing labor expenses and all taxes and expenses associated with the Prevailing Wage. Of course, any other worker employed by the excavation subcontractor on the public works project would be receiving the Prevailing Wage. In theory, this business strategy makes perfect sense and does not cut against the legislative intent of the Prevailing Wage whatsoever. After all, the money is coming from the principal’s profits, and simultaneously going back to the principal as wages. However, while this is fair in theory, the reality is quite different.

    When the principal, on behalf of the excavation subcontractor, submits payment applications for approval to the general contractor on a public works project, it is currently a requirement that the principal pay the Prevailing Wage to him or herself. If the principal does not have the proper paperwork to present to the general contractor, it is likely that processing of the payment applications will be delayed, and there will be a risk of non-payment and potential exposure to liability for failure to pay the Prevailing Wage.

    Many contractors on public works projects are unaware of the numerous pitfalls that arise when dealing with the Prevailing Wage. This is especially true here, where the principal’s conduct is not necessarily morally wrong, but still constitutes a violation of the Prevailing Wave requirements. Contractors on public works projects should be cognizant of both contractual and statutory requirements as the failure to understand the Prevailing Wage can subject contractors to extensive civil and criminal liability.  Reliable legal advice from experienced construction litigators can help contractors avoid these potential pitfalls and the avoid exposure to liability.

    Notify Early, Notify Often…

    Written by Frank Gramarossa on . Posted in Legal Alerts.

    Many contractors are unaware of the procedural pitfalls that lie beneath them when they are submitting a claim for non-payment.  What happens when a contractor fails to provide timely notice of its claim, or somehow else fails to conform to the claims process set forth in the contract?  The claim becomes subject to dismissal.  The issue of untimely notice was again analyzed in the New York State Courts recently by the Appellate Division, First Department in the case titled Lanmark Group, Inc., v. New York City School Construction Authority, (148 AD3d 603).

    In Lanmark, the plaintiff was Lanmark Group, Inc., a contractor hired by the SCA to do work on the exterior masonry, parapets, roof, and paved areas at PS 204(K) in Brooklyn. After work began, the SCA also asked Lanmark to remove existing back up brick from the school, and install some door jambs, frames, saddles and hinges. Lanmark claimed this work was additional work outside of the original scope.  The parties disputed the scope of work called for in the original contract; specifically how much brick had to be removed, and how much was outside the original scope.

    On October 27, 2014, Lanmark sent a letter to the SCA requesting clarification of the scope of the extra work, and it added that it disagreed with the architect’s definition of the scope of work.  The next day, the SCA responded stating it could not specify the quantities of brick to be removed.  Then on December 1, 2014, Lanmark sent a cost estimate in the amount of $891,231.44 for the removal of 6,800 sq. ft. of brick that it claims was not in the original scope.  The SCA responded with an offer of $120,406; however, it did not indicate whether the offer was based on Lanmark’s estimate (6,800 sq. ft.) or the architect’s scope definition (3,890 sq. ft.).  After some discussion, on February 24, 2015, SCA issued a unilateral change order for $120,406. In doing so, the SCA clarified that the amount was for the removal of 6,800 sq. ft. of brick.  On April 6, 2015, Lanmark filed notice of claim for the brick removal.  Lanmark then commenced work on the brick removal, which was completed on July 31, 2015. 

    Lanmark commenced a lawsuit on December 1, 2015 to collect on the balance of its claim.  The SCA filed a motion to dismiss the complaint on the grounds that Lanmark did not provide timely notice required by Public Authorities Law §1744(2). That statute requires that any action against the SCA based in contract requires: 1) notice of claim to be filed with the SCA within three months of accrual; and 2) that the action be commenced within 1 year.  The issue before the Court was simple: when did Lanmark’s claim accrue?  The SCA argued that the claim accrued on December 1, 2014, the date when Lanmark submitted its cost estimate.  This would mean the time to file a notice of claim would expire on March 1, 2015, thus making Lanmark’s filing on April 6th untimely.  Lanmark argued that the claim did not accrue until the brick work was substantially completed on July 15, 2015, rendering its April 6th filing timely.    

