Question. Where, the Supplier and Subcontractor had an open account relationship, did each invoice represent a separate contract requiring notice of nonpayment in order to recover under a payment bond?

answer. NO. The timeliness of a supplier’s claim for payment under a private payment bond, on a project which is not a public improvement project and which is therefore not governed by State Finance Law ¬ß 137, is measured by the final delivery of materials for which claim is made1.

Supplier, contracted to supply construction material to, Subcontractor, for the construction of an apartment building, which was not a public improvement project. To assure payment for all labor, material, and equipment furnished for use in the performance of the entire project, General Contractor obtained a private payment bond.

Supplier supplied construction hardware and supplies to Subcontractor for use on the project. When Subcontractor, failed to make payment for that material, Supplier provided notice of its claim to the Surety, and requested payment under the payment bond.

The surety denied that portion of the claim relating to goods supplied longer than ninety days before the Notice of Claim, on the ground that Supplier’s notice of claim was untimely as to materials supplied before that date. The Surety asserted that Supplier had an “open account” arrangement for the delivery of material for Subcontractor and therefore, under the Surety’s interpretation of the notice provisions of the payment bond, Supplier was required to give notice within 90 days of each separate delivery of materials to the project. Supplier asserted that its arrangement with Subcontractor was not an open account; rather, the 78 deliveries of material by Supplier to Subcontractor were part of Supplier’s comprehensive agreement with Subcontractor to supply all the general construction material for Subcontractor’s portion of the project.
The payment bond provided in this case was issued on a standard form developed and copyrighted by the American Institute of Architects, known as form A312. In order for the sureties to have an obligation to a claimant who does not have a direct contract with the contractor, that claimant must “[h]ave furnished written notice to the contractor and sent a copy, or notice thereof, to the Owner, within 90 days after having last performed labor or last furnished materials or equipment included in the claim stating, with substantial accuracy, the amount of the claim and the name of the party to whom the materials were furnished or supplied or for whom the labor was done or performed.” It is the phrase “having last performed labor or last furnished materials or equipment included in the claim” that is at issue in this case.

The notice provision significantly simplifies the procedures for laborers and material suppliers to obtain prompt payment for their services or goods, eliminating the necessity of their first exhausting remedies under the Labor Law or the Lien Law. The notice provisions also benefit contractors in investigating claims and withholding payments to subcontractors on these claims.

While arguments could be presented on both sides of the question of whether the notice requirements are triggered by each separate invoice in an open account arrangement or by the final delivery by the claimant the argument advanced by the surety would unduly burden suppliers, and owners and would provide marginal additional protection to general contractors, as it would require a separate notice no matter the volume of deliveries or the amount owed for each delivery on an open account.

The notice provided by Supplier within 90 days of its last delivery to Subcontractor was timely without regard to whether Supplier and Subcontractor had a master contract or were working under an open account.

Question. Where a Note does not manifest an agreement between the parties that the contractual interest rate of 5% would continue beyond the Note’s maturity date until Debtor repaid the Note does the [currently] higher judgment rate apply?

answer. YES, in the absence of such a provision, New York’s current prejudgment statutory rate of 9% should apply for the period from maturity through the date of the judgment’s entry. Creditor sold building materials to Debtor for which Debtor did not make timely payment. In exchange, in part, for delaying the commencement of collection proceedings the Debtor provided the Creditor with a promissory note (the “Note”). The Note contained an interest rate of 5% and a maturity date 90 days in the future. The Note contains a choice of law provision, stating that New York law governs its construction. Debtor failed to make payment due under the Note on its maturity date, leading Creditor to file suit.

Creditor argues that interest should be calculated on the judgment in the amount of 9% per annum (the judgment rate pursuant to N.Y. C.P.L.R. 5004), from the day following the Note’s undisputed maturity date. Debtor objects to Creditor’s interest rate calculation. Debtor argues that the Note’s interest rate of 5% should apply to the period between maturity and the entry of judgment. Debtor cites New York case law that holds when a contract provides for interest to be paid a specified rate until the principal is paid, the contract’s rate of interest, rather than the legal rate governs until the contract is merged in a judgment.

