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Adequate Protective Systems Must Be Present During Excavations at All Times

Written by Costas Cyprus on . Posted in Safety Policy.

The Decision in Secretary of Labor v. Petrongolo Contractor’s Inc. is an instructive case for contractors especially those involved in excavation and highlights multiple issues regarding the Occupational Safety and Health Review Commission (the “OSH Commission”) process, the burden of proof and severity of penalties and the considerations made by the Administrative Law Judges who hear these matters.

Petrongolo Contractor’s Inc. (“Petrongolo”) is a public utility contractor primarily engaged in excavation work. On January 27, 2020 it was excavating a trench in a city street in Philadelphia to access a sewer line owned by the Philadelphia Water Department (“PWD”). Petrongolo had to remove the existing manhole and replace it with a larger precast manhole for its subcontractors to be able to access the sewer for relining. Petrongolo removed the existing manhole and dug a trench which was about 10 feet deep from street level to the top of the sewer pipe and the footprint of the trench was 10 x 6 feet. The gas utility, Philadelphia Gas Works (“PGW”) had its own gas main running parallel to the sewer line, and it became concerned that Petrongolo’s excavation would compromise the integrity of its gas main, and its employee caused Petrongolo to stop work, in the early evening on January 27, 2020. PGW’s employees took pictures of the trench in the evening of January 27 and the morning of January 28 and contacted OSHA to report a hazardous excavation. OSHA sent one of its Compliance Safety and Health Officers to the site on January 28, 2020 which led to the issuance of two citations under Safety and Health Regulations for Construction’s Requirements for Protective Systems under 29 C.F.R. § 1926.652(a)(1) and (c)(1).

Citation # 1 alleged a serious violation of Design Support Systems utilizing published appendices for the design of timber shoring in trenches with a proposed penalty of $3,393. Citation # 2 alleged a repeat violation “for failing to ensure that each employee working inside an excavation of approximately twelve (12) feet deep were protected by cave-in protection” and proposed a penalty of $29,687. To establish a violation of such standard, the Secretary (of Labor) must prove by a preponderance of the evidence (the legal standard where a party is able to convince a fact finder that there is a greater than 50% chance that their claim is true) the following: (1) the cited standard applies; (2) there was non-compliance with its terms; (3) employees had access to the violative condition; and (4) the cited employer had actual or constructive knowledge of the violative condition.

The matter was brought before the Commission with remote hearings and submissions before the Administrative Law Judge (“ALJ”) who decided that the Secretary failed to prove by a preponderance of the evidence (a legal standard where a party is able to convince a fact finder that there is a greater than 50% chance that their claim is true) that Petrongolo failed to obtain the soil type in determining the proper configuration of timber shoring that was installed on January 28, 2020. Consequently, Citation # 1 was vacated.

However, the ALJ found that the Secretary proved (by a preponderance of the evidence) that Petrongolo employees were working in a trench that lacked an adequate protective system and that Petrongolo had knowledge of it. Further, Petrongolo failed to rebut the Secretary’s showing that this violation was similar to Petrongolo’s prior violations of the same standard and thus constituted a repeat violation warranting a $22,000 penalty.

Citation # 1 alleged that Petrongolo failed to obtain the soil type to determine the proper configuration when using timber shoring in accordance with the conditions and requirements set for in appendices A and C of § 1926.652(c)(2). Appendix A requires a “competent person” to perform at least one visual and one manual test on the soil to determine soil type and it sets for a series of acceptable visual and manual tests. Petrongolo’s president who was a registered professional engineer with years of experience in testing soil and performing excavations in the local area was deemed a “competent person” and his manual and visual test of the soil were in conformance with the requirements. Even if Petrongolo’s president had failed to conduct the visual and manual tests, the determination that the soil type was “Type C” (the least stable soil type as per the classifications under Appendix A), pursuant to the OSHA’s own interpretations, made “soil testing … superfluous and not required” if the protective system is adequate to protect against cave-ins in Type C soil.

Citation # 2 alleged that Petrongolo failed to provide adequate safety devices for cave-in protection to workers inside an excavation of approximately twelve (12) feet deep. The trench was over five feet deep and constituted as hazard for as long as it was open and lacked an adequate protective system from the time the steel plates covering it were removed up until the time Petrongolo’s crew completed installation of the timber shoring. The photographs taken by PGW’s workers showed workers inside the trench and the fact no other contractor or subcontractor had been working in the trench area provided sufficient circumstantial evidence that Petrongolo’s own employees were working in that area. Moreover, the ALJ found that since Petrongolo’s foreman was present at the site, and gave directions to the employees, he would have had actual knowledge of the of violative condition, or at minimum, based on the weight of the evidence, he could have discovered or prevented the employees’ violative conduct so as to impute constructive knowledge on Petrongolo.

Petrongolo had been previously cited for violations arising from failures to provide adequate protective systems for which it had entered into settlement agreements. Here, the ALJ found that the Petrongolo employees had been exposed to substantially similar, although not identical [cave-in] hazards that led to those two prior violations.

In assessing penalties, consideration is given to four criteria 1) The gravity of the violation; 2) The size of the employer’s business; 3) The employer’s good faith; and 4) the prior history of violations. Gravity (of risk) is the primary consideration and determined by factors such as the number of employees exposed, duration of the exposure, precautions taken against injury and likelihood that an injury would result. Here, the gravity of the violation was considered high, and coupled with two similar prior violations for the same standard within two years clearly constituted a prior history and lack of good faith. However, the business’ small size was also considered. In light of all these circumstances, a $22,000 penalty was assessed.

This matter shows that adequate protective systems must be in place during excavation work when it is contemplated that workers will be present within a trench, as it is an open hazard, even during the interim. In this case, the timber shoring protective system that was ultimately installed was proper but adequate protective systems had not been installed throughout the entire time that employees actually worked in the trench as documented by photographs taken by PGW’s employees, creating a cave-in hazard and leading to the citations. Moreover, a contractor’s prior violation history for substantially similar violations will be considered during the assessments any penalties.

If you would like more information regarding this topic please contact Costas Cyprus at ccyprus@wbgllp.com or call (914) 607-6445

Court Permits Fraudulent Inducement Claim To Proceed

Written by Gregory J. Spaun on . Posted in Safety Policy.

