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Waiver Issues

Written by Thomas S. Tripodianos on . Posted in HVBRA Newsletter.

Question. Does a general contractor waive the requirement of a signed formal written agreement by verbally awarding a contract to a proposed subcontractor for a particular price and verbally instructing a proposed subcontractor to proceed with its work according to an expedited schedule? A preliminary term sheet previously supplied by the contractor to proposed subcontractors specifically addressed such an occurrence of events and provided that such events would not give rise to liability against the contractor, the contractor did not make any statement, either written or verbal, expressly waiving that condition, and the contractor otherwise did not engage in any conduct inconsistent with its reliance on the term sheet.

Answer. NO. General contractor did not waive requirement of signed formal written agreement by verbally awarding contract. It is well settled that, if the parties to an agreement do not intend it to be binding upon them until it is reduced to writing and signed by both, they are not bound and may not be held liable until it has been written out and signed. In this case, in which subcontractor claims the general contractor revoked an alleged oral award of a subcontract, undisputed documentary evidence establishes that the general contractor advised the subcontractor -in writing, and in terms that left no room for doubt-that defendant did not intend to be contractually bound to hire the subcontractor until both of these highly sophisticated parties had signed the contemplated written agreement. Specifically, the general contractor plainly and explicitly notified the subcontractor, in a preliminary term sheet that the potential subcontract would not be binding on the general contractor, even after any initial award of the job to the subcontractor, and even after the subcontractor’s signing of the contemplated written agreement, until the general contractor had also signed that agreement, an act the general contractor reserved the right to do (or not do) until a specific date in the future.

This dispute arises from the effort by the general contractor to obtain and then perform the contract to build a steel hangar and technical operations facility. The project required the general contractor, through its subcontractors, to both design and build the hangar. Before it was awarded the contract, the general contractor solicited bids from several subcontractors, including this subcontractor to design and construct the hangar’s structure and cladding, which was the largest component of the project.

This subcontractor submitted a competitive bid, and negotiations between the general contractor and the subcontractor commenced in the summer. In the course of these negotiations (and before the general contractor allegedly told the subcontractor it had been chosen), the general contractor sent the subcontractor, among other documents, the aforementioned term sheet.

The subcontractor alleges that, in July, a conference call was held between the general contractor and the subcontractor. Prior to that conference call, according to the subcontractor, the parties had agreed on all material terms of the subcontract except for price. During the conference call, the parties agreed that the subcontractor would perform the subcontract for a price of $3.9 million. After that agreement was reached, the subcontractor alleges, the general contractor’s representatives, in the same telephone conversation, “advised the subcontractor that it had been awarded the structure/cladding subcontract,” and “directed the subcontractor to proceed with its design development work, to accommodate the Project’s ‚Äòfast track’ schedule.”

Promptly after the July conference call, the subcontractor commenced the design work (there is no claim that physical construction was performed) called for by the term sheet. A “kickoff meeting” for the project was held in July, which was attended by representatives of the subcontractor and the general contractor. The representatives of the subcontractor left that meeting believing it had gone well.

Only two days later, however, the subcontractor’s president attended a meeting with the general contractor at which he was told that the general contractor was terminating the subcontractor’s involvement in the project, and the (as yet unwritten) subcontract was being transferred to a competitor). Although the competitor was originally, regarded as the preferred vendor of steel building components, the competitor’s bid for the subcontract had been rejected because it was priced substantially higher. After the July meeting the general contractor had turned over the subcontractor’s work product to the competitor and had persuaded the competitor to take over the subcontract at the price and terms to which the subcontractor had agreed. The next day, the general contractor sent the subcontractor a letter confirming that the job was being awarded “to a subcontractor that more closely meets the requirements of the contract documents and schedule.”

The term sheet means exactly what it says, namely, that the general contractor did not intend to become bound by any subcontract until that subcontract had been memorialized in a complete, formal writing and the general contractor itself had signed that writing-a condition that was never satisfied. A manifestation of mutual assent by both the general contractor and the subcontractor was required to create a binding agreement between them.

