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Understanding Misconduct Proceedings Against Professional Engineers

Written by Frank Gramarossa on . Posted in Legal Alerts.

Engineers, as licensed professionals pursuant to the New York State Education Law (hereinafter “Educ. Law”), must comply with a rigorous code of professional ethics.  These rules and the definition of professional misconduct are set forth in the Educ. Law and by the rules promulgated by the New York State Board of Regents (hereinafter “Board of Regents”).  (N.Y. Educ. Law § 6509 and 8 NYCRR §§ 29.1 and 29.3). 

While the vast majority of engineers take their responsibilities extremely seriously, and many complaints brought are simply frivolous, all engineers should understand the process involved in responding to an investigation by the New York State Education Department (hereinafter “Educ. Dep’t.”).

Complaints made to the Educ. Dep’t. are investigated by a professional conduct officer.  In the instance the complaint involves a question of professional expertise, the officer may, but is not required to, consult with a panel of three members of the State Board for Engineering, Land Surveying and Geology (hereinafter the “Board of Engineering”), which was created to assist with “matters of professional licensing, practice, and conduct.”  (N.Y. Educ. Law § 6508).    The investigation may be as simple as requesting certain documents or may involve a more in-depth process involving all the project documents and in-person meetings.      

After his review, the professional conduct officer has two options:  1) He may terminate the proceeding because substantial evidence is lacking or 2) he may determine – after consulting with a professional member of the Board of Engineering – that substantial evidence exists in support of the complaint.  (N.Y. Educ. Law § 6510(1)(b)).  If the matter moves forward, it will involve either expedited procedures or adversary proceedings.  (N.Y. Educ. Law § 6510(3) and 8 NYCRR §17.3).  Both processes are discussed below. 

Expedited Procedures

Minor or technical violations may be resolved by what are known as expedited procedures.  (N.Y. Educ. Law § 6510(2)(a)).  Some examples that qualify for expedited procedures include:  “isolated instances of violations concerning professional advertising or record keeping, and other isolated violations which do not directly affect or impair the public health, welfare or safety.” 

The professional conduct officer, with the advice of a member of the Board of Engineering, has the discretion to determine whether a violation is minor or technical.  If it is determined that a violation exists, but is minor, the professional conduct officer (after consulting with a member of the Board of Engineering) may issue an administrative warning or prepare and serve formal charges.  If the latter option is chosen, a violations panel will schedule a meeting with the engineer.  Thereafter, the panel may issue a censure and reprimand and/or may impose a fine not to exceed five hundred dollars for each instance of minor or technical misconduct.

Adversary Proceedings

In the instance a complaint is not terminated for lack of substantial evidence or resolved by way expedited procedures, disciplinary proceedings will continue and the engineer will be subject to adversary proceedings.  (N.Y. Educ. Law § 6510(3)).

The Hearing

The initial step once adversary proceedings are initiated is a hearing, similar to a trial, before a panel of at least three individuals, two of which must be members of the Board of Engineering.  At the hearing, the design professional (or his counsel) can (among other things):  produce witnesses and evidence in his defense; cross-examine adverse witnesses; and examine adverse evidence.  (N.Y. Educ. Law § 6510(3)(a)).  Importantly, the hearing panel is not bound by the rules of evidence and a guilty verdict requires only a preponderance (i.e., 51%) of the evidence.  (N.Y. Educ. Law § 6510(3)(c)).

After the completion of the hearing, the panel issues a written report with findings of fact, a ruling on each charge (a guilty verdict requires at least two votes), and a recommended penalty in the instance of a guilty verdict.  (N.Y. Educ. Law § 6510(3)(d)). 

Review of the Regents Committee

The report of the hearing is reviewed by a three person “Regents Review Committee” appointed by the Board of Regents.  (N.Y. Educ. Law § 6510(4)(a)).  This committee acts similar to an intermediate appellate court and will schedule a meeting to discuss the findings of the hearing.  Thereafter, the Review Committee will prepare their own report and forward it to the Board of Regents.  (N.Y. Educ. Law § 6510(4)(b)).

Decision of the Board of Regents

Once the Board of Regents receives the report of the Regents Review Committee, it evaluates all the prior evidence, proceedings, and rulings and issues a final order.  (N.Y. Educ. Law § 6510(4)(c)).

The penalties which can be imposed include but are not limited to:  censure and reprimand; suspension, revocation, or annulment of the engineer’s license; and a fine not to exceed ten thousand dollars per guilty charge.  (N.Y. Educ. Law § 6511).