When a construction contractor egregiously fails to perform its obligations under a contract, it is easy for one’s mind to turn to fraud. First, it’s a provocative claim to make, given its quasi-criminal nature. Next, it’s a natural human defense to believe that one could not have erred in the selection of such a bad contractor without some untoward input. Either way, it also has the benefit of bringing a corporation’s principal into a lawsuit that they may otherwise not have been brought into. However, while it’s an easy claim to want to make, a court, in the recent case of Hunter Roberts Construction Group LLC v Vector Structural Preservation Corp., reminds us that the claim is not an easy one to assert.

Background

In early 2017, Hunter Roberts Construction Group entered into a general contract with RXR Realty for the construction of a project known as Garvies Point in Glen Cove. Hunter Roberts, like many larger general contractors, maintains a subcontractor default insurance program, and it requires the enrollment of all subcontractors. As a part of this process, Hunter Roberts uses a third party subcontractor qualification and risk mitigation agency to perform risk assessments of subcontractors who are to be enrolled in the SDI program. Vector Structural Preservation Corp. submitted a bid to Hunter Roberts for the masonry scope of work for the project, and it was required to submit a response to a questionnaire for enrollment in the SDI program. Hunter Roberts alleges that the responses Vector’s principal, Vassilios Handakas, provided to the questions about prior criminal investigations and ongoing legal matters were patently false. Based on the determination that Vector was the “lowest responsible bidder” (which was based on the false response to the questionnaire), the subcontract was awarded to Vector.

As the job progressed, Vector delayed the project, and was delinquent in paying its vendors and employees. In March of 2019, Hunter Roberts defaulted Vector based on these shortcomings and, ultimately, terminated the contract. In addition to suing Vector based on the claimed breaches of contract, Hunter Roberts sued Handakas, personally, for fraud, and to hold him liable for Vector’s debts, alleging that he abused the privilege of doing business in the corporate form (“piercing the corporate veil”). As to the fraud claim, Hunter Roberts alleged that if it had known that Handakis was previously convicted of money laundering and other financial crimes, and that Vector was the defendant in numerous lawsuits brought by suppliers and subcontractors alleging non-payment, it never would have awarded Victor the subcontract. Handakas moved to dismiss the corporate veil claims, arguing that the allegations did not rise to the high level required to hold him personally liable for the corporation’s debts, and both Vector and Handakas moved to dismiss the fraud claim, arguing that the fraud claim (and damages) were simply duplicative of the contract claim, and did not rise to the level required to establish a claim for fraud. Handakas further argued that his representations could not have been reasonably relied upon because his criminal past was easily discoverable with a simple google search.

Decision

The court split its decision. First, it dismissed the “corporate veil” claim to hold Handakas personally liable for the corporation’s debts, finding that there were no specific allegations which would meet the high burden required to set aside Vector’s corporate form and hold Handakas personally liable for its debts. However, the court denied the motion insofar as the fraud claim and permitted it to proceed. In doing so, the court held that Hunter Roberts sufficiently alleged that it relied on Handakas’ false representations to its detriment when it rejected other subcontractors and awarded the contract to Vector. The court also held that Hunter Roberts sufficiently alleged that it incurred specific damages as a result of the fraud which were distinct from the breached contract, to wit: the damages incurred to clean up the aftermath of Vector’s failures, such as paying Vector’s suppliers. As to Handakis’ argument that the reliance could not have been reasonable when a google search would have turned up the information on his past, the court, following well settled case law, held that in the absence of “hints of falsity”, the party to whom the representation was made has no heightened burden of investigation. As such, the question as to whether the reliance was reasonable would have to be determined by a jury, and could not be determined upon a motion to dismiss. Finally, as to the fraud claim against Handakis himself, as opposed to Vector, it permitted the claim to proceed because “a corporate officer who participates in the commission of a tort can be held personally liable even if the participation is for the corporation’s benefit”.

Comment

A popular strategy in litigation is to figure out a way to sue (and keep in the case) a corporation’s principals. This has not only the practical effect of providing another pocket from which to recover (in the not unheard-of event that the corporation is insolvent), but it also may give the principal an extra incentive to resolve the case. A popular way to accomplish this is to level a fraud claim against the principal; another way is to claim that the corporation’s principal abused the privilege of doing business in a corporate form. As Hunter Roberts shows, while these are high burdens, they are not impossible to meet. As can be seen from the split decision here, the crucial difference was the specificity of the allegations in support of each claim. The allegations made in support of the claim to disregard the corporation were conclusory and generic, so they were not sufficient to meet the high burden required to support that claim. However, the allegations made in support of the fraud claim were detailed as to the scope of the fraud, and its results. Accordingly, because the allegations were specific enough to allege a tort committed by Handakis individually, the claim was allowed to proceed to discovery.

The lesson here is that in discussing your matter with construction counsel, do not feel that any detail is too small, as detailed allegations can potentially be helpful in drafting a claim which is sufficient to bring in a corporation’s principals into a lawsuit—and keep them there.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Court Permits Oral Guarantee Claim To Proceed After Bankruptcy Of Owner

Written by Gregory J. Spaun on . Posted in Attorneys' Column.

It is not unusual of that an owner, or an upstream contractor, encounters financial difficulties during a project which jeopardize—or completely stop—the contractor’s payments. However, in today’s modern world, the owner may be but a cog in a larger wheel, with ramifications suffered by others who are somehow related to, or set to benefit from, the construction (such as lenders, parent entities, and others). In such instances, in order to salvage the benefits of the construction, those related to the owner may agree to pay the contractor to finish its work in place of the owner, or even pay the contractor for the previous, unpaid work. An appellate court, in the recent case of Villnave Construction Services, Inc. v Crossgates Mall General Company Newco, LLC, reminds us that such agreements must generally be in writing, and that the exceptions to that general rule are narrow.

