When will an ambiguity in a public owner’s contract documents not support a contractor’s claim for extra work? Answer, (according to the New York Court of Appeals) is when the ambiguity is obvious (patent) on the face of the document, and the contractor did not follow the contract and seek clarification prior to bidding. 
 
Here is what happened. The Contractor was awarded a contract with New York City to remove lead-based paint from the Queensboro Bridge. The Contractor was required to install scaffolding platforms above the inner vehicle roadways and outer pedestrian roadway. Drawing No. 26R contained Note 5 stating that, “minimum vertical clearance of 14 feet shall be maintained above all roadways.” The drawing also contained arrows pointing Note 5 to the area of the inner vehicle roadways. Note 7 on the same drawing stated that protective shielding, platforms and containments shall be installed in accordance with approved shop drawings, to the satisfaction of the contractor’s engineer. The arrows associated with Note 7 pointed to the outer pedestrian roadways. The contractor interpreted Note 7 as being applicable to the outer pedestrian roadway. There was no problem with providing 14 feet of clearance over the inner roadways, as the inner 
roadways were several feet lower than the outer roadway. However, existing power cables located over the outer roadways limited clearance of the platforms over the outer roadways to between 8 feet 5 inches and 12 feet. In order to install work platforms with a minimum 14 foot clearance over the outer roadways, the contractor was required to remove and relocate the power cables – additional work, for which the contractor wanted to be paid. The City denied the Contractor’s claim for payment whereupon the Contractor, following the dispute provisions in the contract, took the dispute to the Contract Dispute Resolution Board (CDRB). 
 
The City argued to the CDRB that the drawings were ambiguous on their face. This, said the City, triggered a contractual provision that required the Contractor to seek clarification of the ambiguity before it submitted its bid. The Contractor having failed to do so, said the City, its claim was barred. The CDRB agreed stating that the City “produced a confusing and contradictory set of drawings” and that, “the conflict between the drawing and the notes indeed created an ambiguity in the contract.” Accordingly, the CDRB concluded, the Contractor was not entitled to claim for additional work, because it failed to comply with the contract. 
 
The Contractor then sought a review of the CDRB’s determination by the Supreme Court in an Article 78 proceeding. 1 The Court noted that, in undertaking its review, it may not substitute its judgment for that of the CDRB, and that it must uphold the CDRB’s determination if the CDRB had a rational basis for it. As you will have guessed, the Supreme Court concluded that the CDRB had a rational basis for its determination. It held that the drawing and notes were confusing and in conflict, which triggered the “seek clarification before bidding” contract clause. “Where a contract requires a contractor to raise any ambiguities or any questions about the requirements of the job with the City before submission of its bid and the contractor fails to do so… the contractor will be bound by the City’s interpretation of the contract.” 

 
The Contractor then appealed to the Appellate Division. There, by a 3 to 2 majority, the appellate court upheld the lower court’s dismissal of the Contractor’s Article 78 petition.2 The Contractor tried again in the Court of Appeals 3, but it fared no better, and its claim stayed dismissed. 

The result of the Contractor’s travels through the state judicial system may have negative repercussions to the entire construction community. By breathing new life into what was previously a relatively innocuous provision in the instructions to bidders, public owners may take a harder line about paying extra work claims arising as a result of patently ambiguous contract documents, where clarification was not sought prior to bidding. 

 1
 L & L Painting Co., Inc. v. Contract Dispute Resolution Board of the City of New York, 2008 WL 226979 
(N.Y. Sup.) 
2 Id. at 68 A.D. 3d 594, 892 N.Y.S.2d 55 (1st Dept. 2009)  
3
 Id. at 2010 WL 1704644 (Ct. of Appeals, 4/29/10) 

Municipal authorities are not required to allow a property owner to develop its property where there is reason to doubt the building would be used for a lawful (zoning permitted) purpose.

