A consistent theme of this column has been that at the end of the day, what is expressed in the parties’ contract will control their relationship—and ultimately control what a court does when something goes awry with that relationship. However, what happens when the parties’ intent, as expressed in their contract, is not clear? The recent case of Top Grade Excavating New York, Inc. v HDMI Holdings LLC shows us that under such circumstances, a court can rely on outside evidence to determine what the parties intended back when they entered into the contract.

Background

In October of 2014, Top Grade Excavating New York entered into a subcontract with Airitan Management Corp. by which Top Grade was subcontracted to perform certain excavation, foundation, and concrete slab work at the construction site owned by HDMI Holdings. The form of contract was Top Grade’s (bare bones) proposal form, which stated that it was based on certain specified drawings and a geotechnical investigation report. The scope of work (which was scattered between various sections of the proposal) described various charges for excavation, and included two lines labeled “Total Rock Breaking Price” and “Total Price for Excavation”. However, below the line labeled “Total Price for Excavation” was a disclaimer stating “no rock breaking, no contaminated dirt, no dewatering, no existing concrete footing and wall demolition, no metal tank or other things”. Later on the proposal form, there were prices (on a per cubic yard basis) for “Rock 1a breaking”, “Rock breaking for elevator pit”, and “Hauling”. Unfortunately, there was nothing in the proposal form defining how the removed rock was to be quantified, or how Top Grade would be paid if it had to break and haul both 1a rock and rock for the elevator pit (which Top Grade ultimately did).

A dispute arose as to how Top Grade was to be paid for the work it performed on the job, and Top Grade eventually filed (and sued to foreclose) a mechanic’s lien it filed against HDMI’s property.  The case ultimately went to a non-jury trial. At trial, Airitan’s principal testified that the contract was a fixed price contract, as was evidenced by the lines “Total Rock Breaking Price” and “Total Price for Excavation”. However, when confronted with change orders that Airitan had previously approved for additional rock breaking, Airitan’s witness then testified that the quantity of rock should be measured by the drawings which showed the rock in place, and not by truckload quantity (which is certainly greater). Top Grade’s principal testified that Airitan’s approval of the earlier change orders stood as an acknowledgement that Top Grade was entitled to compensation for the extra rock removal. As to the calculation of the quantity, Top Grade’s witness testified that measurement by the truckload was the industry standard, even if such number deviated from the Department of Building’s measurements—as was evidenced by Airitan passing along these charges upstream, unmodified, to HDMI for payment.

Decision

The trial court credited the testimony of Top Grade’s witness that the contract was not a lump sum contract, and that truckload measurement was the correct measurement for the quantity of removed rock—even if it was a larger measurement than what the drawings showed. Airitan appealed (and abandoned its lump-sum argument), focusing on the argument that the trial court erred in accepting outside testimony that the truckload measure was the proper measure for billing for rock removal. The appellate court rejected that argument, finding that the contract was silent as to how the quantity of broken rock was to be measured. In light of this silence, and guided by long standing case law, the appellate court held that the trial court “properly considered extrinsic evidence in determining whether the quantity of excavated broken rock was to be based on the dimensions of the excavation, i.e., the volume of the rock in its compacted, unbroken, undisturbed state or the size of the containers it filled after being excavated and broken”.

Comment

While the law is well settled that a court cannot accept outside evidence where a contract is clear on a subject, Top Grade stands for the principle that where a contract is either silent or ambiguous on such a subject, then a court can rely on outside evidence (either documents or testimony, or both) to fill in the blank. Clearly, in such a situation, someone’s understanding of what the contract provided for is not going to prevail. That understanding may affect either a minor, or major, term of the contract—and, as we saw in Top Grade, it can even affect a monetary term of the contract, turning what a contractor believed was a profitable contract into an unprofitable one.

In order to prevent a court from telling a contractor what they meant at the time they signed the contract, such contractor should make sure that all reasonably foreseeable eventualities (such as what, and how, an excavator would be entitled to compensation in the likely event that they hit extra rock) are addressed in the contract to each party’s satisfaction. Consulting with experienced construction counsel to be sure that there is clarity and specificity in a contract would limit a court’s role to enforcing what is already written, while depriving it of any blanks to fill in.