Background

In 2016, defendant Albany MIB+K, LLC leased a space at the Crossgates Mall with the intention to operate a franchise of Waxy’s Modern Irish Bar and Kitchen. In March of 2017, defendant Waxy O’Connor’s Management Company, the franchisor and representative of the Waxy’s brand, worked with MIB+K to negotiate a construction agreement with defendant Trinity Building and Construction Management Corp., for the construction, and to ensure that the buildout would be consistent with other Waxy’s locations.
After construction commenced, MIB+K began to fall behind on payments. In order to have the construction continue, Waxy O’Connor’s Management Co., and defendants Ashok Patel, Amisha II, LLC, and Jasmine Hotel Management (the group of which were all somehow related to Waxy O’Connor’s), and defendant Crossgates Mall Devco, LLC (the Mall), promised to pay Trinity if Trinity would continue the construction. Shortly thereafter, when MIB+K filed a bankruptcy petition, Trinity’s principal reached out to the Waxy’s Group and the Mall to ascertain their intentions. The Waxy’s Group and the Mall responded by orally committing to pay Trinity for its continued performance, so long as Trinity would not suspend its work under the contract (as was its contractual right) based on MIB+K’s failure to pay. Based on these oral promises, Trinity continued to perform under the contract. However, Trinity only received a partial payment from one of the Waxy’s Group.
Ultimately, when MIB+K’s lease was terminated based on the non-payment of rent, one of Trinity’s unpaid subcontractors filed, and sued to foreclose, a mechanic’s lien. Trinity cross-claimed against the Waxy’s Group and the Mall to recover on the oral promises of payment, specifically asserting claims for unjust enrichment, promissory estoppel, and breach of the guarantee. The Waxy’s Group and Mall defendants moved to dismiss, arguing that the unjust enrichment claim failed in light of the express written contract between Trinity and MIB+K, and that the alleged guarantee promises were not enforceable as they were not in writing.

Decision

First, as to the unjust enrichment claim (and as this column has repeatedly noted), under controlling case law, such claims generally fail in the presence of an enforceable written contract covering the subject of the unjust enrichment claim. However, because of MIB+K’s bankruptcy filing, the enforceability of that contract was called into legal question (since the bankruptcy court has the authority to discharge the contract). Accordingly, the court held that the unjust enrichment claim could be asserted as an alternate to what may be an unenforceable, discharged contract.
Turning to the oral promises, the court also correctly noted (as this column similarly noted in our October, 2020 issue) that generally, such promises have to be in writing in order to be enforceable. However, here, unlike in the case referenced in the previous column, Trinity alleged that it entered into an agreement to not only perform under the old contract with MIB+K, but it also agreed to refrain from terminating its contract with MIB+K—even though it had the legal right to do so. This delay in terminating its performance under the contract benefitted the Waxy’s Group and Mall defendants by permitting them time to avoid their own personal obligations under the defaulted MIB+K lease. Given these allegations of new consideration—separate and apart from those obligations that Trinity was already under—and the new benefits to be realized by the promisors, the narrow exception to the Statute of Frauds (a law requiring certain agreements to be in writing) could apply, and the claim was permitted to proceed to discovery on this issue.

Comment

It is always comforting for a contractor, when faced with financial difficulties of an owner or an upstream contractor, to find solace in another’s promise to pay. However, such oral promises are generally unenforceable unless they fit into a narrow exception. Accordingly, the gold standard, of course, is to get such promises in writing. Failing that, you should consult with experienced construction counsel so that you can take actions, similar to those referenced by the court here, which will permit you to allege, and ultimately show, that the promise to pay is supported by new, additional consideration (such as not exercising a right you would otherwise have exercised under the contract), and the new promise benefits the promisors directly in some way. Essentially, you are making a new contract, so be prepared to treat (and document) it as such. After all, and as we have often cautioned: if it ain’t in writing, it didn’t happen!

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Court Enforces Whistleblower Protection Statute In Face Of Contract Permitting Owner To Direct Discharge Of Contractor’s Employee

Written by Gregory J. Spaun on . Posted in Attorneys' Column.

While this column often deals with issues relating to the construction industry, it is sometimes overlooked that construction contractors are, more generally, employers, just like those outside the construction industry. Those generally applicable rules, however, can be just as easy to run afoul as those which are uniquely applicable to the construction industry. In the recent case of Shevlin v Wonder Works Construction & Development Corp., a Court reminds us that New York’s generally applicable whistleblower protection statute (Labor Law §740) is also applicable to construction contractors.

Background

Prior to 2013, Wonder Works Construction Corp. entered into a contract with 421 Kent Development, LLC for Wonder Works to be the construction manager for a construction project at 421 Kent Avenue in Brooklyn. The contract between Wonder Works and 421 Kent provided that “[421 Kent] reserves the right to direct the removal of any of [Wonder Works’] staff for cause (at [421 Kent’s] sole discretion) including Key Personnel, and [Wonder Works] shall promptly replace such individuals with competent substitutes acceptable to [421 Kent]”. 

In 2013, Scott Shevlin was hired by Wonder Works to be a site superintendent at the 421 Kent Avenue project. At the commencement of the project, the 421 Kent Avenue site was surrounded by a fence around three sides, which had been left by the previous owner. The site was divided by a private street, which was guarded by rolling gates that were supposed to have been closed when not in use. The New York City Department of Buildings required that Wonder Works both build an interior fence on the fourth side of the site, and keep the rolling gates closed when not in use, in order to safeguard the site as a condition of lifting a previous stop-work order. If the gates were left open, the public would use the private street as a shortcut between two local thoroughfares.

A problem arose with the site’s neighbor, who preferred to leave the rolling gates open for his own convenience. As DOB continued to warn Wonder Works about leaving the gates open, Shevlin would close them. Both Wonder Works’ vice president and 421 Kent Development’s site representative would tell Shevlin he should leave the gates well enough alone, and that they did not care about whether the gates were open or closed. This indifference was communicated to Shevlin several more times prior to his termination, and Shevlin, pursuant to both DOB’s and his immediate supervisor’s instructions, would insist on keeping the gates closed. 

In January of 2014, Wonder Works received a letter from 421 Kent Development’s site representative directing Wonder Works to replace Shevlin with “alternative competent personnel for cause”, claiming that “Shevlin has demonstrated a lack of fiduciary responsibility and a retaliatory approach in dealing with daily issues”. In response, Wonder Works terminated Shevlin’s employment. In subsequent correspondence between Shevlin and another Wonder Works principal, Shevlin was advised that the termination was the owner’s decision, and that Shevlin did nothing wrong.

Shevlin commenced a lawsuit under New York’s Whistleblower Protection Statute, Section 740 of the Labor Law, against both Wonder Works and 421 Kent Development, alleging that he was terminated for insisting on keeping the gates closed, even though it caused consternation with the neighbor. Wonder Works and 421 Kent Development both claimed that the termination had nothing to do with the rolling gates issue. Wonder Works also claimed that in light of its contract with 421 Kent Development, it was required to terminate Shevlin and had no discretion in the matter; 421 Kent Development also claimed that it could not be held liable because it was not Shevlin’s employer.