There is no reason to allow the subcontractor, a sophisticated corporate entity, to seek to have the benefits of a putative contract judicially bestowed on it based on a set of circumstances that the subcontractor had been told, in the plainest of terms, would not give rise to an agreement binding on the general contractor. To do so would be to negate the general contractor’s prior express limitation of its intent to contract, thereby making, by judicial fiat, a contract that the parties never made for themselves. In this regard, it should be borne in mind that the concept of freedom of contract includes the “[f]reedom to avoid oral agreements,” a freedom that “is especially important when business entrepreneurs and corporations engage in substantial and complex dealings.”

If the subcontractor, before it commenced work on the project, wished to have a real assurance from the general contractor that the general contractor in fact regarded the requirement of a signed writing as a technicality that had been superseded, the subcontractor easily could have requested that the general contractor expressly waive the conditions of the term sheet. Having chosen to begin work at a point when it knew that neither party was contractually bound (neither having executed a subcontract), the subcontractor voluntarily assumed the risk that the general contractor would ultimately enter into a subcontract with another company.

Court Rejects Delay Claim

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

New York courts will generally bar a contractor’s delay claim when the contract contains a so-called “no-damages-for-delay” clause. There are recognized exceptions, however, to the no-damages-for-delay clause. It will not be enforced where the delays were: (a) not contemplated by the parties at the time the contract was entered into; (b) caused by bad faith or willful, malicious or grossly negligent conduct; (c) so unreasonable that it constituted an intentional abandonment of the contract; or (d) resulted from breach of a fundamental obligation of the contract.

The same exceptions apply where there is a no-damages-for-delay clause in a contract between a general contractor and a subcontractor. In the recent case of Commercial Electrical Contractors, Inc. v. Pavarini Construction Co., Inc., the subcontractor sought to avoid the enforceability of the no-damages-for-delay clause by arguing the exceptions outlined above.

Background

Pavarini Construction Co., Inc., a general contractor, contracted with Commercial Electrical Contractors, Inc., an electrical subcontractor, to perform work at the Museum for American Folk Art. The prime contract was incorporated by reference into the parties’ subcontract, and both contained no-damages-for-delay clauses. Upon project completion, the electrical subcontractor sought to recover damages due to delays caused by the general contractor’s improper scheduling and organization of subcontractors, changes to the work, and failure to provide temporary heating. According to the electrical subcontractor, this conduct constituted gross negligence, was unanticipated, and delayed the project anywhere from 8 to 20 months.

After the general contractor refused to compensate the electrical subcontractor for the delay, the subcontractor sued. In moving for summary judgment, the general contractor argued that the damages sought for the delay were barred by the no-damages-for-delay clauses. The general contractor also noted that the owner clearly retained the right to make changes or modifications to the work, and the prime contract included a procedure to deal with delays. The trial court granted the general contractor’s motion for summary judgment, and dismissed the subcontractor’s claims for delay damages. The subcontractor appealed.

Decision

The appellate court affirmed the trial court’s decision. The appellate court held that no-damages-for-delay clauses are unenforceable if the delays were caused by the contractor’s bad faith or its willful, malicious, or grossly negligent conduct; were uncontemplated; were so unreasonable that they constitute intentional abandonment of the contract; or resulted from breach of a fundamental obligation under the contract. The court found no evidence to indicate that the conduct of the contractor was the result of gross negligence or willful misconduct. Instead, the court stated that the conduct amounted to nothing more than inept administration or poor planning, which falls within the contract’s exculpatory no-damage-for-delay clause.

The court also held that it was reasonably foreseeable that there would be changes to the work, such as changes to room dimensions, and delays of the types involved on this project. Lastly, the court stated that the delay was not long enough to qualify as abandonment of the contract.