New York law provides that interest shall be recovered upon a sum awarded because of a breach of performance of a contract.” N.Y. C.P.L.R. ¬ß 5001. In an action for breach of contract prejudgment interest is recoverable as of right.

Creditor argues that the Note’s provision that it shall bear 5% interest “to the date this Note shall have been repaid in full” shows that the parties intended for Debtor to pay the balance by the maturity date and the 5% interest rate should be extinguished on that date. Creditor argues that the statutory date should apply in the absence of a specific provision that identifies the rate of interest to be charged post-maturity.

Contrary to Debtor’s assertions, the Note does not state that the 5% rate shall apply until the principal is paid. Rather, the Note provides in part “[t]he aggregate outstanding principal balance of this Note shall bear interest accruing from the date hereof to the date this Note shall have been repaid in full at the rate of five percent (5%) per annum.” (Emphasis added). The Note is silent as to what rate would apply if Debtor did not pay the principal by the maturity date. In other words, there is no default interest rate.

This conclusion is consistent with the contractual interpretation doctrine of “plain meaning. In New York, it is well-settled that a “written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Here, the parties’ unambiguous language shows that the interest rate of 5% was to continue until the Note’s maturity date.

Question. Does the “merger doctrine” extinguish a clause in the buyers’ pre-purchase-agreement allocating their respective percentage of ownership of real estate where such clause conflicts with a similar provision in the deed of conveyance that provides a different percentage of ownership?

answer NO. Buyer A entered into an agreement (hereinafter referred to as “buyers-pre-purchase-agreement”) with Buyer B to jointly purchase certain real property. The property was divided into four distinct parts: a garage, a multi-purpose dwelling and two vacant lots, which were intended to accommodate buyer’s respective businesses.

Pursuant to the buyers-pre-purchase-agreement, after the purchase, Buyer A shall occupy the garage and Buyer B shall occupy the remainder, a multi-purpose dwelling and two vacant lots. The buyers-pre-purchase-agreement required Buyer A to provide the down payment and Buyer B to cover the remainder of the purchase price with a purchase money mortgage. In addition, the buyers-pre-purchase-agreement provides that, after the closing, the parties shall undertake to cause the property to be divided so that the lot improved by a garage building shall be designated as one lot and the remaining three lots as one lot.” The garage constitutes twenty five percent (25%) of the property, while the other three lots constitute seventy five percent (75%) of the property.

Seller, who is not a party to this action, owned these four contiguous real properties. Seller entered into a purchase-and-sale agreement to convey the real properties to Buyer A and Buyer B. The deed executed and delivered to purchasers contains a provision allocating thirty percent (30%) ownership of the property to Buyer A, and the remaining seventy percent (70%) to Buyer B According to Buyer A prior to closing, Buyer B was unable to meet part of its commitment. In consideration for making up for the deficiency of Buyer B’s commitment, Buyer A received an increase of five percent of his ownership interest in the properties. In contrast, Buyer B claims that the five percent increase was done solely to require Buyer A to assume a greater percentage of the tax obligation, so as to more equitably reflect the actual value of its portion of the property; it was never intended to alter the ownership split, as provided in the buyers-pre-purchase-agreement.

Reportedly, since the transfer Buyer A has used a portion of the vacant lot behind the multi purpose dwelling to store certain business equipment and vehicles. Such space, Buyer A claims, constitutes the five percent (5%) increase in ownership it acquired at the closing. A dispute ensued when Buyer B refused to divide the property along the 70/30 percent split, as delineated in the deed of conveyance.

There is no support in the law for Buyer A’s contention that the buyers-pre-purchase-agreement-allocating a 75/25 percent split of ownership-merged into the deed and is therefore extinguished. The merger doctrine has no application to this case. This is because the principle of merger addresses the obligations between the seller and buyer of real property. Except in limited circumstances, a deed entered between the seller and buyer would have the effect of extinguishing unfinished obligations of the seller or buyer arising from a prior contract of sale. In other words, the delivery and acceptance of an executed deed is considered prima facie evidence of a merger superseding the provisions of the antecedent contract which had imposed obligations upon the parties.