Conclusion

While many complaints are meritless, the disciplinary process detailed above can be involved and serious.  If a complaint is filed with the Educ. Dep’t., all engineers should engage legal counsel in order to understand the full scope of the ramifications and to chart out an appropriate course in responding to the Educ. Dep’t.  Ideally, counsel should be retained prior to any substantive communications with the Educ. Dep’t.

Think Your Additional Insureds have Coverage? Better Check the Insurance Policy

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

While it can be a headache, Commercial General Liability Insurance (“CGL”) is a necessity in construction. Generally, every party involved in a construction project is required to obtain insurance not just for themselves, but also for many other entities involved in the project. Most contractors and owners are diligent in procuring the additional insurance coverage required under their contracts. But inevitably, when a claim is made during or after the project and the insurance companies get involved, contractors, subcontractors and owners often find themselves with limitations and restrictions on the coverage they thought they had.

Take, for instance, the recent decision of New York’s Appellate Division, First Department, in the case of Gilbane Bldg. Co./TDX Const. Corp. v. St. Paul Fire & Marine Ins. Co.1 Gilbane/TDX was a joint venture that contracted with the Dormitory Authority of the State of New York (“DASNY”) to be the construction manager on a New York City public project for construction of a DNA lab at the Bellevue Hospital Campus in Manhattan (the “Project”). Under the Construction Management Agreement between Gilbane/TDX and DASNY, any prime contractor, whether retained by DASNY or otherwise, was required to name Gilbane/TDX as an Additional Insured under its CGL policies. DASNY contracted directly with a prime contractor, Samson, for excavation and foundation work on the Project. Pursuant to its contract with DASNY, Samson was to procure CGL insurance specifically naming, among others, Gilbane/TDX as an Additional Insured. Samson obtained a policy from Liberty Insurance Underwriters (“Liberty”) with the following Additional Insured endorsement:

WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.”

During the Project, Samson’s work allegedly caused adjacent buildings to sink, resulting in significant structural damage to those buildings. DASNY commenced a lawsuit against Samson and the Project architect, which, in turn, led to a third-party action being filed against Gilbane/TDX. Gilbane/TDX thereafter provided notice to Liberty and sought defense and indemnification as an Additional Insured under Samson’s policy. Liberty denied coverage to Gilbane/TDX, and Gilbane/TDX commenced a declaratory judgment action to force Liberty to provide Gilbane/TDX with coverage as an Additional Insured under Samson’s policy. The motion court held that Samson had a written contract with DASNY to provide Additional Insured coverage to Gilbane/TDX and, thus, held that Gilbane/TDX was an Additional Insured under the language of Samson’s policy with Liberty. Liberty appealed.
    
The appellate court reversed the motion court’s decision, focusing on the specific language of the Additional Insured endorsement contained within the policy of insurance issued by Liberty. The appellate court held that the endorsement required that the party seeking Additional Insured coverage (Gilbane/TDX) must have a written contract with the Insured (Samson) under whose policy it was seeking coverage as an Additional Insured. The Court focused on two words in the Additional Insured endorsement, “with whom”, and determined that those words required a contract between the Insured (Samson) and the entity seeking Additional Insured coverage (Gilbane/TDX) to trigger such coverage. The appellate court held that since Samson, the insured, only had a contract with DASNY and not Gilbane/TDX, no Additional Insured coverage existed for Gilbane/TDX under the policy procured by Samson from Liberty.
    
As an aside, the appellate court noted that Gilbane/TDX could possibly recover from Samson on a breach of contract theory based on Samson’s failure to obtain the insurance required in its contract with DASNY. However, no such claim was made in this action. Accordingly, the end result was that Gilbane/TDX was left without any coverage.

TAKEWAY: Every insurance policy contains different language which could lead to differing levels of coverage. Unfortunately, the contractor procuring the insurance may not realize the effect of the language used in the policy until it’s too late. Courts uniformly hold that the language of the insurance policy, and not that of a contract or an insurance certificate, governs the insurance coverage provided by an insurance carrier.  This may lead to situations in which contractors, subcontractors and owners may be exposed to liability, such as: (1)  if you were supposed to have the benefit of the additional insurance, you do not have the coverage you bargained for—and thought you had—in your contract(s) due to the actual language used in the insurance policy (thus exposing yo to direct claims); and (2) if you were supposed to have provided the additional insurance, you have breached your contract because you have not provided the correct coverage required.  In order to best avoid these situations, contractors, subcontractors and owners should have their insurance policies reviewed by their attorneys and insurance brokers (and their contracts reviewed by their attorneys) to ensure that proper coverage is provided.