Decision

A non-jury trial was held on Shevlin’s claim, and the court credited the testimony that there were no complaints about Shevlin’s employment other than his insistence on keeping the gates closed, and discredited the testimony that his firing was unrelated to the access issue. In order to find a violation of the version of Section 740 in effect at the time, the court also had to find that there was, in fact a violation of a statute, code, etc. The court found such a violation of Section 3307.3.4 of the Building Code, which requires that openings in fences, sidewalk sheds, barriers, and railings be closed at all times except during actual loading and unloading operations, and the court linked Shevlin’s termination to his insistence on keeping these gates closed. (The current version of the statute only requires that the employee have a reasonable belief about the violation of a statute, code, etc., not that the violation actually exist). 

The court found that Wonder Works’ defense of just following the contract was unconvincing, holding that while the contract did give 421 Kent Development the right to remove Wonder Works’ employees “for cause”, as determined to exist in the sole determination of 421 Kent Development, it could not require Wonder Works to violate applicable law in doing so. As to 421 Kent Development, even though it was the root cause of Shevlin’s termination, it was not liable because the statute was specifically made applicable to employers, and 421 Kent Development was not Shevlin’s employer. Based on these findings, the court dismissed the case against 421 Kent Development, and it directed Wonder Works to pay Shevlin $227,000 in back pay, plus his attorney’s fees.

Comment

In dealing with contractual provisions between parties, this column has routinely cautioned that obligations should be made consistent both upstream and downstream (e.g.: if a GC’s contract with the owner requires arbitration, the GC should require arbitration of its subcontractors). As the Shevlin court reminds us, those obligations must also be consistent with state law, including generally applicable employment law. As Wonder Works learned here, the defense of “just following the contract” was not sufficient to save it from a significant lost wages claim—plus potentially over $50,000 in attorney’s fees.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Respondent in Citation Contest Proceeding Scores Rare Win Via Summary Judgment

Written by Costas Cyprus on . Posted in Safety Policy.

Citation contest proceedings before the OSH Review Commission, while subject to specialized procedural rules, for the most part are litigated under the Federal Rules of Civil Procedure, as govern civil lawsuits in the U.S. District Courts.

Thus, while the same is infrequently resorted to, contest proceedings are subject to the summary judgment procedures of the FRCP.  For you nonlawyers, summary judgment permits courts to better manage their dockets, curtail proceedings, and avoid trials, in the limited class of cases in which either side can show convincingly that there are no “material facts” (i.e., facts on which the outcome of the suit depends) as to which there exists a genuine dispute requiring a trial.

While summary judgment is to be employed sparingly, it is appropriate where all of the facts that will determine the outcome are admitted, or the evidence concerning them is so one-sided that it is obvious that the party moving for summary judgment must prevail as trial.

The party deeming itself entitled to summary judgment presents a motion to the court, annexing evidence (transcripts of pretrial deposition testimony, probative documents, etc.) and a legal memorandum explaining the basis for the motion. In assessing whether genuine fact issues exist, the court must resolve all ambiguities, and draw all reasonable inferences, in favor of the nonmoving party.

In my many .years of experience litigating in federal and New York state courts, I have observed that, while judges look with favor on opportunities to pare their trial dockets, they are aware that appellate rulings overturning orders granting summary judgment greatly outnumber those reversing denials of summary judgment.  Where the issue is doubtful, therefore, such a motion is unlikely to succeed.

In my extensive review of decisions in citation contest proceedings, I have seldom seen summary judgment attempted .by employers, no doubt in large part because preparing papers, and arguing such a motion, is labor-intensive on the part of the respondent’s counsel (which is to say, expensive).  In the usual case, the penalty amounts at issue are often far less than in federal civil lawsuits, and the legal costs to be saved by a successful motion are often not enormous (.as pretrial discovery procedures are less extensive than in regular lawsuits, and lengthy trials are uncommon).

However, as illustrated by Secretary v.  Harvestland Constructors, Inc,,  a garden-variety fall-protection case, it may be worth asking your attorney to ponder whether the Secretary’s case has an ”Achilles’ heel,” that could make it susceptible to a summary judgment motion.

Harvestland involved a single-item citation, alleging that the employer had violated the OSH Act, by exposing employees to falling through holes in elevated working/walking surfaces by the nonuse of personal fall arrest systems, covers, or guardrail systems erected around such holes.

Most of the relevant facts in this case were undisputed.  An experienced, 66-year-old carpenter, had a continuing assignment to identify and cover uncovered holes in the flooring on a project in Georgia.  Most of these “penetrations” had been created to allow equipment to be passed from one level of the floor to another.  When a hole was observed, this individual, named in the decision as “Carpenter NM,” would cover it with ¾” plywood, and secure the plywood sheeting with cleats, nailed in to prevent slippage.

On the afternoon of the day in question, Carpenter NM, who had been performing this work on the project for about 3 weeks, was working alone (as he usually did) on the second floor of the structure.  

All Harvestland employees were required to use fall protection when working 4’ or more above ground level, supervisors inspected the site several times daily for compliance, and an outside consulting firm performed monthly safety inspections. This employer had a site-specific safety plan, conducted weekly safety meetings, and sent home workers observed to be in violation of safety rules.

Carpenter NM was up-to-date in his training, had been supplied with a personal fall arrest system, and had often been observed utilizing fall protection.  In five years of employment with Harvestland, he had never been cited for safety violations.

On his last afternoon, Carpenter NM covered and nailed down the cleats on nine of thirteen openings existing on the second floor.  About ten to fifteen minutes after returning from a break, he fell through an  uncovered hole, and plunged 38 feet to his death.  For reasons unknown, he was not wearing fall protection at the time.

Of the four elements constituting the Secretary’s burden in order to prove the violation, three were open-and-shut in favor of the government.  Since Carpenter NM was working on a surface with openings far above the floor below, the necessity for fall protection was clear.  Two additional elements — namely, a failure to comply with the fall protection standard and employee exposure — were established beyond question by the fact that Carpenter NM was not using fall protection when he fell 38 feet.