In this case, however, the dispute is not between the seller and buyer. Rather, the dispute pertains to the rights and obligations between the buyers. Accordingly, the resolution of the conflict depends upon the interpretation of the terms of the buyers-pre-purchase-agreement and the deed with regard to the party’s respective share of ownership of the property upon the agreed partition. Thus, since the rights of the parties as to the allocation of ownership upon the agreed partition does not arise from the contract of sale, their promulgation in the buyers-pre-purchase-agreement are not extinguished by the doctrine of merger.

Question. Homeowners and Builder entered into a written contract for Builder to construct a single family home on Homeowners’ property. That contract obligated the Builder to provide labor and materials necessary for such construction in accordance with certain plans and specifications. Those plans stipulated the type of roof and its materials, including specific shingles of a particular manufacturer. The contract also provided that the Builder would “deliver those warranties given under Article 36-B of the General Business Law except as may be contained herein.” The Builder constructed the home and was paid in accordance with the contract. The Builder did not install the shingles as stipulated in the written contract. Rather, Builder installed shingles manufactured by another company.

Homeowners also claim that after the completion of the home problems began developing with the roofing shingles, resulting in some shingles being blown off the roof. They further claim that they contacted the Builder, who refused to address the situation. They contacted the manufacturer of the shingles that were installed, which acknowledged that the shingles were defective and refunded Homeowners the purchase price paid by the Builder. Refund of the shingles’ purchase price did not cover installation of a new roof. Homeowners seek compensation from the Builder representing the cost of a new roof less the sum reimbursed by the shingle manufacturer.

Builder claims that he received no written notice of any alleged shingle defect until almost four years after contract completion and that he did replace the shingles that were blown off the roof but refused to replace the entire roof.

Homeowners rely on a breach of contract theory. Builder asserts the Homeowners’ had to comply with the requirements of article 36-B of the General Business Law, entitled “Warranties on Sales of New Homes.”1 If the Breach of Contract theory is not available the Homeowners will have no remedy under the warranty as the defect complained of did not arise within the applicable statutory one year warranty period.

Can the Homeowners rely on a breach of contract cause of action?

answer YES. The statutory new home implied warranties imposed by article 36-B of the General Business Law apply to custom homes and protect purchasers of such homes. If a home buyer fails to comply with the statutory requirements for assertion of his rights under the statutory implied warranty, he has no cause of action for breach of contract based upon the builder’s or seller’s implied obligation of merchantability. Thus, to the extent that Homeowners’ cause of action is based upon defective workmanship and materials predicating a claim that the home was not “constructed in a skillful manner as defined in General Business Law ¬ß 777(a), the Homeowners’ failure to abide the statutory notice and limitations period would bar the action. However, Homeowners assert that the Builder breached the express provision of their contract regarding the manufacturer and type of shingles to be installed This claim is one that is not encompassed within the statutory new home warranty law, and would not be barred by the written notice and abbreviated limitations period applicable to most statutory implied warranty claims. The six year statute of limitations for breach of contract governs, absent agreement to the contrary, which is not alleged in this case. Whether the Homeowners suffered compensable damages is another question.

The Statutory New Home Warranty Law: History and Overview

It has long been cemented in the common law of contracts that, “[a]s a general rule, there is implied in every contract for work or services a duty to perform it skillfully, carefully, diligently, and in a workmanlike manner”. This general rule has also been long understood to apply to housing construction contracts.

Traditionally, once the buyer accepted the deed, he absolved the vendor of all duties under the sales contract. Under the merger doctrine, all contract obligations ‚Äòmerged’ into the deed when the seller delivered it to the buyer. If the vendor intended to fulfill additional obligations, the parties had to list the obligations in the deed.