Generally, a provision in a private construction contract that extras must be ordered and agreed to in writing, is valid and binding upon all parties and no recovery can be had for alterations or extras done without a written order. However, as evidenced by the following, where there is an oral waiver, modification, or abrogation of such a provision, the First Department of the Appellate Division, will recognize and enforce such oral agreements.

 A mechanic’s lien foreclosure action was initiated by the HVAC subcontractor on the improvement and reconstruction of the Uniqlo USA’s (“Uniqlo”) flagship retail store in the SoHo district of Manhattan (the “Project”). A named defendant and fellow mechanic’s lienor, Absolute Electrical Contractors, Inc. (“Absolute”), the protagonist of our story, answered the complaint and asserted counter-claims1 against Uniqlo, as the owner, and the general contractor, Richter & Ratner Contracting Corp. (“R&R”) for amounts owed for additional labor, including overtime and shift work, performed at the direction of R&R. 

Absolute asserted that significant amounts of overtime work and additional shifts were required to meet the scheduled completion date, understood to be grand opening party for the store on November 10, 2006. R&R orally agreed to pay Absolute for its overtime and additional shift work on the basis of “work tickets” submitted by Absolute and signed by R&R. Based on this agreement, Absolute submitted daily work tickets and requests for additional compensation for overtime, additional shift and other extra work. R&R issued and executed 19 change orders and paid all. However, roughly three weeks before the completion date, R&R directed Absolute to further accelerate its work by working literally around the clock, including weekends, but instructed Absolute to stop submitting daily work tickets. Instead, R&R directed Absolute to submit a bill for the overtime and additional shift work at the completion of the Project, which R&R agreed to pay. At the completion of the Project, Absolute submitted a “Proposal for Equitable Adjustment,” requesting payment of overtime, additional shift work and other costs and damages resulting from R&R’s accelerated work directives. In the end, R&R refused to issue a change order or pay any portion of these sums.

 R&R responded to Absolute’s claims by cross-moving for summary judgment based on provisions of the subcontract, which expressly required that “any additional or extra work must be authorized in writing by a Project Manager, Project Executive or Officer of R&R,” and restricted any remedy for delay to an extension of time. Absolute then cross-moved for summary judgment on their “counter”-claims for amounts owed for extra work against R&R. Judge Lowe of the Supreme Court, New York County, granted Uniqlo and R&R’s motions for summary judgment dismissing the counterclaims asserted by Absolute and denied Absolute's motion for summary judgment as to liability on such counterclaims. Absolute appealed. 
                                                              1 The decision as reported and the documents filed erroneously refer to the cross-claims made by the co-defendants as counter-claims.

The Appellate Division ruled that R&R failed to meet its burden on summary judgment of Absolute’s counterclaims, holding that the oral directions to perform extra work overrode the contract provisions requiring written authorization and that there were issues of fact to be resolved as to whether Absolute was paid in full. Quoting Barsotti’s Inc. v. Consolidated Edision Co. of N.Y., 254 A.D.2d 211 (1998) and citing testimony of R&R representatives, the Court stated that “[u]nder New York law, oral directions to perform extra work, or the general course of conduct between the parties, may modify or eliminate contract provisions requiring written authorizations or notice of claims.” The Court found that, given such testimony admitting to directing Absolute to perform the additional work, agreeing to pay for the work and instructing them not to bother with the “tickets,” the general contractors claim that it did not have to pay for this overtime because there were no written tickets or change orders was meritless. 

The Court also alluded to the fact that the no-waiver provision of the subcontract did not avail R&R, as Absolute was not claiming that the general contractor waived its right to enforce the no-oral-modification clause by making other payments. Rather, Absolute was claiming that R&R waived such right by directing it to perform overtime work and not to bother with the tickets. Further, R&R could not rely on a “no damages for delay” clause as Absolute was not seeking to recover damages caused by delay, but rather to be paid for overtime that R&R directed and for which it had agreed to pay. 