Comment

No-damages-for-delay clauses are routinely upheld by the courts. Though usually just a short paragraph, the effect of the clause can be significant. Often, otherwise valid claims are completely barred. Contractors should be wary of this clause when negotiating contract terms and conditions. Inclusion of the clause quite likely will bar a contractor’s right to compensation for legitimate project delays.

Indemnification

Written by Thomas S. Tripodianos on . Posted in HVBRA Newsletter.

Question. Must Contractor indemnify Owner for damages allegedly sustained by a neighboring landowner, Neighbor, during Contractor’s performance of excavation work on Owner’s property?

Answer. NO. At least not on the facts presented. The construction contract in question is an AIA Document A201/CM (1980). Owner entered into a contract with Contractor for the excavation, drainage, and sanitary work necessary to build a restaurant on property that Owner owned in New York. The contract price, as ultimately adjusted with additions and credits, was $167,401.

A Contractor employee was excavating on Owner’s property for the sewer line when his backhoe struck and damaged an underground power cable supplying electricity to Neighbor’s adjacent property. Before beginning this work, a project superintendent employed by the construction manager and the owner representative’s on the site, had notified “New York One Call” to ask for the electric line servicing Neighbor to be marked. Although this was done, an unidentified electrician at some point relocated the cable.

The excavator was working 10 to 15 feet from the flags put in place to mark the cable when he struck it. Further, after the accident it was discovered that “excess cable, in the form of a loop had been buried, at the time of the original cable installation.” Contractor agreed to pay for the materials necessary to repair the cable, and the electrician agreed to supply his labor. At the same time, the excess loop was removed.

Sometime thereafter, the project superintendent was supervising a Contractor employee, who was excavating in the same area in order to adjust the sewer’s height. The ground gave way, dragging the cable toward the excavation site. The cable did not come into contact with the excavator’s backhoe, but was damaged at the place where it had previously been repaired, apparently again disrupting electric service to Neighbor’s property. Contractor once more paid for the materials necessary to fix the damage to the cable.

Owner paid Contractor $85,000 of the contract price, but withheld the $82,401 balance due, ostensibly because Owner was involved in a dispute with Neighbor over damages allegedly caused by the accidents. Owner subsequently resolved this dispute by paying Neighbor $69,639.

Contractor filed a notice of mechanic’s lien against the property. Owner claims that in response to threats by Neighbor to commence litigation and in order to resolve the dispute that Contractor failed and refused to resolve, Owner was forced to make a payment to Neighbor resulting in damage to Owner.

Article 4 of the AIA form contract at issue is entitled “Contractor,” and Paragraph 4.18 is entitled “Indemnification.” Subparagraph 4.18.1 states that

“[t]o the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, the Architect, the Construction Manager, and their agents and employees from and against all claims, damages, losses and expenses, including, but not limited to, attorneys’ fees arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (1) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including the loss of use resulting therefrom, and (2) is caused in whole or in part by any negligent act or omission of the Contractor … regardless of whether or not it is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge or otherwise reduce any other right or obligation of indemnity which would otherwise exist as to any party or person described in this Paragraph 4.18.”

Article 10 of the form contract is entitled “Protection of Persons and Property,” and Paragraph 10.2 is entitled “Safety of Persons and Property.” As relevant to the issue herein, Subparagraph 10 .2.1.3 provides that

“[t]he Contractor shall take all reasonable precautions for the safety of, and shall provide all reasonable protection to prevent damage, injury or loss to: … property at the site or adjacent thereto, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designated for removal, relocation or replacement in the course of construction;….”

Finally, Subparagraph 10.2.5 specifies that

“[t]he Contractor shall promptly remedy all damage or loss … to any property referred to in Clause[ ] … 10.2.1.3 caused in whole or in part by the Contractor … and for which the Contractor is responsible under Clause [ ] … 10.2.1.3, except damage or loss attributable to the acts or omissions of the Owner, the Architect, the Construction Manager or anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable, and not attributable to the fault or negligence of the Contractor. The foregoing obligations of the Contractor are in addition to the Contractor’s obligations under Paragraph 4.18.”