1 2016 NY Slip. Op. 06052; 2016 WL 4837454 (1st Dept Sept. 15, 2016)

Failure To Comply With Statutory Service Requirements Costs Contractor His Mechanic’s Lien

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

The requirements for serving a Notice of Mechanic’s Lien are straightforward:

Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice upon the owner, if a natural person, (a) by delivering the same to him personally, or if the owner cannot be found, to his agent or attorney, or (b) by leaving it at his last known place of residence in the city or town in which the real property or some part thereof is situated, with a person of suitable age and discretion, or (c) by registered or certified mail addressed to his last known place of residence *** if the owner be a corporation, said service shall be made (i) by delivering such copy to and leaving the same with the president, vice-president, secretary or clerk to the corporation, the cashier, treasurer or a director or managing agent thereof, personally, within the state, or (ii) if such officer cannot be found within the state by affixing a copy thereof conspicuously on such property between the hours of nine o'clock in the forenoon and four o'clock in the afternoon, or (iii) by registered or certified mail addressed to its last known place of business *** Failure to file proof of such a service with the county clerk within thirty-five days after the notice of lien is filed shall terminate the notice as a lien

(Lien Law, §11).  However, as simple as they are, these service requirements are also strictly construed by our courts.  For example, in EK Mt Kisco, LLC v Arcon Const. Group, Inc., 138 A.D.3d 1118 (2d Dept. 2016), an owner commenced a proceeding pursuant to Lien Law § 19(6) to summarily discharge a mechanic’s lien, based on improper service.  The Appellate Division affirmed the lower court’s decision to grant the owner’s petition, discharging the mechanic’s lien, because:

the appellant failed to demonstrate that it complied with the requirements of Lien Law § 11, since its affidavit of service of the notice of the mechanic’s lien did not demonstrate that the notice was sent to the last known place of business of the petitioner EK Mt Kisco, LLC

(Id., at 138 A.D.3d 1119).  Here, as the lienor had specific knowledge of that last known address, its service at a different address was fatal to its lien, even though that other address had been specifically provided for in the contract.

Indeed, one of the cases cited by the Appellate Division in EK Mt Kisco, LLC, demonstrates just how strictly courts will enforce these service requirements. In    Thompson Bros. Pile Corp. v. Rosenblum, infra, a contractor who performed work on the home of an individual owner filed a mechanic’s lien and the home owner later moved to dismiss the lien foreclosure action.  The trial court denied the home owner’s motion, stating:  “In the instant matter, the Court finds that the notice of lien was served at the address provided by Jeffrey M. Rosenblum, for all purposes under the contract” (2012 WL 11980655 [N.Y.Sup. Nassau]).  In reversing the trial court, the Appellate Division noted that:

However, the plaintiff's affidavit of service of the mechanic's lien demonstrates that the plaintiff failed to serve the notice of the mechanic's lien in compliance with Lien Law § 11, as the notice was not sent to the defendants' last known place of residence. As strict compliance with the statutory requirements is mandated and the courts do not have discretion to excuse noncompliance (see Matter of HMB Acquisition Corp. v. F & K Supply, 209 A.D.2d 412, 618 N.Y.S.2d 422; 146 W. 45th St. Corp. v. McNally, 188 A.D.2d 410, 591 N.Y.S.2d 402), the Supreme Court should have granted that branch of the defendants' motion which was pursuant to Lien Law § 11 to dismiss the sixth cause of action, which was to foreclose a mechanic's lien

(Thompson Bros. Pile Corp. v Rosenblum, 121 A.D.3d 672, 674 [2d Dept. 2014]).  So, even where a lienor serves its notice of mechanic’s lien upon an owner at an address designated by that owner in a construction contract, if the lienor does not satisfy the service requirements of Lien Law §11, the lienor is at risk of losing his lien for improper service.

Subcontractor’s Unjust Enrichment Claim Against Project Owner Held Invalid

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

In MCM Products USA, Inc. v. Aliusta Design, et al., the Plaintiff/owner of the relevant property engaged a general contractor (the “GC”) in connection with a construction project located in New York City (the “Project”). Thereafter, the GC engaged numerous subcontractors (the “Subcontractors”) to carry out portions of the work. Importantly, the Subcontractors were directly engaged by the GC, and had no contractual relationship with Plaintiff/owner.

As payment disputes arose on the Project, mainly due to the GC’s failure to pay certain Subcontractors, mechanic’s liens were filed against the property. Thereafter, Plaintiff/owner commenced a declaratory judgment action seeking a determination that it is not liable to the Subcontractors for any money due and owing from the GC. In response to Plaintiff/owner’s complaint, one of the Subcontractors asserted a counterclaim for unjust enrichment1. Plaintiff/owner subsequently moved to dismiss the counterclaim.