However, three elements out of four will not do, and on the fourth element — actual or constructive knowledge of the violative condition on the employer’s part — Harvestland prevailed, winning summary judgment and the vacatur of the citation.

The Secretary, as the Court found, had to prove either that the employer (through a supervisor) had actual knowledge of the infraction, or that its inadequate safety program was such that a finding of constructive knowledge could be made, based on the conclusion that had the employer exercised due diligence, the violation would have come to a supervisor’s attention.

In a detailed analysis set forth in her decision, the ALJ ruled for Harvestland, because there was no triable issue that it had actual or constructive knowledge that the decedent had been working around openings in the floor without fall protection.  The judge cited facts (many of them corroborated by the testimony of the Compliance Officer) concerning (among other things) the employer’s work rules, and its generally praiseworthy safety training, surveillance of its workforce, and rule enforcement.  Since these factors disproved constructive knowledge, and no basis existed to find actual knowledge, the citation had to be vacated.

The ALJ rejected, as immaterial, the Secretary’s contention that the arguably defective condition of a nylon strap on the harness that Carpenter M was not wearing established the violation.

Not many contests will present a strong case for summary judgment, but given the unpredictably of trials generally, and what witnesses will testify to in particular, your case should be carefully analyzed to determine if summary judgment might offer prospects of success.

Geoffrey S. Pope, an attorney practicing construction law and commercial litigation, after many years with Welby, Brady & Greenblatt, LLP, is joining the firm of Cermele & Wood, LLP, in White Plains, New York.  .The articles in this series do not constitute legal advice, and are intended for general guidance only.

If you would like more information regarding this topic please contact Costas Cyprus at ccyprus@wbgllp.com or call (914) 607-6445

Appellate Court Enforces Waiver Of Consequential Damages

Written by Gregory J. Spaun on . Posted in Attorneys' Column.

References to consequential damages are often found in construction contracts, without appropriate appreciation as to what, exactly, those damages are. These references are most often found in mutual waivers of such damages; but the question is begged as to what, exactly, is being waived. In the recent case of Lam Platt Street Hotel LLC v Golden Pearl Construction LLC, an appellate court reminds us that waivers of consequential damages are strictly enforced. Accordingly, contractors would be well advised to appreciate the full import of such clauses.

Background

In 2011, Lam Platt Street Hotel LLC entered into an agreement to construct a hotel near the South Street Seaport, and Golden Pearl Construction was retained as the general contractor. The form of contract was an AIA A101/201 combination, which contained a time of the essence clause requiring completion before Super Bowl XLVII, which was held in February of 2014 in (as much as the “New York” football teams eschew the name) nearby East Rutherford, New Jersey. The contract also contained provisions governing termination for cause, which required certification by the project’s architect that the general contractor was in default (and which would also permit Lam Platt to suspend its obligation to make further payments to Golden Pearl until the completion of the project), and for convenience (which required that Lam Platt pay Golden Pearl for all work completed through the termination date). Finally, the contract contained a mutual waiver of consequential damages, which expressly included “rental expenses, loss of use, income, profit, revenue, financing, business and reputation”. 

During construction, disputes arose between Lam Platt and Golden Pearl over extra work and payments, and Golden Pearl’s alleged failure to properly staff the project. In December of 2014, Lam Platt and Golden Pearl ostensibly resolved their differences, and the project’s time and price were increased. Unfortunately, this agreement was not the last word on these subjects, and the relationship broke down. In June of 2015, Lam Platt terminated Golden Pearl’s contract, without specifying whether the termination was for cause or for convenience, but also without any certification by the architect. Because there was no architect’s certification, Golden Pearl rejected any claim that the termination was for cause. (Ultimately, the architect refused to certify that the termination was for cause, citing its own contract and claiming that it had no such responsibility to do so.) Golden Pearl subsequently filed a mechanic’s lien against the property, claiming that it was owed nearly $3.2 million.

In February of 2017, Lam Platt sued Golden Pearl for breach of contract, seeking, amongst other damages, delay costs and the profits it would have realized if the project had been completed in time for the Super Bowl. Golden Pearl moved to dismiss this claim, arguing that the damages that Lam Platt sought were specifically barred by the waiver of consequential damages contained in the contract. 

Decision

The motion court granted Golden Pearl’s motion, and the appellate court affirmed. In doing so, both courts cited to well settled case law that an agreement between the parties to allocate the risk of loss via a waiver of consequential damages must be enforced as written.

Comment

As the courts here noted, a waiver of consequential damages is, essentially, an agreement as to how the risk of a breach is to be allocated. To best understand that risk, one must understand what “consequential damages” really are: damages which flow indirectly from the breach (as a consequence of that breach), rather than those which are caused directly by the breach. Unfortunately, this language is not often clear to attorneys, and is frequently the subject of endless argument and court ruling. The best way to illustrate the difference is by example: direct damages often include the cost to repair defective work, the cost to complete incomplete work, the payment owed under the contract, the loss of value of a project as a result of improper work, and the profit the contractor would have received if it had been permitted to complete the job and not improperly terminated; consequential damages, on the other hand, often include lost profits from the intended use of the project, lost rents, or lost profits on jobs not taken because the contractor was tied up on the disputed project (to be contrasted from lost profits on the revenues not realized because of an improper termination, which are considered direct damages), extended overhead and delay costs, increased financing costs, and even lost bonding capacity. Because these items can vary widely—and are often difficult to prove—parties frequently include a liquidated damages provision, as an estimate of damages, along with the waiver of consequential damages. To better understand what would be included and excluded from recovery on any particular project under the applicable contract, contractors would be well advised to consult with experienced construction counsel so that they can fully understand how they are allocating the risks of a breach of the contract they are about to enter.

Parenthetically, it must also be noted that a significant issue in Lam Platt was whether the termination was one for cause or convenience. Crucially, under the contract at issue, no termination could be made for cause without the actions of a third-party to the contract—here, the architect—certifying that the general contractor was in default. The architect declined to issue any such certification because his own contract did not require him to do so. This dichotomy shows the importance of harmonizing all upstream, downstream, and parallel contracts for the consistency of obligations, and making sure that if one contract provides that a third-party is to act as a condition precedent to any action by the contracting party, that such third-party is actually under his or her own obligation to do so.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby. 

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

ALJ Vacates Citation for Failure of Proof Despite the Employer’s Failure to Protect Its Workers

Written by WB&G on . Posted in Safety Policy.