There is insufficient proof in this case to support indemnification under Subparagraph 4.18.1. As for the first accident, the parties agree that the electrical cable servicing the Neighbor property was not where it was supposed to be, but had been relocated by others before Contractor began work. As a result, there is no proof of Contractor’s negligence, and because the identity of the electrician responsible for the relocation is unknown, it is not possible to figure out whether that person was someone for whose acts Contractor might be liable, so as to trigger indemnity under Subparagraph 4.18.1.

With respect to the second incident, the facts reveal only that the same electrical cable was damaged when the ground adjacent to Contractor’s excavation gave way, dragging the cable towards the excavation site. An employee of the construction manager was present and supervising Contractor’s work at the time. There was no contact between the excavation equipment and the cable, and the only damage to the cable was at the site of the previous repair.

As for Subparagraph 10.2.5, its reach is limited in this case to “damage or loss … to any property referred to in Clause[ ] … 10.2.1.3”; namely, “property at the site or adjacent thereto, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designated for removal, relocation or replacement in the course of construction.” The only “property” damaged would appear to have been the cable, and there is no evidence as to whether Neighbor actually suffered any damage to its own property as a result of the damage to the cable, or, instead, sustained purely economic injury which Subparagraph 10.2.5 does not cover. In light of the above there is no need to reach and express an opinion as to whether Subparagraph 10.2.5 imposes a negligence or fault-type liability standard.

Court Rejects Bid For Unresponsiveness

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

New York’s competitive bidding statutes serve a dual purpose. The primary purpose is to benefit the taxpaying public by enabling government agencies to obtain the best price for public construction projects through open, competitive bidding. The secondary purpose is to assure that contractors are on an equal footing when bidding public works.

These statutes are designed to reject a contractor who is unqualified or whose bid is not responsive to the invitation for bid. The award must be made to the lowest responsible and responsive bidder. The factor most likely to cause problems in the bid selection process is responsiveness, as shown in the recent case of Total Construction Corp. v. City of New York.

Background

The New York City Department and of Parks and Recreation solicited bids for two contracts. The bid documents relating to each contract required the submission of an original bid bond or bid deposit with a contractor’s bid. Total Construction bid on each contract, and submitted a bid bond for each. The bid bond submitted by the contractor was not an original but rather a faxed copy. Additionally, the bond itself was a reproduction which had the word “VOID” appearing throughout the face of the document. Also, much of the actual text on the document was difficult to read if not illegible. Upon receiving the bid bond, the Parks Department contacted the surety named on the bond. The surety representative confirmed that the bond copy, as presented, was invalid.

Based on the bid bond deficiencies, the Parks Department rejected the contractor’s bids as non-responsive. The contractor appealed the Department’s determination, arguing that on numerous prior occasions over the course of several years, the Department had accepted facsimile copies of bid bonds without objection. The contractor also stated that it would provide a letter from its surety attesting to the validity of the bid bond.

In denying the appeal, the Department again focused on the deficiencies of the bond. The Department also noted that the contractor failed to provide specific examples that in the past the Department accepted faxed copies of bid bonds from the contractor without objection. Additionally, the Department stated that even if faxed copies were accepted in the past, the Department did not waive the requirement of receiving an original bond in this particular instance. The Department also noted that despite the appeal, still no original bond was provided. Upon the denial of the contractor’s appeal, the contractor sued the Department.

Decision

The Court approved of the Department’s non-responsive determination. The Court noted that the bonds were not originals, could not be read, and that the word “VOID” appeared all over the bonds. The Court stated, “under these circumstances, where the bonds appeared invalid on their face, the Parks Department had a rational basis for rejecting petitioners bids as non-responsive, since petitioner failed to submit bonds in literal compliance with the bid specifications.” The Court further pointed out that “the court may not substitute its judgment for that of the agency responsible for making the determination, but must ascertain only whether there is a rational basis for the decision or whether it is arbitrary or capricious.”