In granting Plaintiff/owner’s motion to dismiss the counterclaim for unjust enrichment (which rests on a theory of quasi-contract), the Court noted that, generally, the existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi-contract for events arising out of the same subject matter. The general rule further precludes a quasi-contractual claim against a third-party non-signatory to a contract that covers the subject matter of the claim (i.e. Plaintiff/owner).

Given that the unjust enrichment counterclaim does not assert any allegations linking Plaintiff/owner to the services allegedly performed, and that the counterclaiming Subcontractor admitted it was engaged directly by the GC, Plaintiff/owner may not be held liable to the counterclaiming Subcontractor.

The holding in MCM Products USA, Inc. demonstrates the importance of knowing from whom a subcontractor can recover monies owed. Where there is an express contract between a general contractor and subcontractor, the owner of the subject project may not be held directly liable to the subcontractor on a theory of implied or quasi-contract, unless the owner has expressly assented to such an obligation. The mere fact that an owner consented to the improvements being provided by a subcontractor (and accepted the benefit of such improvements), however, does not render it liable to a subcontractor. Rather, the subcontractor’s sole remedy lies against the general contractor with whom it contracted.

1A claim for unjust enrichment is based on the theory of quasi-contract. Such theory seeks to create an implied contract when a written agreement doesn’t actually exist. The theory is based in equity and is designed to avoid an individual or entity being unjustly enriched at the expense of another.

 

A Lesson that Contractors should thoroughly Document Approval of any Owner Directed Design Changes

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

Ordinarily, an owner and design professional are liable for defects and omissions in the plans and specifications for a project. Generally speaking, the owner and design professional impliedly warrant that project plans and specifications are accurate, without defects and suitable for the purpose intended. That is not to say contractors should let their guard down as an owner may attempt to shift the risk of design errors to a contractor through language in the contract. The following case shows the fruits of proper contract language and documentation.

In Maines Paper & Food Service, Inc. v. Pike Co., Inc., 137 AD3D 1366 (3d Dept 2016), the Appellate Division, Third Department, had an opportunity to examine liability for a design change approved and directed by the owner and architect that ultimately resulted in costly damages to a project. The dispute arose out of a 2009 contract between the owner and contractor, Pike Co. Inc. (“Pike”), for the construction of a supermarket. After completion, there was “considerable settling of the [supermarket’s] floor”, which the owner alleged was directly attributable to Pike’s failure to construct the foundation in accordance with the contract documents, including the plans and geotechnical engineering report. It was noted that the initial plan did not call for Pike to attach the slab to the pile caps. However,  after the project had commenced, Pike submitted a request for clarification (“RFC”) to the architect. In response to the RFC, the architect indicated that rebar reinforcement should be added to “tie-in the pile-cap, slab and column to each other”, and he provided a drawing for clarification. Thereafter, a change order was approved and issued by the owner and architect referencing the RFC and directing Pike to undertake work in accordance with the architect’s clarification and drawing. Interestingly, the geotechnical engineering report contained in the project manual indicated that a slab-on-grade concrete foundation could be used and specifically warned that the slab should not be connected to the pile caps to limit the risk of potential settlement.

The owner filed a lawsuit alleging breach of contract for Pike’s failure to follow the project plans and design specifications. After answering the lawsuit, Pike promptly moved for summary judgment. The trial court granted the motion and dismissed the complaint, noting that Pike did not breach the terms of the contract because the changes to the design of the foundation were approved by the architect and owner. The Appellate Division upheld the lower court’s decision dismissing the complaint against Pike. In so doing, the appellate court noted that Pike’s submission of the RFC and owner directed change order was sufficient to insulate Pike from liability—even though the original plans and geotechnical engineering report in the project manual specified the floor slab not be connected to the pile caps. The court was unpersuaded by the owner’s claims that Pike breached its contractual duty to “carefully study and compare the various Contract Documents” and its obligation to report any “errors, inconsistencies or omissions” in the plans, noting that pursuant to the language of the contract Pike was not a design professional, was directed to follow the design change, and was not “responsible for the adequacy of the performance and design criteria specified in the Contract Documents”.

It is easy to envision a very different outcome had Pike failed to thoroughly document the change to the project plans or, worse yet, simply relied upon an oral directive of the architect or owner. In that case, Pike would have been stuck conducting time consuming and costly discovery to try and prove that the owner and architect approved and directed the design change. Instead, all Pike needed was the contract, RFC and change order to obtain summary judgment dismissing the complaint shortly after the lawsuit was commenced.