When a client is cited for alleged OSHA violations, it’s a perennial — and often difficult — question as to whether, or in what circumstances, all or some of the  items should be contested.

While it’s rumored that penalties for OSHA violations may be increased (as much as tenfold) in the near future, historically the penalties have been sufficiently small, that the disproportion between the legal fees and expenses involved in litigating a contest proceeding before the OSH Review Commission, and the penalties at stake, has usually counseled in favor of striking a quick compromise, if one is to be had, and moving forward.

In addition to the Secretary’s advantage of having at his disposal a corps of specialized lawyers paid by the taxpayers. (and the dearth of private attorneys experienced in handling such matters) there are technical and procedural advantages favoring the government in citation contest proceedings. 

Of course, OSHA infractions are a blemish on an employer’s safety record, and “Willful” and “Repeat” violations (in addition to carrying penalties that can run into six figures per item) can impair an employer’s ability to win contracts. (So, too, can an accumulation of “Serious” infractions). Every employer likes to be seen as safety-conscious.  Many business owners take citations very personally, and it’s irksome to be slapped with a substantial monetary penalty, due possibly to a lapse on the part of a careless employee.

But while the OSH Review Commission is no “kangaroo court,” and its Administrative Law Judges, in my opinion (based on having read hundreds of published opinions over the years) .are knowledgeable and conscientious, I have perceived some reluctance to discount the testimony of OSHA inspectors. My belief is that a defense based on legal grounds offers the respondent better chances than one that would require the ALJ to discredit the testimony of an OSHA Compliance Officer.

I believe the most fertile grounds for success in an OSHA contest proceeding are a thorough understanding of the elements of the Secretary’s case, and (if the case goes to trial) close attention to the proofs. If the attorney representing the employer is both attentive and well-prepared, an argument to the ALJ that the Secretary has failed to prove any element of his case by a preponderance of the competent and admissible evidence, will often win the day.

It sometimes comes as a surprise to an employer that the ALJ, where warranted, will vacate a citation, even where there was an injury (actually, an injury, even a fatality, is legally irrelevant) and despite the employer’s conduct having been less than exemplary. However, the Secretary’s failure to prove even a necessary element of his case is probably the most common basis for citation items being vacated.

A striking example of this is the case of Secretary v. George Weis Co. The employer in that case was a family-owned drywall, ceiling, and plaster contractor, working as a subcontractor on a hotel construction project in Missouri.

The employer had a two-man crew installing soffits underneath a sun deck about 26 feet above grade.  The foreman installed the soffits from the bucket of an aerial lift located just below the sun deck, while the second worker knelt on the edge of the sun deck, just inside the wire rope guardrails, and handed materials to the foreman.

The worker on the roof, intending to rise to his feet, grabbed the mid-rail and pushed down, in order to support himself. The mid-rail gave way, and as it did so, the worker fell headfirst through both the mid-rail and top-rail onto the aerial lift.  Although the worker, fortunately, did not plunge to the ground, he was badly injured when he tumbled into the bucket.

Subsequent inspection by OSHA showed that the c-clamps, which allowed the wire ropes to loop around the stanchions and clamp back onto themselves, had not been adequately tightened. The OSHA inspector determined that a contractor had removed the guardrails from the sun deck to deliver materials, and failed to re-set them properly. Although the employer proffered testimony that it had inspected the guardrail, such inspection, if it occurred at all, was merely visual, and neither the employer nor the general contractor, following the removal of the guardrail to allow the materials delivery, had physically tested it to ensure that it met the standard requiring that it be capable of withstanding a force of at least 200 lbs., applied within 2 inches of the top edge, in any outward or downward direction.

The employer was cited under 29 CRF 1926.502(b)(3) and timely contested the citation. The Secretary had the obligation to prove at trial (1) the applicability of the standard; (2) that the standard was violated; (3) employee access to the cited condition; and (4) the employer’s actual or constructive knowledge.

Following trial, the administrative law judge, in his decision, had no difficulty in finding that the standard applied, and that the employer had a duty to provide fall protection to the injured employee. Since the guardrail was the sole means of fall protection deployed, the ALJ found that both the top-rail and the mid-rail needed to satisfy the 200 lbs. of force requirement.

Employee exposure was obvious, the ALJ ruled, as the injured employee had been working next to the guardrail for about two hours when the mishap took place. Plainly, given that the fall occurred upon the employee having grabbed the guardrail to support himself as he stood up, he was exposed to the allegedly defective condition.

The complainant had established constructive knowledge, the Court also found, as (notwithstanding some inconsistent testimony on this issue) the respondent had failed to discharge its obligation to perform a “careful and critical examination” necessitated by the location of the work, the potential gravity of injury, and lack of any additional means of fall protection. The foreman’s claim of having tugged and pulled on the rope, the ALJ found, was unconvincing and. in all events, insufficient.

Despite the foregoing, and while emphasizing that he was not finding that the employer had acted properly, the ALJ vacated the citation for lack of testimony or documentary evidence that a man of the injured worker’s height and weight, performing the activities engaged in at the time of the accident, would not have imposed more than 200 lbs. of force on one or more of the wire guardrails. The ALJ distinguished several cases cited by the Secretary, finding that in the case before him, unlike the cases cited, there was lacking “objective and  patently obvious reasons” why the guardrail could not support the required force.

“This case,” the ALJ concluded, “highlights the importance of the Complaint’s burden of proof, and the distinction between failing to prove a violation and whether a violation, in fact, existed.”  The employer in Weis “failed to take appropriate steps to ensure its employees were not exposed to hazardous conditions,” but while it was likely, even probable, that the guardrail could not have met the specific terms of the standard, the Secretary failed to prove it, wherefore the citation had to be vacated.

Geoffrey S. Pope, an attorney, is Of Counsel to the construction law firm of Welby, Brady & Greenblatt, LLP, with its main office in White Plains.  The articles in this series do not constitute legal advice, and are intended for general guidance only.

Court Reminds Contractors That Cure Periods Are Ignored At Their Own Peril

Written by Gregory J. Spaun on . Posted in Attorneys' Column.