The Court also noted that the agency has the right to determine whether a variance from bid specifications is material or should be waived as a mere irregularity, and that determination must be upheld by the court if supported by any rational basis. Here, the Court found that the Department had a rational basis for rejecting the contractor’s bids as non-responsive because of its failure to comply with the bond requirements of the bid specifications.

Comment

There is no conclusive formula for determining on a case by case basis what constitutes a mere irregularity or technical noncompliance with bid specifications as opposed to a material noncompliance with the bid requirements. The courts give broad direction to public authorities in determining whether a bid is responsive. Where the agency’s insistence upon strict compliance with the bid specifications has a rational basis, the courts will uphold the determination of non-responsiveness.

No Damage for Delay

Written by Thomas S. Tripodianos on . Posted in HVBRA Newsletter.

Question. Are “no claim for delay” clauses enforceable in New York and can an Owner deny a Contractor’s claim based solely on it’s the Owner’s Engineer’s determination?

Answer. YES and YES. The Contractor, entered into a contract with the Owner to perform certain construction work. Due to delays caused by freezing weather in January and part of February and the erroneous belief of the Owner and/or its engineer that an additional permit was required, the Contractor was compelled to stop work and was unable to resume its operations for six months. The Contractor made a claim seeking to recover, out-of-pocket expenses allegedly incurred by the delay in the project, alleged lost profits resulting from the delay, and the cost of certain work which it claimed was extra work not included in the contract price

The lost profit claim is speculative and likely unrecoverable.

The “no claim for delay” clause of the parties’ contract exculpated the Owner from liability for damages resulting from delays “in commencement, performance or completion of the Contract, regardless of whether said delays are, or may be caused by the Owner, Engineer or any governmental agency.” That provision is valid and enforceable and is not contrary to public policy ( see Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 309, 502 N.Y.S.2d 681, 493 N.E.2d 905).

“[E]ven with such a clause, damages may be recovered for: (1) delays caused by bad faith or willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract” Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d at 309, 502 N.Y.S.2d 681, 493 N.E.2d 905.

The Owner demonstrated that the delay was caused by several factors, including foreseeable winter weather, the Contractor’s own conduct, and decisions made by entities specifically mentioned in the contract, to wit, the owner and/or engineer, and a governmental agency. The Contractor failed to illicit any facts which would satisfy the exceptions to the “no claim for delay” clause.

The Owner also denied the extra work claim included in the contract price, based upon the Owner’s engineer’s determination that the work was included in the contract price

Where, as here, an agreement clearly and unambiguously indicates that a determination as to what work is to be performed pursuant to the contract is to be made by an engineer, that engineer’s determination is conclusive unless the party challenging the determination is able to show the existence of fraud, bad faith, or palpable mistake In this case, Contractor failed to make any such showing so its claim was properly denied.

Trust Funds Assure Payment to Subs and Suppliers

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

New York’s construction trust fund statutes are designed to ensure payment adownsfor labor and material furnished to a particular project. The statutes provide that monies received for a construction project by an owner, contractor or subcontractor are trust funds held by them as trustees for payment to those performing work or furnishing materials for the project. The statutes were intended to prevent owners, contractors and subcontractors from using the trust monies to pay creditors on other projects or keeping the monies for themselves.

In the recent case of Matter of SN Contracting, Inc. v. Bank of New York Mellon Corporation, a judgment creditor of a contractor sought to attach the contractor’s bank accounts for the purpose of satisfying the judgment. The bank accounts contained trust monies for the benefit of subcontractors and material suppliers.

Background

In May 2005 the Bank of New York obtained a judgment against SN Contracting, Inc. and its president, Solaman Mia, in the amount of $111,488.22. In July 2007, seeking to enforce the judgment, the Bank of New York served a restraining notice upon Washington Mutual Bank. Two Washington Mutual accounts were attached, one in the name of the contractor, and the other in the name of the corporate president, Solaman Mia. The total deposits in the two bank accounts was $72,630.87.