New York’s Prompt Payment Act Survives……For Now

Written by Gregory J. Spaun on . Posted in Legal Alerts.

New York's Prompt Payment Act was amended in 20091 to deal with the problem of slow payments from owners to construction contractors and subcontractors. Under the Act, as amended, a contractor or owner presented with an invoice for payment for construction services or materials has 12 days to lodge objections to the invoice (or portions thereof). The portions of the invoice which are not objected to within the 12 day time frame are deemed approved and must be paid within 30 days thereafter. In the event that such invoices are not paid within that timeframe, or if the objections to the invoice are disputed, the unpaid contractor has the option to bring an expedited arbitration proceeding, rather than suffer through years of litigation. Reinforcing this right is another section of the Act, which provides that any contractual  provision which denies a party the right to that expedited arbitration proceeding is void. This particular provision raised eyebrows when it was enacted because it deprives a party of his or her Constitutional right to a jury trial.

This question was recently passed on (by being passed over) by an appellate court in the case of Matter of Capital Siding & Construction, LLC v Alltek Energy System, Inc. In Capital Siding, Alltek entered into a construction subcontract with Capital Siding. During the job, Capital Siding withheld certain amounts from Alltek's payment, which Alltek disputed. In order to quickly resolve this dispute, Alltek sought expedited arbitration pursuant to the Act. In response, Capital Siding brought a special proceeding to permanently stay Alltek's arbitration, noting that the subcontract specifically provided for litigation.

The trial court denied Capital Siding's request, holding that the Act provides for arbitration, and that the Act specifically voided the contractual provision which denied Alltek of its statutory right to such arbitration. Capital Siding appealed, also raising the constitutional issue that the Act denied it of its right to a trial by jury—an argument it would not have been able to raise if the contract contained a waiver of a jury trial, as many construction contracts do. The Appellate Division affirmed the trial court's holding. As to the constitutional issue, that the Act denied Capital Siding of its Sixth Amendment right to a trial by jury, the Appellate Division declined to rule on the substance of the issue. Rather, that court dodged the issue by noting that the issue had been improperly raised for the first time on appeal, and that Capital Siding had failed to provide the Attorney General with a required notice of its intent to challenge the constitutionality of the statute "at any stage of this proceeding".

As is implicit in the Appellate Division's note that Capital Siding failed to provide notice of its constitutional challenge "at any stage", the Appellate Division could have permitted Capital Siding to give that notice and permitted the Attorney General to be heard in support of the Act. However, the Appellate Division's decision not to do so means that the Prompt Payment Act survives–for now, until a challenger raises the issue before the trial court and provides the Attorney General with the required notice.

1 The Prompt Payment Act contains limitations as to what projects to which it is applicable.

The Critical Need for Record Keeping on Oral Agreements

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

Contractors, subcontractors and owners involved in residential or small scale construction projects often find themselves contracting through short-form, non-comprehensive written contracts or, sometimes, bare oral agreements. This is also common where extra work not contemplated in the original agreements becomes necessary. While contracting in definitive terms is generally the best plan, oral contracts have remained a part of the construction industry because some projects may seem to lend themselves to a simpler contract or an oral agreement. Counterintuitively, contracting on less-than-complete and/or oral terms often makes detailed record keeping even more critical for both owners and contractors. Such is particularly the case  when construction does not go as planned and the scope of work must be changed, or a contractor must be terminated.

The New York Appellate Division, Second Department, recently released a decision in the case of DiSario v. Rynston1 reminding of the critical importance of record-keeping on construction projects, especially those based on oral contracts. Rynston, a Suffolk County homeowner, sought to remodel his home and hired DiSario to perform the work, which included enlargement of the kitchen, remodeling of the master bath and painting of the master bedroom. The parties entered into an oral2 agreement that DiSario would perform all of the work for $48,000. While DiSario was performing the work, he discovered that there were various unforeseen extra work items that needed to be performed. Chief among these items was additional kitchen work attributable to the existence of a structural post not previously known, as well as an infestation of carpenter ants in the kitchen ceiling. Although none of these additional items were subject to the original agreed contract sum of $48,000, DiSario, with the homeowner’s consent, undertook to perform these extra tasks throughout the project. Eventually, the homeowner became dissatisfied with DiSario’s work and terminated him after paying only $15,000 of the agreed $48,000 contract price. Thereafter, DiSario demanded payment of the unpaid balance of  $27,000, which included allegedly unpaid contract work and agreed upon extras. The homeowner refused to pay any additional sum to DiSario, and DiSario filed a mechanic’s lien for $27,000. The Homeowner proceeded to complete DiSario’s scope of work with completion contractors.