    The lower court (Supreme Court, New York County), agreed with Lanmark and denied the SCA’s motion.  It cited a Court of Appeals case (CSA Constr. Corp. v. New York City School Constr. Auth., 5 NY3d 189, 192 [2005]), which held that “a contractor’s claim accrues when damages are ascertainable” which, although the date will vary based on facts and circumstances, “generally has been recognized that damages are ascertainable once the work is substantially completed or a detailed invoice of the work performed is submitted”.  The appellate court upheld the decision, holding that the “[Lanmark]’s notice of claim was timely served, because it was filed before the [SCA] executed a certificate of completion.”  In addition, the Court held that Lanmark’s submission of a cost estimate did not trigger the running of the three-month notice period, as it was not a detailed invoice for final payment for work completed.

    Many contractors are unaware of numerous notice requirements applicable to their claims, whether required by contract or by statute.  Contractors should be cognizant of both contractual notice provisions and statutes requiring the filing of a notice of claim prior to initiating a lawsuit.  Contractors should also have an understanding as to when their claim accrues.  Failure to understand these timing and notice issues can lead contractors to unwittingly create procedural defects in their claims.  Reliable legal advice from experienced construction counsel can help contractors avoid these potential pitfalls and bring them one step closer to obtaining a favorable result on their claims.

    When is a Restrictive Covenant Not Enforceable

    Written by WB&G on . Posted in Legal Alerts.

    It has been common practice, especially in the first half of the twentieth century, for owners of residential subdivisions (hereinafter referred to as “grantors”) to include in the deeds to individual lots various restrictions on development. These could include minimum or maximum home sizes, type of homes which could be built, roofing material to be used (usually slate) or restrictions on use such as prohibition against farm animals, storing of recreational vehicles or prohibitions against commercial usages. Often approval of building plans would be reserved to the grantor, which created a problem when that person or entity was no longer in existence.

    More recently, these restrictions have taken the form of recorded Declarations of Restrictive Covenants which are binding on “heirs, successors and assigns”, in other words, all future owners. As often happens, some of the provisions of the restrictions become obsolete over time or are simply ignored by future owners and the ancient deed restrictions may not be included in later transactions. If there is no interested entity insuring compliance with the original restrictions they may be frequently ignored by later generations.

    When there is no enforcement of the restrictions by a grantor or successor in interest to the grantor the question arises as to whether an owner in the chain of title can enforce the restriction against a neighbor who has or is threatening to violate it. The answer, as in most legal issues, is a definite maybe. A recent case in which we represented a defendant (Shehan v. Commisso and Cassano, Supreme Court, Suffolk County) explores that issue. The issue was whether a neighbor (Shehan) could enforce a 1929 deed restriction purportedly prohibiting further subdivision of a lot owned by the defendants, as to which the Planning Board had approved a subdivision of a lot into two building lots.

    The Court ruled that he could not and dismissed his suit. In so doing the Court relied on existing law which allows a neighbor to seek enforcement of a deed restriction only if that neighbor can prove that the restriction was part of a common scheme or plan throughout the subdivision intending to benefit all owners. In this case there was ample evidence that no such common scheme existed. First, not all of the lots in the subdivision contained the same original deed restriction, and some of them had restrictions which expired by their terms in 1933. Additionally, the grantor had retained the right to impose other or different restrictions in future deeds. Also, the original 28 residential lots, through various re-subdivisions, had now grown to over 40, with three of them improved by a school.

    Thus it was found that despite the deed restrictions being said to “run with the land” and inuring to the benefit of subsequent owners, they were not part of a common scheme or plan, so could not be enforced by one owner against another. It may also have been significant that the deeds for both plaintiff’s and defendants’ properties, going back to at least 1950 did not contain any reference to the original restrictions.

    The lesson here is that when dealing with ancient deed restrictions, especially ones which seem to make no sense in contemporary times, it is important to consult with an attorney and thoroughly research the history of and current conditions within the subdivision.

    If you would like more information regarding this topic please contact Alan D. Singer at asinger@wbgllp.com or call (914) 607-6460