Ultimately, the court found that there were issues of fact as to whether R&R had fully paid Absolute for Absolute’s overtime work during the three week period. Therefore, where there is a provision within a subcontract requiring that all extra work be requested and agreed to in writing, any oral waiver, modification, or other abrogation of such a clause will be recognized and enforced if supported by corroborating testimony. 

Pay attention to lien waivers, lien releases and retainage reduction release forms that you and your surety may be asked to sign.

Even large companies sometimes bite off more than they intend to when they purchase assets of another company.  Take this recent example out of the Court of Appeals.  In 1970, American Standard, Inc. entered into a agreement sell its Kewanee boiler division to Oakfabco, Inc.  Back then, boilers were insulated with asbestos.  This made Oakfabco a target of many personal injury tort lawsuits over the years. Some of those claims involved boilers manufactured by American Standard, where the injury manifested itself after Oakfabco purchased the boiler division.  Oakfabco wanted American Standard to pay damages for injuries caused by the boilers it manufactured.  American Standard declined, arguing that Oakfabco bought that liability when it purchased the boiler division.   

The asset purchase agreement between the two companies described the purpose of the transaction with the following language:  

     Seller (American Standard) desires to sell, and Buyer (Oakfabco) desires to purchase, substantially all the assets of Seller, real and personal, tangible and intangible belonging to it, which are used in connection with Seller’s [boiler] business and operations … subject to all debts, liabilities, and obligations connected with or attributable to such business and operations.     

The agreement also provided that Oakfabco would purchase the boiler division subject to the boiler division’s liabilities, which were defined in the agreement as:  

   “all the debts, liabilities, obligations and commitments (fixed or contingent) connected with or attributable to Kawanee existing and outstanding at the Closing Date.”   

Focusing on the “existing and outstanding at the closing date” language, Oakfabco’s argued that unless a claim for damages was known on or before the closing date, American Standard remained liable, for claims that arose post- closing on the boilers it manufactured.    

American Standard, seeking to obtain closure on the issue, started a declaratory action in New York Supreme Court.  In that action American Standard sought to obtain a judgment against Oakfabco declaring that Oakfabco is liable to pay damages for all asbestos related injuries, whether those injuries were known before or after the closing date.  The Supreme Court ruled in favor of American Standard.1   The Appellate Division affirmed the lower court and also issued an injunction against Oakfabco from re-litigating the issue in any forum.2  The Court of Appeals granted Oakfabco’s motion for leave to appeal.3   

1  American Standard, Inc. v. OakFabco, Inc. 26 Misc.3d 1216(A), 907 NYS2d 98 (Sup.Ct., NY Cty, 2008) 

 In the Court of Appeals4, Oakfabco argued that the “existing and outstanding” language limited its assumption of American Standard’s liabilities more than the language used to state the purpose of the agreement.  The Court indicated that Oakfabco’s interpretation would be plausible if the provision is read in isolation from the other provisions in the asset purchase agreement, but the Court chose not to do so.  

 Focusing on another provision in the agreement, the Court noted that Oakfabco issued a bond to American Standard as security that Oakfabco defend and indemnify American Standard against all liability for warranty, service, repair and return obligations, in connection with any products manufactured, sold, leased or installed by the Kewanee boiler division on or before the Closing Date.  This provision, the Court said, clearly demonstrated that Oakfabco agreed to be answerable for any problems with boilers sold before the closing date, including problems manifesting after the closing date.    

Commenting further the Court stated: “It would have been absurd for Oakfabco to tell a customer whose boiler failed after the closing date, it was not Oakfabco’s problem.”  

By including warranty, service, repair and return claims in the definition of Kewanee Liabilities, the parties, said the Court, were not reading the words “existing and outstanding” as Oakfabco wants the Court to read them.   

Accordingly, the Court of Appeals affirmed the Appellate Division’s decision in part and modified it by removing the injunction preventing Oakfabco from ever relitigating the issue.  