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

We have written on more than one occasion about how a construction contract is meant to define the relationship between the parties, and that absent a provision which violates public policy (pay-if-paid, pre-emptive lien waivers, indemnification of a party for its own negligence, etc.), the contract will be enforced as written. The provisions of these contracts which seems to be invoked most frequently are the provisions for delivering notice of claims to the owner for extra, additional, or even delay compensation. In the recent case of APS Contractors, Inc. v New York City Housing Authority, an appellate court again showed us the importance of strict compliance with these contractual notice of claim provisions.  

Background

In May of 2014, APS Contractors entered into a contract the New York City Housing Authority where APS was to be NYCHA’s general contractor for a façade and roofing project at the Pink Houses in Brooklyn. The contract contained a provision, at Section 32(a), requiring the contractor to file a notice of intention to file a claim within 20 days after such claim arose, or else such claim was waived.

On April 28, 2017, the Certificate of Final Acceptance was issued, and on May 9, 2017, APS submitted a document that it denominated “Verified and Itemized Statement and Notice of Claim”, which asserted three claims, as follows: $1,416,543 for additional work for lead abatement and painting at the railings; $512,727.50 for additional work for temporary roofing; and $114,020 for additional work in removing certain concrete patching. No payment was made on this claim, and APS commenced its lawsuit to recover on these claims on May 17, 2018.

NYCHA ultimately moved to dismiss APS’s lawsuit, citing to Section 32(a) of the contract. NYCHA argued that APS had knowledge of the lead abatement claim on April 20, 2016, the date on which NYCHA advised that it would be calculating APS’s compensation in a manner different than that proffered by APS. Similarly, NYCHA argued that APS had knowledge of the temporary roofing claim on January 16, 2016, when NYCHA first rejected its request for additional compensation, claiming that temporary roofing was included in the contract. Likewise, as to the concrete repair claim, NYCHA argued that APS had knowledge as early as May 11, 2016, the date on which NYCHA indicated that would not provide APS with additional compensation for this work. APS argued that voluminous email correspondence adequately advised NYCHA of the fact that APS was making claim for these additional monies, and that this correspondence otherwise satisfied the requirements of the contract.

Decision

The motion court denied NYCHA’s motion as it related to the lead abatement claim, finding that the significant amount of email correspondence apprized NYCHA of APS’s intent to file a claim within the contractual deadline, and provided the requisite information. However, the court granted NYCHA’s motion as it related to the other two claims, finding that there was no similar chain of correspondence that would have apprized NYCHA that APS would be making a claim for those sums.

On appeal, the appellate court reversed the motion court and dismissed the complaint, finding that the motion court had erred in finding the email correspondence satisfied the notice of claim requirement. In doing so, the appellate court held that the contract was specific that the notice of claim had to be denominated as such, had to contain certain specified information, and had to be clear that APS intended to pursue the claim for compensation. The appellate court found that the email correspondence met none of these requirements.

Comment

APS is yet another reminder that in most circumstances, contractual conditions precedent will be strictly enforced. Here, what appeared to be over $2 million in valid claims for extra and additional work ended up dismissed for a simple failure to follow contractual formalities. While APS’s claims ended up buried in the graveyard of inadequate notice, this did not need to happen.

It goes without saying that contractors would be well advised to follow such contractual conditions precedent to the letter so that you are not in the position of having to later argue, like APS, that cobbled together correspondence constitutes the notice required by the contract. Often, and unfortunately, by the time the contractor recognizes that it is up against a deadline to submit a notice of claim, that deadline may have already passed. Your project people must learn to recognize the actions and correspondence from the Owner that trigger the Notice stop watch.  In that regard, contractors should examine their contracts with experienced construction counsel so that they can—at the outset of the job—have a checklist of what to submit when a claim arises, and the deadline for doing so.

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

We have written on more than one occasion about how powerful of a tool a mechanic’s lien can be for a contractor to secure its payment, and how that tool comes with certain responsibilities (such as providing a verified itemized statement of lien upon proper demand, and being accurate in the assertions made in the lien, among others). Another responsibility is to properly set forth the information required by Section 9 of New York’s Lien Law, which sets forth the information that it is to be included in the Notice of Lien. However, as a court recently reminded us in the case of Matter of Malbro Construction Services v Straightedge Builders, Inc.,  such requirement is not a trap for the unwary, and Section 9 should be interpreted liberally, in accordance with the purpose of the Lien Law—which is to protect the beneficial interests of lienors.

Background

Prior to 2017, petitioner Malbro Construction Services, Inc., entered into several contracts with homeowners affected by Hurricane Sandy to perform remedial work to their homes under the auspices of the New York City Build it Back program. Malbro retained the services of Straightedge Builders, Inc., as one of its subcontractors for the required work.