It is well known that in business, including the construction business, the applicable contract governs the relationship between the parties. As the subject of negotiation, its specific terms should be familiar to all parties. Unfortunately, during the bustle of the project, some contractual provisions, including notice provisions and right to cure provisions, fall by the wayside. While, the majority of the time, these missed provisions end up being inconsequential (because the parties make their way past the issues and deal with them at the end of the job), an appellate court, in East Empire Construction, Inc. v Borough Construction Group LLC, reminds us of the importance of complying with these provisions so that any subsequent actions, such as a termination, will be valid.

Background

In 2015, Borough Construction Group, a general contractor, entered into a subcontract with East Empire Construction whereby East Empire was to perform the steel scope of work for the construction of a building in Columbus Circle in Manhattan. The relevant contract, which was an AIA A401/201 form of contract, contained a provision permitting Borough to undertake to correct East Empire’s defective work if East Empire failed to do so itself within five days of receiving notice of such defective work. Another provision of the contract required Borough to provide East Empire with a 10 day period within which to cure any defect as a condition precedent to termination.
In May of 2016, Borough sent East Empire a notice of termination, stating that the subcontract would be terminated three days from the date of the letter, claiming that East Empire was in default by “failing to provide sufficient manpower [] [and] failing to meet the schedule, safety regulations and qualified workmanship” for the project. The parties discussed these issues and, after negotiations, Borough withdrew its termination letter. One week later, Borough sent East Empire an identical notice of termination, and subsequently retained a new steel contractor to complete East Empire’s scope of work.
In November of 2016, East Empire sued Borough for breach of contract, alleging that Borough breached the contract by improperly terminating East Empire’s subcontract, and seeking the monies for which it had invoiced up until the termination. Borough denied the allegations in the complaint, and asserted East Empire’s claimed breaches of the subcontract as a defense to payment. East Empire moved for summary judgment in its favor on its breach of contract claim, and dismissing Borough’s affirmative defense, on the grounds that Borough denied it of its contractual opportunity to cure the claimed defects. In opposition, Borough argued that East Empire’s acts of default were persistent and incurable. 

Decision

The motion court granted East Empire’s motion, and found that by failing to give East Empire the opportunity to cure provided for in the subcontract, Borough’s second attempt at termination was improper and, itself, constituted a breach of that contract. The appellate court affirmed, addressing not only the clear lack of the contractually required cure period, but also the limited exceptions to this requirement. The appellate court discussed that while such a notice to cure need not be given where: the terminated party repudiates its performance; the terminated party abandons the project; the breach is impossible to cure; or the breach is so substantial that it undermines the entire contractual relationship such that it cannot be cured, the exceptions are of very limited scope, and none applied here. In doing so, the appellate court cited well settled law in holding that the defaults complained of, mere faulty steelwork and failing to meet the schedule, was “the very situation to which the cure provision was intended to apply”. 

Comment

Notice and opportunity to cure provisions, like other contractual provisions, must—absent extraordinary circumstances—be strictly complied with. Typically, arguments that extraordinary circumstances apply are made not when there are such extraordinary circumstances, but when the notice and cure provisions are overlooked (or, in a haste to remove a contractor from a project, simply not complied with). East Empire highlights how a subcontractor in default was able to completely turn the tables on the general contractor and not only avoid the consequences of its own default (being backcharged for the excess cost incurred by the general contractor to complete its work), but also have an affirmative recovery and get paid for its (claimed defective) work. While the reflexive statement to a contractor in default is to “get off of my jobsite”, contractors would be well advised to review their contracts to see if there are notice and cure provisions, and strictly comply with them. Surely, the offense at having the contractor around for an extra few days while he tries to remedy a default is not as grievous as having to not only forego a backcharge for excess completion costs, but also actually writing that contractor a check for work you believe is defective. If you have any questions as to whether such an exception applies, experienced construction counsel can help.

About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100

Reducing Hazards Associated with Manual Handling of Materials in the Construction Workplace

Written by WB&G on . Posted in Safety Policy.

This month’s column is inspired by materials I found online, published by the European Agency for Safety and Health at Work.  OSHA’s construction standards do not have a subpart dedicated specifically to ergonomic approaches to prevent or ameliorate lower back pain (which, in Europe, is said to be the #1 item among reported work-related disorders).

Although apparently this isn’t an OSHA compliance issue, your company would do well to carry out assessments of how tasks are performed, provide training to your employees, and act to protect employees from cumulative harm to the musculoskeletal system over months and years of repetitive lifting and handling activities on the jobsite.

Generally described, your company should be doing the following:

  • Designing and organizing tasks to avoid, or limit, the handling of materials manually;
  • Employing automation and lifting devices;
  • Where repeated lifting and manual handling cannot be avoided, organizing the work in a safe way, by dividing larger loads into smaller ones, providing rest periods, etc.;
  • Training employees in the correct handling of materials, including the opportune use of equipment, and how frequently-.required tasks should be performed.

“Manual handling” can be defined as supporting or transporting a load by lifting, holding, putting down, pushing, pulling, carrying, or moving it.  In the EU at least, just under two-thirds of  all workers spend at least a quarter of their working hours performing such tasks, and (in addition to fatigue) two varieties of injuries may result.  One includes sudden events, such as cuts, bruises, fractures, and the like, and the other variety involves damage to muscles, tendons, ligaments, bones, joints, bursa (the small, fluid-filled sacs that reduce friction between moving parts in the body’s joints), blood vessels and nerves.

What are referred to as musculoskeletal disorders are divisible into three groups: neck and upper limb disorders; lower limb disorders, and  back injuries and back pain.  Most people experience lower back pain to some extent by age thirty, and between one-quarter and one-half of construction workers complain of it.

The factors that make manual handling more or less hazardous fall into four groups:  the load, the task, the environment, and the individual.  The risk of back injury increases if the load is too heavy (20-25 lbs. is heavy for most people, especially if the load must be handled repeatedly), too large, difficult to reach or to grasp, unbalanced, or contains items within that move around.  A basic rule is that items should be lifted and carried as close to the body as possible.

Pushing and pulling generally impose fewer stresses on the body than lifting and carrying. Unbalanced loads are difficult to support, and sudden movement can throw the bearer off-balance.  Gloves, handles, or other aids for gripping can make it easier to maintain one’s grasp.  Loads that can only be reached with outstretched arms, or by bending or twisting the torso, may harm the spine, and carrying loads with sharp edges or dangerous materials is also to be avoided.