The contractor, through its attorney, requested that that the Bank of New York voluntarily release the attachment. The contractor claimed that since the two bank accounts held trust assets relating to two specific construction projects, the monies could not be used to satisfy the judgment obtained by the Bank of New York. According to the contractor, monies were owed to subcontractors and suppliers on both projects. The contractor stated that the restraining notice resulted in a refusal of Washington Mutual to honor checks drawn on the accounts, and that as a result, the contractor was unable to pay its subcontractors and suppliers on both jobs. When the Bank of New York refused to voluntarily release the attachment, the contractor sued for an order canceling and vacating the restraining notice and releasing the attachment.

Decision

The Court noted that Article 3-A of the Lien Law creates trust funds of certain construction payments or funds to ensure payment to subcontractors and suppliers. The Court further noted that the statutory provisions were intended to ensure that funds obtained as payment for the performance of construction contracts are in fact used to pay the cost of the labor and material furnished on those jobs. The Court went on to state that “the contractor must hold those trust assets for certain expenditures arising out of the improvement it incurred in the performance of its contract, including the payment of claims of subcontractors.” In this case, the Court determined that the subcontractors’ claims for work performed were trust claims and that the subcontractors were designated “beneficiaries” of the contractor’s “trust” under the Lien Law.

In determining whether the $72,630.87 contained in the bank accounts could be used to satisfy the judgment, the Court evaluated whether the monies were indeed trust funds. The Court noted that the contractor had received payments totaling $73,000.00 in connection with the two projects, and that the contractor had paid $32,600.00 to subcontractors and suppliers in connection with the two projects. Since $73,000.00 in trust assets were received and $32,600.00 of those trust assets were paid out, the Court held that the balance, i.e. $40,400.00, of the attached funds were trust assets which must be paid to subcontractors and suppliers on the two projects. The Court held that the remaining $32,230.87 in the two bank accounts were non-trust assets that could be levied upon by the Bank of New York and may be applied towards satisfying its May 2005 judgment in the amount of $111,488.22.

Comment

The construction trust-fund statutes are a valuable tool for collecting money for labor performed or materials supplied. This may be the only source of recovery where mechanic’s lien rights are not available or the claimant is not protected under a labor and material payment bond. It is only fair that job claimants, who have provided the wherewithal that made possible the construction of the project should be the beneficiaries of the “trust funds” received by the owner, contractor or subcontractor.

Cutting of Neighbor Trees

Written by Thomas S. Tripodianos on . Posted in HVBRA Newsletter.

Question. What is the proper measure of damages for wrongfully cutting down your neighbor’s trees?

Answer. The parties became adjoining property owners when Choppers purchased the vacant lot next to Arbors’ property. Choppers purportedly intended to construct a house on their property. Shortly after this purchase, Choppers began clearing land without consulting the map referenced in their deed or having a survey conducted. It is undisputed that Choppers removed 29 trees from the Arbors’ property.

As you might surmise the first measure of damages is the value of the trees removed from the property. This is of course dependent on the type, age and health of the trees that were cut. An arborist can help in proving the value. The second measure is for the recovery of any damages to the land or improvements thereon caused as a consequence of the cutting of the trees.

The Arbors may also be entitled to treble (double) damages (see RPAPL 861) for the removal of this timber.

Indeed, in order to avoid treble damages, Choppers have the burden of proving by clear and convincing evidence that, when they removed the trees from Arbors’ property, they “had cause to believe the land was [their] own” (RPAPL 861[2] ).

According to the Choppers before they purchased the subject property, they walked it on one occasion with their realtor at which time Choppers specifically inquired about the boundary lines. The realtor, however, was unable to answer Choppers’ question with any certainty. Specifically, the Choppers admitted that the realtor did not know where the precise boundary lines were that day and therefore Choppers themselves did not know. Choppers also candidly admit that no steps were taken to obtain a survey or consult the map referenced in their deed before clearing the land.