In August of 2017, Straightedge filed mechanic’s liens on five of the properties on which it worked as a subcontractor to Malbro. On the form Notice of Lien, the address used for Straightedge was clearly that of the attorney it used to file the liens, and not the “the business address of such firm, or corporation” that is the lienor, as is required by Section 9 of the Lien Law. Malbro commenced a special proceeding to cancel the liens based on what it characterized as the facial defect, arguing that without the lienor’s actual address, it could not serve a Demand to Foreclose under Section 59 of the Lien Law (which requires either personal service on the lienor, or service upon someone of suitable age and discretion at the lienor’s last known address). Straightedge opposed the motion, arguing that the listing of the attorney’s address was proper and, in any event, there was no prejudice because Malbro was aware of Straightedge’s address because it was on both the contract and every check sent by Malbro to Straightedge.

Decision

The court denied Malbro’s motion, holding simply that “the alleged defects in the liens [are not] fatal”. Malbro appealed, and the motion court’s order was affirmed. In doing so, the appellate court cited well settled case law that “in determining the validity of a notice of lien, the requirements of the Lien Law are ‘to be construed liberally to secure the beneficial interests and purposes thereof. A substantial compliance with its several provisions shall be sufficient for the validity of a lien and to give jurisdiction to the courts to enforce the same’”. In concluding, the appellate court held that Straightedge’s Notices of Lien complied substantially with the requirements of Section 9.

Comment

As we saw here, courts can save a mechanic’s lien with an exercise of discretion in determining that a defect was not prejudicial and the notice nevertheless “substantially complied” with the requirements of Section 9 of the Lien Law. However, the better course of action would be to review the requirements of Section 9 and, using the statute as a checklist, insert accurate information in response to all seven criteria set forth. While the common sense “it’s the address where you mailed the checks” argument ultimately prevailed here, a lot of time, effort—and money—could have been saved for the simple want of double checking the information on the lien form as it was being completed. Further, since this holding was made, essentially, as an exercise of the court’s discretion, there is no guarantee that another judge in another courtroom would exercise his or her discretion in the same manner.

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

One of the most utilized forms in connection with a construction project is the waiver of lien, which operates to both waive a contractor’s right to assert a mechanic’s lien, and to release the contractor’s claim for money. These forms come in two “flavors”, the partial waiver of lien, and the final waiver of lien. The partial waiver is exactly what the description says it is, a document waiving a part of the contractor’s claim (in exchange for a partial payment in the same amount), usually in conjunction with a contractor’s monthly requisition. The final waiver, like the partial waiver, is exactly what it is described as, a waiver of the remainder of the contractor’s claim, in exchange for full payment on the project, upon completion. However, in the recent case of C & A Seneca Construction, LLC v G Builders LLC, a court recently reminded us what, exactly, is necessary to make a final waiver of lien operative for its intended purpose.

Background

In October of 2016, C & A Seneca Construction entered into a contract with G Builders for a construction project on Pier 94 in Manhattan for an agreed upon cost of $240,100. In December of 2016, C & A executed a partial waiver of lien in exchange for a specifically referenced payment of $75,000, which was payment for all work performed by C & A through December 23, 2016. C & A continued to work on the project, and on March 10, 2017, it executed another partial waiver of lien, this one reciting a payment of $50,000 for all work performed through that date.

A dispute arose between C & A and G Builders as to the quality of C & A’s work, and G Builders claimed that the parties agreed to resolve the dispute by C & A’s accepting a final payment of only $3,184.71 (out of the $115,000 remaining under the contract). Toward that end, a lien waiver denominated as a “final” waiver was executed reciting payment for “100%” of the contract price. C & A claims it never received anything other than the first $75,000 payment, and it sued to collect the $165,000 balance. G Builders moved to dismiss, citing the final waiver of lien and arguing that the release contained in that document barred C & A’s claims.

Decision

The court denied the motion, and permitted C & A’s lawsuit to proceed. In doing so, the court cited well settled case law that in order for a final waiver of lien and release to be operative, it must evidence a clear and unequivocal intent to serve as a release of claims, and it must: (1) contain language clearly indicating finality; and (2) recite the amounts of the payments which were made. Because there was no language as to the specific amount of the release, or that the outstanding balance of $115,000 was being compromised by 97% to account for claimed defective work, it was found that the final waiver of lien document did not evidence an unequivocal intent to serve as a release of the remainder of the claim. Accordingly, a jury will have to sort out the intended function of that document.