The effect of the merger doctrine was to extinguish claims based upon defective home construction once the buyer accepted title to the underlying real estate. Consequently, because of the perceived unfairness and inequity of this result, the Court of Appeals held that at least in the context of new residential home sales, the merger doctrine applicable upon transfer of title, whether derived from the parties’ contract or otherwise by operation of law, would not extinguish the implied warranty

Less than two months after the Court of Appeals decided that case the State Legislature enacted and the Governor signed into law what is now codified as article 36-B of the General Business Law, and known as the new home warranty law.

After enactment of General Business Law article 36-B, there was uncertainty as to whether the common law implied warranty recognized by the Court of Appeals survived the statutory enactment. It became and remains clear that the courts will enforce the notice requirement of the statute as a condition precedent to suit and the abbreviated statute of limitations applicable to statutory new home warranty claims and dismiss actions failing compliance with either or both. As such, it became inevitable that the case would arise where a buyer unable to establish compliance with the notice or statute of limitations requirements of the statutory new home warranty would seek a basis for a remedy outside of the statute.

That case arose in 1998. More than a year after transfer of title, the plaintiff home buyer discovered defects in the sprinkler system master pump, as well as in a bathroom drain, handrail, and plumbing fixture. The plaintiff failed to comply with the condition precedent to suit under the limited warranty given by the builder under the statute. The Court of Appeals ruled that the statutory warranty effected a complete displacement of the common law implied warranty in cases where the statute is applicable and denied the home buyer’s claim.

Question. Over the course of two years the Supplier and Contractor entered into a series of twelve sales agreements for steel casings, or hollow steel pipe. Pursuant to those sales agreements, Supplier delivered steel casings to Contractor.

The parties do not dispute that their sales agreements constituted valid contracts. Contractor initiated each purchase by sending to Supplier a purchase order including the basic specifications of the steel casings desired. Each of Contractor’s purchase order forms included the following clause:

No terms or conditions, other than those stated herein, and no agreement or understanding in any way modifying the terms and conditions herein stated shall be binding upon purchaser, unless mutually agreed upon in writing.

In response to Contractor’s purchase orders, Supplier sent two subsequent documents to Contractor: an acknowledgement form, alternately labeled a “Sales Contract” or a “Sale Note,” sent prior to delivery of the goods, and a “Sales Invoice,” sent following the delivery of goods. Each acknowledgement form included the following paragraph:

This contract is made between the buyer and the seller whereby the buyer agrees to buy and the seller agrees to sell the undermentioned [sic] goods subject to the terms and conditions as stipulated hereafter. This contract reflects in its entirety all details as agreed between the parties thereto. Any changes must be in writing and accepted by both parties. Any contract disputes are to be resolved through friendly negotiations. If no settlement can be reached then either party may submit the dispute to arbitration as per the rules of the American Arbitration Association in New York.

Some of the acknowledgement forms also altered other terms contained in Contractor’s purchase orders, including changes in the length of the payment term and minor variations in the price and the amount of steel casing to be delivered.

After sending each acknowledgement form to Contractor, Supplier delivered the requested steel casings to Contractor. Contractor accepted each delivery of casings, but it failed to fully pay Supplier the amount due under various invoices.

Does a valid agreement or obligation to arbitrate exist?

answer NO. In this case, there is no dispute that Supplier and Contractor entered into a series of binding sales contracts, and the parties agree that those contracts are governed by New York law and in particular by the Uniform Commercial Code (“UCC”) as adopted by New York. The parties do not, however, agree on the answer to the central question: whether those contracts included an agreement to submit disputes between Supplier and Contractor to arbitration. An arbitration clause appears in the acknowledgement forms Supplier used to confirm Contractor’s orders, but not in Contractor’s purchase orders. Contractor contends that its purchase orders constituted offers, and that Supplier’s acknowledgement forms constituted acceptances of those offers. Supplier argues that its acknowledgement forms were not acceptances of Contractor’s offers, but were instead counter-offers that Contractor accepted by performance when it took delivery of the steel casings.