DiSario brought an action to enforce the $27,000 lien, but was only awarded $7,000 of his claim. The lower court found that although DiSario could not sufficiently prove he performed $27,000 worth of work, he was able to prove that he performed $7,000 worth of work for which he was not paid. DiSario appealed the award seeking a greater payment and the homeowner cross-appealed, arguing that DiSario was not entitled to any award at all, and that he was entitled to compensation for its cost to complete DiSario’s work.

The Appellate Division, Second Department, reversed the court below and found in favor of the homeowner, holding that DiSario would not receive any payment for contract or extra work performed. The court pointed out that while DiSario was able to establish the existence of both the oral contract and the homeowner’s consent to the extra work, DiSario failed to produce the accompanying bills, invoices, receipts, timesheets, checks or other documentary evidence that supported that he performed any such work. DiSario apparently offered some oral testimony regarding the description and value of the work, but the court did not find it persuasive.

Interestingly, the homeowner’s counterclaim against DiSario for the increased cost to complete DiSario’s original scope was dismissed for similar reasons. The court found that the homeowner failed to provide documentary evidence of the description and value of alleged completion work, and found oral testimony on that point inadequate.

TAKEWAY: Owners and contractors alike need to engage in detailed record keeping, no matter the size of the construction project. Sometimes record keeping is required specifically in the contract documents, but that is not always the case and is even less common in smaller residential construction. Still, in the event something goes wrong on a  construction project of any size, witness testimony alone will often not be enough to convince a judge or jury that you are entitled to any payment. Use of simple agreements, especially oral contracts, should not be an excuse to relax record-keeping. Quite the contrary, such should instead warn of the necessity to keep especially detailed records of all contract and extra work. In the end, the party that keeps detailed records of work, including important information regarding the work such as dates, values of labor/materials and detailed descriptions, will likely have a much easier (not to mention less expensive) time winning its case. Contractor and owners undertaking a construction project would be well served to consult their construction attorney to ensure they employ adequate record keeping procedures in the event that litigation becomes necessary.

1 DiSario v. Rynston No. 2014-04072, 2016 WL 1355814, at (N.Y. App. Div. Apr. 6, 2016)

2 In some counties and in New York City, an oral agreement for home improvement contracting services is unenforceable by the contractor.

Federal Contracts, the Boards of Contract Appeals, and Federal Liability under Integrated Design and Construction Contracts

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

Those of you who work regularly at West Point, at Picatinny Arsenal, or for the General Services Administration know that most federal agencies employ informal in-house procedures to resolve contract disputes.  But what if those in-house procedures fail, and that the contractor must proceed against a federal agency?  What is the route for dispute resolution? 

In order to litigate a federal government contract claim, the contractor must proceed either in the United States Court for Federal Claims in Washington, D.C. or in one of the many Boards of Contract Appeals, such as, the Armed Services Board of Contract Appeals, the General Services Board of Contract Appeals, or the Civilian Board of Contract Appeals.  The advantage of appearing before Boards of Contract Appeals is that the trials are held in the general locale of the project.  The judges come to you.

These Boards of Contract Appeals, although administrative in nature, are not as favorable to the government agency as their status as a fellow government agency may suggest. One such case where the contractor prevailed in front of a Board of Contract Appeals was Kiewit-Turner, a Joint Venture v. Department of Veterans Affairs, which involved the construction of a Veteran Affairs (VA) medical center campus in Colorado.  The VA had awarded a contract for preconstruction services to Kiewit-Turner, a Joint Venture (KT) with an option for performance of construction services.  However, the design was already 50% complete when the VA hired KT.  All funding decisions had been made and the VA had established construction costs at $582 million.  At the 65% design phase, KT advised the VA that construction would cost $664 million.

The Board found that the VA knew that the design was over budget by approximately $200 million.  It found in addition that the VA failed to control its design team, failed to process change orders, failed to make timely payments, and drove up the costs of construction.  The Board found that under these circumstances, KT was entitled to stop work. The Board cited an engineer’s description of the VA team as the “least effective and most dysfunctional [VA] staff on any project that [he] had ever seen.”

Following the Board’s decision, the VA found additional funding to cover more than $150 million in delinquent payments to KT.  KT has resumed construction work on the project on a cost-reimbursable basis.

Prevailing on any claim, before a court or before a Board of Contract Appeals, requires properly documenting that claim and presenting it in such a manner as to show entitlement under the contract. You should contact your construction counsel as soon as you believe that you may have an issue so as to be able to sufficiently document your claim during the project, and so that you can have it properly presented afterwards.