Comment

Here, the court focused on the lack of unequivocal intent to evidence the release of the remaining $115,000 of C & A’s claim. However, C & A sued for $165,000. While the second release (the one which specified a second payment, in the amount of $50,000) would meet the court’s specified criteria and ostensibly defeat $50,000 of C & A’s $165,000 claim (leaving only the $115,000 mentioned by the court), the fact that C & A alleged that it was not paid that amount was sufficient to permit it to press the claim. This is because a release must be supported by valid consideration (payment), and if that payment is not made, then the release fails.

As a practical matter, sometimes such documents are titled “Lien Waiver & Release”, and operate as both.  However, other times they may simply be titled “Lien Waiver”, but still contain binding release language. Because waivers of lien and releases are such important documents in the construction process—often the gatekeeper to payment—it is crucial that the documents be as specific and “tight” as possible. If they are not, they may be found to either waive more than is intended, or not be operative at all. Further, many waivers of lien—both partial and final—require contractors to waive other aspects of their claim (for disputed change orders, for retainage, etc.) that are not specifically reserved. Contractors should not be so anxious to receive their monthly payment that they ignore the actual language and unintentionally waive outstanding claims, disputed change orders, etc. Accordingly, owners, contractors and subcontractors (basically, anyone who is a party to a waiver of lien) would be well advised to consult with their construction counsel to determine the true nature and effect of the document they are asking someone, or being asked, to sign.  

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

The procurement of adequate insurance is important in any industry, and the construction industry is no different. However, insurance is different than many of the goods and services a construction contractor procures because insurance is not tangible good but, rather, a contractual promise to make good for losses that the contractor may incur. Often times, it is only after a liability has been incurred (and it’s too late) that a contractor will realize that the insurance it has procured was not sufficient. In such situations, the contractor often tries to look to the insurance broker who did not procure the adequate coverage to make things right after the fact and cover the loss for the contractor (often, with the broker’s own insurance policy). In the recent case of Gibraltar Contracting, Inc. v Northeast Brokerage, Inc., an appellate court reminds us that such claims against insurance brokers are limited to situations where the broker fails to procure coverage that was specifically requested by the Contractor, but not procured by the Broker.

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

It is widely known in the construction industry that one way to get the attention of an upstream contractor that is not remitting payment is to file a mechanic’s lien against the project. Aside from the obvious claim against the title of the property, a mechanic’s lien can also have the effect of putting an upstream contractor in default of its obligations under its contract, putting the property owner in default of its mortgage, and preventing a sale transaction from going forward, amongst others. However, notwithstanding these effects, there are contractors who may be tempted to give their lien a little extra “oomph” by increasing the amount of the lien beyond what they are actually owed. In the recent case of LaPenna Contracting v Mullen, an appellate court reminded us that this is always a very bad idea.

Background

In July of 2016, LaPenna Contracting entered into a contract to construct an extension on the Mullens’ home. Problems arose between LaPenna and the Mullens, and LaPenna’s services were terminated in March of 2017. The Mullens retained one of LaPenna’s subcontractors to complete the project. At the time of its termination, LaPenna had been paid $36,350 from construction loan proceeds, and an additional $9,515.48 directly by the Mullens. LaPenna promptly asserted a mechanic’s lien for $33,870, and immediately commenced a lawsuit to foreclose that lien. The Mullens asserted a counterclaim in that lawsuit to recover the money they paid to LaPenna’s former subcontractor to complete the project. The Mullens also claimed that LaPenna’s mechanic’s lien was exaggerated.  The case ultimately went to trial.

Decision

The trial court found that LaPenna’s work was deficient and defective, and that the Mullens properly terminated LaPenna for its breach of contract. At the time LaPenna was terminated, the trial court found that there was only limited progress made on the Mullens’ home, and that the approximate value of that work was only $36,350—even though LaPenna had been paid $45,865.48. Accordingly, the trial court awarded the Mullens the amount that they had to pay to complete the home, as well as the difference between the amount of work actually performed by LaPenna and what was paid by the Mullens. The trial court also found that LaPenna’s mechanic’s lien was exaggerated, and it awarded the Mullens damages accordingly. LaPenna appealed.