Purchasing the assets and sometimes the liabilities of an existing business is complicated and must be thought out so that if there are any limitations on what is being bought, those limitations are clearly and precisely spelled out in the asset purchase agreement.  Here is an example where large companies did not do so, leading to years of litigation and possibly the assumption by the buyer of more liability exposure than it thought it was taking on.       

This alert provides general information only. It is not intended to provide legal advice.  We encourage you to contact an attorney should you desire to discuss specific situations for which you may need legal advice 
                                             

 2  American Standard, Inc. v. Oakfabco, Inc., 58 AD3d 485, 872 NYS2d 12 (1st Dept 2009)

3  Id. at 12 NY3d 712

4  Id. at 14 NY3d 399, 901 NYS2d 572 (2010) 

 Heed the instructions to bidders is the lesson from a recent case in the Appellate Division, Second Department. The Contractor didn’t and lost it $772,000 claim, after winning at trial.

In 2003 the New York State Court of Appeals ruled on a public project the time within which material supplier had to give notice of its claim for payment under a statutory payment bond is measured from the date of the last delivery of materials for which the claim is made.

A recent case out of the Appellate Division, Second Department is instructive to 
public works contract bidders, who believe that the low bidder gets the contract. The 
case is In the Matter of AAA Carting and Rubbish Removal, Inc. v. Town of Southeast.1
In this case the Town awarded a contract for rubbish removal to the second low bidder 
(Suburban Carting). and the low bidder (AAA Carting) sought court review of the 
Town’s decision by bringing an Article 78 proceeding. The Town favored the second 
low bidder on the basis that it could offer superior service as compared to the low bidder. 
To the Town, the second low bidder was the lowest responsible bidder even though the 
cost would be higher. 
 
The Supreme Court, Putnam County, granted the low bidder’s Article 78 petition, thereby 
overturning the Town’s decision to award the contract to the second low bidder. The 
second low bidder (not the Town) appealed to the Appellate Division, Second 
Department. The appellate court reversed the lower court and dismissed the low bidder’s 
Article 78 petition, leaving intact the contract between the Town and the second low 
bidder. 
 
In reversing the lower court, the appellate court summarized several principals of law that 
potential bid challengers should be aware of: 
 
a. A court reviewing an Article 78 bid challenge may not substitute its 
judgment for that of the public body unless the decision is arbitrary and capricious or the 
public body’s exercise of discretion lacks a rational basis. 
 
b. It is not the reviewing court’s role to weigh the desirability of any action 
or to choose among alternatives. 
 
c. General Municipal Law §103(1) requires any public works contract for 
more than $10,000 to be awarded to “the lowest responsible bidder”. This is an elastic 
concept that includes “consideration of skill, judgment and integrity”. 
 
d. Public bodies may investigate the experience and background of the 
bidder. 
 
e. Public bodies need not give “slavish attention to financial considerations 
alone.” 
 
f. Where good reason exists, the low bid may be disapproved or all the bids 
rejected. 
 
g. Where a public body exercises its discretion and rejects one or more bids, 
its decision “ought not to be disturbed by the courts unless it is irrational, dishonest or 
otherwise unlawful.” 
 
Successful bid challenges are difficult to achieve. Now you know why. 

 
 
 \
This alert provides general information only. It is not intended to provide legal advice. 
We encourage you to contact an attorney should you desire to discuss specific situations 
for which you may need legal advice. 

 1 74 AD3d 959 (2nd Dept. 2010)  

New York’s Labor Law 240(1) covers Employees, not Volunteers. New York’s employee protection scaffold law, Labor Law §240(1), makes all contractors and owners and their agents (except for owners of one and two-family dwellings who contract for but do not direct or control the work) responsible for work-site safety practices. However, in a recent case decided by the New York Court of Appeals, light has now been shed on who is and is not a protected employee.