A Troubling Trend: Co-Insureds on a General Liability Insurance Policy

Written by Gregory J. Spaun on . Posted in Legal Alerts.

In the ever competitive world for the insurance premium dollar, brokers are under increasing pressure to come up with novel ways to save their clients money. The typical way that brokers have accomplished this goal was to shop their client’s policy at renewal time, and by examining their client’s business so that they could tailor the policy to remove those coverages (generally by introducing exclusions to the policy) which are not specifically germane to the client’s scope of work—such as by removing coverage for EIFS issues from a site contractor’s policy.

With many policies already thoroughly shopped around, and with many others already tailored to remove unneeded coverages, some insurance brokers have started a troubling trend of placing a construction project owner and its general contractor, or a general contractor and its subcontractor, on the same general liability policy as co-insureds. This process is loosely modeled after what are commonly known as “wrap-up” programs, or owner (or contractor) controlled insurance programs (OCIPs/CCIPs). These OCIP/CCIP programs place the owner, the general contractor and all subcontractors on a construction project onto a project-specific group insurance policy. There are, of course, issues which need to be dealt with in the context of an OCIP/CCIP, such as, for instance, whether a contractor’s off-site operations (at its fabrication shop) will be covered under the OCIP/CCIP program. However, by placing all parties to a construction project with a common insurance carrier, the inevitable cross claims asserted in a lawsuit (fighting over which contractor bears ultimate responsibility) are not as important to litigate because the claim is covered by the same OCIP/CCIP policy. By reducing, or even eliminating the need to engage in expensive in-fighting, the premiums for such programs tend to be lower.

With the so called joint policy, because not all parties to the construction project are intended to be co-insureds, the issue of cross claims remain. In order to get around the cross-claim exclusion common in most general liability policies, some carriers have attempted to draft amendments to the common cross suits exclusion which purport to not apply the exclusion to certain suits between Co-Insured A and Co-Insured B. A sample of such a form can be found by clicking here. Questions often arise as to whether a form such as the example sufficiently “excludes the exclusion”. Even in the example form, the exclusion only applies to property damage claims (thus still excluding cross claims in personal injury lawsuits) and completed operations (thus still excluding cross claims in lawsuits where the co-insureds are still working). Regardless, these amendments are generally illegal in New York.

Chapter 11 of New York Codes, Rules and Regulations governs financial products, including insurance. Paragraph c of Section 153.3 of Chapter 11 of the NYCRR prohibits group policies from being issued, except where:

(1)        the group is homogeneous in nature, based upon standards acceptable to the superintendent;

(2)        the group is formed for purposes other than obtaining insurance;

(3)        the group consists of at least ten group members engaged in similar activities giving rise to similar risks, based upon standards acceptable to the superintendent, except that a smaller number of members, but not less than five, may be covered on a group basis where each such member generates at least $5 million in annual revenues or annual premiums for such group total at least $500,000;

(4)        group members are either public entities or nonprofit organizations; and

(5)        coverage includes any kind of property/casualty insurance, but not a kind specified by section 1113(a)(16), (17), (21), (22), (23) or (25) of the Insurance Law.

Clearly, a co-insured arrangement like the one referenced above: 1) is not homogeneous in nature (being comprised of a construction contractor and a non-contractor, or two different trade contractors), thus violating ¶ c(1); 2) is formed for the purpose of obtaining insurance, thus violating ¶ c(2); 3) does not consist of at least 10 members (or 5 under the conditions referenced), thus violating ¶ c(3); and 4) does not include group members who are public or nonprofit entities, thus violating ¶ c(4). OCIP/CCIP programs get around these prohibitions by virtue of the the fact that policies covering shared interests are not defined as group policies (but only to the extent of those shared interests). Since an OCIP/CCIP policy is project specific, the interests of the insureds are shared. By the same account, because the OCIP/CCIP policy covers only the one project, it covers only those shared interests.

On the other hand, the practice of simply placing both an owner and a general contractor, or a general contractor and a subcontractor on a single policy as co-insureds fails that “only to the extent” test because, unlike an OCIP/CCIP policy limited to one specific project, a joint policy insures both entities for all risks, whether shared or not. As such, it is defined as an impermissible group policy. Where brokers try to get around this problem by restricting the policy to a single project, thus ensuring that all risks are shared, the problem of the cross claims exclusion still exists. This problem most often surfaces where there is a potential for the injured party’s claim to exceed policy limits (such as the young union construction worker who will never work again, where even “straight line” economic damages are easily into the millions of dollars). In such instances, it is likely that even where two entities are co-insured the owner entity will need to assert a cross-claim against the contractor (employer) entity, thus giving the carrier a reason to trigger the cross-suits exclusion and vitiate coverage. The carrier may also pre-emptively use this exclusion to deny coverage because of the possibility of such claims (and contend that such claims were not actually asserted solely to keep coverage intact). In practicality, the Co-Insureds may simply be buying themselves additional litigation against their carrier on the coverage issue—in addition to the underlying negligence action that they sought to be insured against in the first place. To truly deal with this problem, the cross claim exclusion needs to be removed from the policy in its entirety—something which carriers are loathe to do.