The statutory scheme clearly applies to the facts and circumstances of this case and, it would therefore seem that an award of treble damages would be consistent with its purpose and intent.

Court Rules Contractor’s Claims are Not Time Barred

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

Contractors and subcontractors should be mindful of contractual and statutory time limitations imposed on their claims. The most common limitation periods relate to providing notice of the claim and commencing suit. This article focuses on the second requirement, the timely commencement of an action.

On private construction, a six year statute of limitations covers breach of contract actions. This means the action must be brought within six years of the breach, or the claim is lost. The construction contract between the parties, however, may provide for a shorter time period than the six year statutory period.

On public projects, the statute of limitations varies, depending upon the nature of the public works involved. For example, for a breach of contract claim for monies due arising out of a school construction project, the New York Education Law provides for a relatively short statute of limitations of one year from the time of the breach.

In the recent case of Mainline Electric Corp. v. East Quogue Union Free School District, the court addressed the question of whether the contractor’s breach of contract claim was time-barred for failure to commence suit within the statutory one year time limitation.

Background

Mainline Electric Corp. was the prime electrical contractor on a project to renovate the East Quogue Elementary School for the sum of $667,735.00. Final payment, consisting of the entire unpaid balance of the contract, was to be made when the contract was fully performed and a final certificate for payment had been issued by the architect. The contract also provided that final payment was to be made by the School District not more than 30 days after the issuance of the architect’s final certificate for payment, “or as soon thereafter as is practicable.”

Most of the contractor’s work was completed by December 2000. However, punch list items continued through February 2003. The contractor’s efforts to close out the project and receive final payment were the subject of various discussions, meetings, and correspondence between the parties which extended through September 2003. On September 26, 2003 the contractor sent the District a letter entitled “Final Demand”, seeking payment of its final requisition. The District never responded to the final billing requisition and the contractor commenced an action against the District on November 18, 2004. The District moved to dismiss the contractor’s claim as time barred under the one year statute of limitations period. The trial court granted the District’s motion and dismissed the action. The contractor appealed.

Decision

The appellate court overruled the lower court, holding that the contractor’s claim was not time barred. The court first noted that New York Education Law ¬ß3813 provides that no action can be maintained against the District more than one year after the cause of action arose. The court also noted that a cause of action to recover damages for breach of contract arises, and the statute of limitations begins to run, from the time of the breach. As to when a breach occurs, the court stated “a breach of contract can be said to occur when the claimant’s bill is expressly rejected, or when the party seeking payment should have viewed his claim as having been constructively rejected.”

The court said the District failed to establish that it either expressly or constructively rejected the contactor’s final billing requisition at any point prior to the commencement of the action in November 2004. The District argued that its refusal to respond to the contractor’s letter for final payment constituted constructive rejection. The court disagreed since the contractor’s letters did not impose a deadline for payment of the contractor’s final billing requisition.

The court also stated that the District’s failure to respond to the plaintiff’s final billing requisition within 30 days could not be deemed a constructive rejection, since the contract did not impose an unequivocal 30 day deadline in which final payment was to be made. Lastly, the court held that the District’s obligation to make payment was not triggered until the issuance of a final certificate of payment by the project’s architect and the District offered no evidence that such a certificate was ever issued.

In the absence of any evidence that the contractor’s final billing requisition was ever actually or constructively rejected, the court held that the contractor’s claim was not time barred.

Comment

The decision did not address whether the contractor provided notice of its claim within 3 months after its claim accrued, as required under the New York Education Law. A contractor may ultimately find itself unable to recover on his claim under the Education Law because of the relatively short 3 month statute of limitations period for filing the notice of claim and the one year limitation period for commencement of the action. The prudent contractor should closely monitor, and become familiar with, each project’s contractual and statutory time limitations. Otherwise, a contractor may find itself unable to recover on a claim because of its failure to comply with the applicable limitations period.

Deposit not Partial Performance

Written by Thomas S. Tripodianos on . Posted in HVBRA Newsletter.