The appellate court affirmed, finding that an award to LaPenna on its mechanic’s lien would result in a payment to LaPenna of $79,735.48, or 94% of the contract price, when the evidence established that the value of that work was only $36,350—and LaPenna submitted no evidence to suggest otherwise. Given this math, there was no other conclusion to be drawn other than the mechanic’s lien was willfully exaggerated. Accordingly, the award to the Mullens of the amount of the exaggeration (here, the entire lien) and attorney’s fees—on top of what the Mullens were awarded on their breach of contract counterclaim—was upheld.

Comment

Mechanic’s liens are a powerful tool because they not only involve the upstream contractor who is not paying, but they also attach to the title of the property itself. Accordingly, in order to prevent abuse of this powerful tool, the state legislature put in a safeguard in the form of an award against an exaggerating lienor of not only the attorney’s fees incurred in discharging the exaggerated lien and the interest on monies deposited to discharge the exaggerated lien (or the premium for any lien discharge bond), but an amount of money equal to the amount of the exaggeration itself. One can see here that even though LaPenna’s work was legitimately worth $36,350, after the award of the amount of the exaggeration (which was the entire lien), LaPenna was left with only $2,480 to show for its efforts.

Contractors should be forewarned of the bitter penalties that can be imposed if they exaggerate a lien. Accordingly, one should consult with construction counsel to determine what evidence you have available to meet your burden of proving the reasonable value of the work performed such as would support the filing of the lien.  

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

It is widely known in the construction industry that New York is a “trust fund” state, meaning that trustees of a construction trust fund have specific responsibilities under the Lien Law, and that there are significant penalties for diverting trust funds—including criminal penalties. While owners, contractors and subcontractors are universally acknowledged to be trustees, and payments made downstream are acknowledged to be trust funds, questions often arise as to a construction lender’s role in the trust fund scheme. In the recent case of ECD NY, Inc. v 616 First Avenue Developer, LLC, an appellate court shed some light on the lender’s role in the process, and when it may be able to be held liable under Article 3-A of the Lien Law.

Background

In 2014, ECD NY entered into a contract with 616 First Avenue Developer where ECD was to perform excavation, sitework, foundation and structural concrete work for the construction of a 47 story mixed use building in Manhattan. 616 financed the construction through construction loans with various lender entities, and signed a building loan agreement on December 22, 2016. 616 secured the loan by assigning its leases and rents to the lenders. The lenders filed their Notices of Lending on January 27, 2017.

ECD undertook its work, and ultimately sued to collect what it claimed was its outstanding balance. ECD also sued 616’s lenders, alleging that they were trustees of the statutory trust, and that they improperly received trust fund assets such that they would be directly liable to the contractor on a diversion claim. The lenders moved to dismiss the lawsuit as against them, arguing that they were not trustees under the statute, and that they were insulated by the fact that they filed a Notice of Lending against the project.

Decision

The motion court denied the lenders’ motion (and also, it should be noted, granted 616’s motion to dismiss an unjust enrichment claim on the grounds that such a claim is precluded where, as here, there is a written contract governing the subject matter of the claim), finding generally that there were disputes that had to be the subject of discovery before dismissal could be assessed.

On the lenders’ appeal, the appellate court dismissed the cause of action for diversion of trust funds, noting that the statutory list of trustees includes owners, contractors and subcontractors, but not lenders. As to the cause of action for receipt of diverted trust funds, the appellate court was more nuanced. While holding that lease payments are not listed in the lien law as trust assets, the court was compelled to deny the motion because the Notice of Lending was filed 5 weeks after the building loan agreement, and there was no evidence that payments weren’t made by the owner between the signing of the building loan agreement and the date on which the Notice of Lending became effective. Accordingly, so held the court, discovery was necessary to flesh out this issue.

Comment

While the court was clear that the lender was not liable as a trustee, it did highlight that there are circumstances when lenders could be deemed to have improperly received trust funds based on the date of its filing of a Notice of Lending (which insulates the payments made to a lender, even though these payments are technically outside of those otherwise permissible under the trust statute). If payments are made to the lender before the Notice of Lending is effective, then a potential trust fund diversion exists.

There are often collectability issues on construction projects; for instance, your upstream contractor may not be solvent, there may not be a sufficient lien fund available to satisfy your claim, or there may be no payment bond on the project, amongst other reasons. Accordingly, it makes sense to attempt to bring in as many potential defendants as possible. Before doing so, however, one much make sure that there are viable claims against those potential defendants; courts have little tolerance for simply applying a shotgun approach.

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