In sum, insurance brokers, insurance carriers and their clients would be cautioned against engaging in such joint policy practices. Of course, all would be well advised to consult with their attorneys to determine whether their insurance policy qualifies as a permissible OCIP/CCIP, an impermissible group policy that violates the above (or other applicable) regulations, or something in between.

Be Careful What You Lien For or You May Not Get It

Written by Paul G. Ryan on . Posted in Legal Alerts.

Mechanic’s liens are a way for architects and engineers to protect themselves for work that they have performed and not yet been paid for. But what work can architects and engineers actually claim in a mechanic’s lien? When filing a lien in New York, the property owner against which the lien was filed has the right to ask for an Itemized Statement, outlining all the items, materials, and labor that are being claimed within the lien. (Lien Law § 38). Your description of the work performed or services provided can possibly form the basis for the lien to be disputed?

This type of dispute arose in a recent decision (1/6/16) in the case of Maverick Construction Services LLC v. 868 Broadway Corp.. The case began with an agreement between Defendants, Douglas Dey and 868 Broadway Corp., and Third-Party Defendant, Walter Sedovic Architects (WSA), whereby WSA agreed to provide certain architectural services for renovations and improvements to the premises at 868 Broadway, NY, NY. On July 7, 2011, WSA filed a Notice of Mechanic’s lien (the Lien) claiming that they were still owed $122,621.83 for services performed. On or about December 1, 2011, WSA assigned their rights, title, and interest in their claim against the Defendants, as well as the lien, to the Plaintiff, Maverick Construction Services LLC.

On August 27, 2013, in response to a Lien Law § 38 Demand, Maverick served an Itemized Statement setting forth the labor and materials for which WSA claimed a lien. On 1/24/14, per Lien Law§19(4) the mechanic’s lien was discharged by substitution of bond in the amount of $134,884, representing 110% of the amount claimed.  Upon Plaintiff’s filing of a motion per Lien Law §19(4) and CPLR §2508 for an order directing Defendants to post further security, the Defendants filed a cross-motion for summary judgment and argued that the Lien was defective and should have been cancelled and vacated pursuant to Lien Law § 19. Specifically, the Defendants argued that the work itemized by WSA and the Plaintiff, in its Itemized Statement, consisted almost entirely of generic charges for “construction administration” work, which does not qualify as “architectural work.” In order for the charges to be a valid basis for a mechanic’s lien filed by the architect, the Defendants argued that the work needed to specifically include supervision, management and control of the construction project. In opposition to the Defendants’ claims, the Plaintiff argued that the Lien is subject to a liberal construction, and that the validity of specific charges in the itemized statement are issues for trial.

The court ruled that the Lien met all the statutory requirements of Lien Law § 9; therefore the Lien was valid on its face. The court also concluded that because the Lien was valid on its face, the validity of specific “architectural service” charges under the Lien were to be determined at trial. Therefore, Defendants’ motion for summary judgment to dismiss the lien was denied.

Although the architect in Maverick dodged the dismissal of its lien, the case serves to warn against filing a lien for services which do not fall under the Lien Law, and further demonstrates the importance of clearly itemizing the work that was performed and the services provided to ensure that it falls within the confines of the Lien Law.  In other matters, the courts have looked at statements provided by parties in support of liens. For example in Sperry v. Miller a statement furnished by a lienor which did not specify all items of skilled and unskilled labor furnished by the lienor and the various kinds of materials furnished for improvement failed to  comply with the requirements of Lien Law § 38. 5 N.Y.S.2d 249, 249-50 819 (App. Div. 1938). Additionally, itemized statements of the lienor consisting of copies of invoices, which the lienor asserted included all items of materials furnished, and lump sum statement of money representing labor furnished was also insufficient for the courts. Application of Seid, 219 N.Y.S.2d 962, 963 (Sup. Ct. 1961).

In order to protect your lien rights, make sure the services provided are allowable under the Lien Law and be very specific as to the services performed. Organization and proper documentation are the key.