This is a two for one this month. Both questions lend themselves to concise answers but don’t let their length diminish the importance of the concepts they present.

Q1. Buyer and the Seller entered into negotiations for the sale of real property owned by the Seller. Although one of the Buyer’s principals signed a proposed contract at the office of the Seller’s son who was acting as the Seller’s attorney, and tendered the down payment, the Seller never executed the contract. May the Buyer compel specific performance of the proposed contract?

NO. The Seller never signed the proposed contract. Whether the Seller’s son had the authority to bind the Seller is not relevant to the instant dispute, as the Buyer concedes that the Seller’s son did not sign the proposed contract in the first instance. Furthermore, the Buyer’s tender of a down payment upon signing the proposed contract, standing alone, did not constitute part performance which would take an oral agreement for the sale outside the statute of frauds and the requirement that agreements for the sale of real property be reduced to a signed writing.

Q2. Where the Buyer has defaulted under the parties’ real estate sale contract may the Seller retain the down payment which constitutes approximately 14% of the contract price?

YES. Pursuant to settled case law and the express terms of the contract, the Seller was entitled to retain the monies deposited with it by the Buyer pursuant to the contract The mere fact that the amount retained by the Seller was approximately 14% of the contract price was insufficient to support the conclusion that the parties did not enter into an arm’s length agreement or provided for an unenforceable penalty or was the product of overreaching

Court Rules on Measure of Damages to Repair and Complete Contract Work

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

What is the proper measure of damages an owner can recover from the contractor as a result of defective work and failure to complete the work under a contract? As a general rule, the reasonable value of the cost to repair defective work and to complete the work required under a contract is the appropriate measure of damages. The reasonable cost to complete the contract work may be substantially higher than the actual contract price for that work, as demonstrated in the recent case of Caggianelli v. Son’s Masonry.

Background

A husband and wife, as homeowners, entered into a written agreement with a concrete contractor for the installation of a stamped concrete patio, associated walkways and ramps, together with planters and a retaining wall. The contract price was $16,600.00.

The contractor failed to properly perform the work required under the contract and the homeowners sued for breach of contract. In the lawsuit, the homeowners sought recovery for the costs of repairing the contractor’s defective work and for completing the work required under the contract.

A hearing was held, where the homeowners were required to prove the amount of their damages. The homeowners presented the testimony of a licensed contractor who stated that the total cost to repair and complete the work under the written contract was $52,100.00. The judge who presided over the hearing granted judgment in favor of the homeowners and against the contractor in the sum of $26,600.00, representing damages consisting of $10,000.00 as the reasonable value for the demolition and clean-up associated with the removal and remediation of the contractor’s defective work and $16,600.00 as the reasonable value of the uncompleted work under the written contract. The homeowners appealed.

Decision

The appellate court overruled the lower court, holding that the $26,600.00 award was inadequate. The court stated, “it is well settled that, in a case of defective construction, the appropriate measure of damages is the reasonable market cost to repair the defects, if the defects are reparable, less any amount still due under the contract.” The court also noted “this general rule does not impose a condition that precludes hiring a contractor to perform the necessary remediation at a cost greater than the original contract price, provided that the new contract terms are the reasonable market cost of the work to be performed.”

The court held that since the there was no evidence suggesting the $52,100.00 customarily charged by the licensed contractor for such work did not represent the reasonable market cost, the award of $52,100, less the amount unpaid on the original contract, was appropriate.

Comment

Calculating the measure of damages based on the reasonable market cost is a fair-minded remedy, aimed at making the owner “whole.” This reasoning insures that the owner would be in as good a position as if the contract was fully performed. Here, the homeowners contracted for the installation of specific items for a set price. Given the contractor’s failure to properly perform and complete the work, the court necessarily looked to the reasonable market costs of replacing the defective work and completing the contract.

It does not matter that the reasonable cost of completing the work was substantially higher than the price contracted for. When looking to make an owner whole, courts will focus on the reasonable market cost of repair and completion as the appropriate measure of damages.