As for “the task,” the same can be very rigorous, if carried out over and ever for too long a period, or at a tempo that cannot be varied by the worker, or without sufficient rest periods.

The “environment“ means factors such as the space available to carry out the handling, the condition of the floor or working level, climate, and illumination.  If a large load must be hefted in a tight space, awkward body postures may be required, which can require joints to be held close to their maximum range of movement, or result a heavier load on the joints and spine and increased fatigue.

If the flooring is wet, uneven, or subject to moving (e.g., the deck of a fishing boat) handling materials becomes more difficult, and accidents more likely. Temperature, humidity, and ventilation affect a worker’s ability to carry out handling operations, especially if the same are to be repeated over the course of the workday. Poor lighting may increase the risk of an accident, or require the employee to work in awkward positions.

Naturally, individual factors also affect the likelihood of back injuries or other bad outcomes from handling operations.  An employee’s size, fitness, strength, lifestyle, age, medical history, experience, training, familiarity with the job and the tasks to be performed, and willingness to use personal protective equipment all affect his or her ability to perform handling operations, and prospects of avoiding injury while doing so.

Your company should carry out a risk assessment, or examination of potential hazards from manual handling operations,  Consider carefully tasks, and locations where they are performed, that could produce accidents, injuries, or poor health. Evaluate whether procedures and precautions in place are sufficient to minimize risks of harm, and what additional measures might be taken.

Among other things, you should consider the practicability of eliminating the “manual” element of at least some manual handling, and reduce or avoid altogether employees having to lift, carry and move things, by instead using devices such as conveyor belts, lift trucks, electric hoists, or a gravity-powered roller track.  Due consideration should be given to the potential downside, however (e.g., possible noise or hand-arm vibration hazards) from any alternatives being considered.

If the elimination of manual handling is not possible, or technical measures are ineffective in reducing the risks, you should next consider organizational or administrative measures.  For example,   heavier items could be lifted or carried by two people instead of one, or amounts to be handled could be reduced, or loads split into two or more smaller ones.

The pace of manual handling should not be set by a machine, supervisor, or co-workers.  The time for performing manual handling tasks should be extended by providing for breaks, or by alternating such tasks with other tasks, to allow muscles time to recover.

Pretty much all construction employees, even those who infrequently have to perform manual handling, should be trained in the correct techniques for lifting and carrying, and for pushing and pulling devices such as barrows and trolleys.

If your company has employees who must frequently perform manual handling, I commend to you NIOSH Publication No. 2007-131, “Ergonomic Guidelines for Manual Material Handling,” which you can download online.  It contains a wealth of information that will make their lives easier, more productive, and less painful.

I conclude this month’s installment .on .a personal note.  After 15 years of working on these articles, next month’s column will be my last for Construction News.  My deep thanks to my readers, and to George Drapeau and John Jordan, my editors.  Stay safe, everyone!

Geoffrey S. Pope, an attorney, is counsel to the construction law firm of Welby, Brady & Greenblatt, LLP, with its main office in White Plains.  The articles in this series do not constitute legal advice, and are intended for general guidance only.

Court Reinforces that Arbitration Must be Consensual

Written by WB&G on . Posted in Attorneys' Column.

Arbitration is often the most prompt and just means for dispute resolution. However, this leads to the questions: when can you arbitrate? and: what arbitration remedies might a contractor choose to exercise?

In BML Properties Ltd. v. China Construction America, Inc., et al., an appellate court reminded us that arbitration is a consensual process. BML involved a series of agreements in connection with the development of the multi-billion Baha Mar resort complex in the Bahamas. BML was the direct parent of Baha Mar Ltd.  In 2009, Baha Mar Ltd. and one of the China Construction defendants memorialized their agreement in a Main Construction Contract, which provided that any suit, action, or proceedings shall be brought in the courts of the State of New York, or the United States District Court, located in the Borough of Manhattan in the City of New York. A subsequent Bahamian receivership proceeding (think: bankruptcy) resulted in the sale of the assets of Baha Mar Ltd. to Perfect Luck Assets Ltd, (“Perfect Luck”). Consequently, BML lost its entire investment in in Baha Mar Ltd., or approximately $845 million, as well as its expected profits from the resort.

In 2016, Perfect Luck and one of the China Construction defendants amended the Main Construction Contract, deleting the New York forum selection clause and inserting a new provision requiring that any disputes be referred to and finally resolved by arbitration under the Rules of the International Chamber of Commerce. On December 26, 2017, BML filed a lawsuit in New York State Supreme Court in Manhattan alleging a multi-year scheme to fraudulently delay the Baha Mar resort project and increase construction costs. China Construction moved pursuant to NY CPLR 7503 and to the Federal Arbitration Act to compel arbitration.  BML countered, arguing that BML had not consented to arbitration and, accordingly, could not be compelled to participate. Correctly, the Court determined that its threshold question was whether the parties made a valid agreement to arbitrate, noting that the proponent of arbitration has the burden of demonstrating that the parties agreed to arbitrate. The appellate court affirmed, noting that while the Federal Arbitration Act favors arbitration, it is limited by the principle that arbitration is always a matter of consent, not coercion.  Defendants, while moving to compel arbitration, argued that the Main Construction Contract, as amended by Amendment No. 9, required BML to arbitrate the dispute.  However, BML was a non-signatory to Amendment No. 9, which post-dates the disputes at issue.

While in certain limited circumstances New York courts can impute the intent to arbitrate to a non-signatory, such as where the non-signatory may evince an intent to be bound or where the non-signatory received a direct benefit from a contract containing an arbitration clause, such as payment under the contract, or enforcement of the contract against others.  However, neither the lower nor the appellate courts found those triggering circumstances here. Accordingly, it found the arbitration clause inapplicable and, therefore, denied the motion to compel.

To understand the lower court’s ruling, it is important to remember the basic premise of arbitration: that arbitration is a consensual method of dispute resolution.  Parties contemplating arbitration can enter into an arbitration agreement either before or after a dispute arises; but enter into an agreement they must. The situation in BML fatally departed from this basic requirement and, accordingly, the case was relegated to ordinary litigation.

CONCLUSION:

It is clear that Courts are more inclined to sustain the right to arbitrate when supported by signed documentation, rather than surrounding factual circumstances. Should you believe you have a right to arbitrate, it is best to have the documents or circumstances on which you rely reviewed by your attorneys.