Under New York law, section 2-207 of the UCC governs the formation of contracts when the terms of the parties’ writings are not identical. This provision was adopted to alter the common law rule requiring perfect symmetry between the terms of an offer and an acceptance and to resolve the “battle of the forms” problem in a way that better conforms to modern business practices.

Under paragraph (1) of section 2-207, a seller’s form response to a buyer’s purchase order normally constitutes a “definite and seasonable expression of acceptance” if it repeats the terms of the buyer’s order. According to the proviso at the end of paragraph (1), if the seller’s response does not state that acceptance is “expressly made conditional” on the buyer’s assent to additional terms the seller included, that response operates as an acceptance and a contract is formed. When a contract is formed under paragraph (1), paragraph (2) applies to determine whether the additional or different terms become part of the contract.

If, however, the seller’s response is “expressly made conditional on assent” to the divergent terms, then the proviso in paragraph (1) provides that no contract is formed, and instead the seller’s response constitutes a counter-offer. To be deemed ‚Äòexpressly conditional,’ the seller’s invoice must place the buyer on unambiguous notice that the invoice is a mere counteroffer

When the paragraph (1) proviso applies to prevent contract formation, the parties’ conduct may nonetheless recognize the existence of a contract, and in that case paragraph (3) of section 2-207 defines the terms of the agreement as those upon which the parties agree together with any supplemental default terms provided elsewhere in the U.C.C.

Supplier argues that its acknowledgement forms were “expressly made conditional on assent” to their additional terms, including the arbitration clause, and thus that they could not have operated as acceptances under section 2-207(1). Supplier asserts that its acknowledgement forms therefore constituted counter-offers, which were subsequently accepted by Contractor’s performance. The following two sentences from Supplier’s forms are the only likely candidates for Supplier’s alleged “express” condition:

This contract reflects in its entirety all details as agreed between the parties thereto. Any changes must be in writing and accepted by both parties.

But these sentences merely purport to characterize the acknowledgement forms as final versions of an agreement that the parties had already reached, rather than expressly requiring assent to additional terms. Supplier’s acknowledgement forms thus were not “expressly made conditional” on assent to their additional terms, and in particular to the arbitration clause they included.

The language in Supplier’s acknowledgements differs markedly from the express language that courts have found sufficient to establish an “express condition,” for example, a seller’s reply to a buyer’s purchase order with an acknowledgement form including the following statement, along with an added arbitration provision is enfprceable:

Seller’s acceptance is, however, expressly conditional on Buyer’s assent to the additional or different terms and conditions set forth below and printed on the reverse side. If the terms and conditions are not acceptable, Buyer should notify seller at once.

It should be noted that even if Supplier’s forms constituted counter-offers as it has argued, Supplier could not succeed in incorporating its arbitration clause into the contract. Where, as here, the conduct of the parties indicates that a contract was formed, but the parties’ writings do not themselves form the contract, section 2-207(3) applies to provide the terms of the agreement. The parties’ writings do not agree on the arbitration clause, and it does not fall under any default provision of the UCC, so section 2-207(3) would exclude the arbitration clause. Supplier’s arguments that its forms included some different terms regarding the price and specifications for the steel casings ordered and that Contractor never objected to these variations upon delivery are unhelpful, because Contractor’s conduct in accepting the goods only evidences the formation of a contract and Contractor’s agreement to certain undisputed terms.

Because Supplier’s responsive forms did form a contract under section 2-207(1) despite proposing additional terms, section 2-207(2) applies to determine whether those additional terms became part of the contract. Section 2-207(2) provides that when both the buyer and seller are merchants, the proposed additional terms become binding unless any one of three exceptions applies. The first exception, which is relevant here, excludes additional terms when “the offer expressly limits acceptance to the terms of the offer.”

In each of its purchase orders, Contractor included the clause: “No terms or conditions, other than those stated herein, and no agreement or understanding in any way modifying the terms and conditions herein stated shall be binding upon purchaser, unless mutually agreed upon in writing.” This clause contains clear language expressly limiting acceptance to the terms contained in the purchase order. Supplier’s acknowledgement forms thus could not unilaterally impose additional terms without Contractor’s written assent.