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New York Construction Law

Subcontractor Required to Strictly Comply with General Contractor’s Contractual Claim Provisions

Posted in Construction Contracts

In construction, incorporating a “prime contract” by reference into a subcontract is commonplace. Recently the Courts have broadly construed such “incorporation” provisions, often to the detriment of subcontractors. General Contractor

In Schindler Elevator Corp. v. Tully Const. Co, Inc., 139 A.D.3d 930 (1st Dept. 2016) the Plaintiff Schindler Elevator Corp. (“Schindler”) entered into a subcontract with the Defendant Tully Construction Co., Inc. (“Tully”) to provide five elevators for the City of New York Department of Sanitation (“DOS”). The subcontract incorporated by reference the “Prime Contract” between Tully and DOS. The Prime Contract had a condition precedent-type notice provision which required “a contractor claiming to be sustaining delay damages to submit, ‘within forty-five (45) Days from the time such damages are first incurred, and every thirty (30) days thereafter for as long as such damages are incurred, verified statements of the details and amounts of such damages, together with documentary evidence of such damages.’” The Prime Contract went on to state that a failure “to strictly comply with the requirements … shall be deemed a conclusive waiver by the Contractor of any and all claims for damages for delay arising from such condition.”

While after trial, the trial Court found in favor of Schindler relying upon the letters and emails of “actual notice” of the delays and the claim, on appeal, the First Department reversed the trial Court’s decision and found that “actual knowledge of the delay and the claims did not relieve the plaintiff of its obligation to serve a proper notice of claim.” The First Department rejected Schindler’s letters and emails as sufficient “since they did not contain verified statements of the amount of delay damages allegedly sustained by the plaintiff and were unsupported by documentary evidence.” Essentially, “substantial performance” is not enough when a condition precedent-type notice provision is incorporated by reference in a subcontract.

Parties to construction contracts should not only be cognizant of the claim provisions in its subcontract, but should also review and understand any other document that is incorporated by reference to that subcontract.

NY State Finance Law §137: Guidelines for Posting a Payment Bond under the “Little Miller Act”

Posted in Architects & Engineers, Construction Contracts

State Finance Law §137, modeled after the federal Miller Act, the father of all public project-bonding statutes,  requires general contractors on most public works projects to purchase payment bonds. Unlike a construction performance bond, which guarantees that construction work will be completed as per the terms of the contract, a construction payment bond is meant to protect an owner against claims made by subcontractors and suppliers and many others who provide work to a construction project. State Finance Law §137 requires payment bonds and therefore provides another avenue of recovery for subcontractors and suppliers for nonpayment by a general contractor or developer.

A payment bond is required for any public construction project that in the aggregate, exceeds $100,000, but only if those projects are not subject to New York’s Wicks Law.

State Finance Law §137 provides that an eligible party may bring a claim against the bond once 90 days have elapsed since the last furnishing of labor or materials and no payment has been received. Those subcontractors and suppliers that have a direct contract with a principal of a bond are not required to submit a written notice, but it is recommended. However, second tier claimants must submit a written notice within 120 days of its last provision of labor or materials or when such second tier claimant would be “entitled” to payment under its contract.

The Notice of Claim must accurately state the name of the entity for which the work was performed or provided materials to and must also identify the amount due with substantial accuracy. The Notice of Claim must be served by registered mail or personally served on the contractor at the place where it maintains an office or conducts its business or at its residence. The surety is not required to be served, but it is prudent to do so as it issued the payment bond.  Once a written Notice of Claim has been submitted (if required) and payment is still not forthcoming, a lawsuit may be filed against the surety and/or contractor that issued the bond.  Venue is in the county in which the contract of the contractor who furnished the bond was performed.

The Court, in its discretion, may also award attorney fees to the prevailing party.  The fees should be covered by the bond if it is determined that the original claim or the defense to the claim was without substantial basis in law or fact. Notwithstanding this provision, it is extremely unusual for a court to grant legal fees under State Finance Law §137.

An action against a payment bond must be commenced within one year from the time that the “entire contract work has been completed and accepted” by the public entity. It should be noted, however, that State Finance Law §137 will not override an enforceable pre-existing bond provision regarding the statute of limitations to bring a claim. For instance, if a bond provided on a public project includes a two-year statute of limitations, that two-year period prevails. It is thus imperative that the bond itself be evaluated before any action is undertaken.

State Finance Law §137 is strictly construed and non-compliance with the requirements can lead to rejection of the claim. It is therefore advisable to consult an attorney specializing in construction law in order to protect your rights under the bond.




Condo Board Lacks Capacity to bring Construction Defect Action for Failure to Follow Bylaws

Posted in Construction Contracts, Real Property Law 339-dd

In a July 2, 2014 Commercial Division decision by Justice Demarest, the court granted the defendant’s motion to dismiss the complaint. The plaintiff board of managers of a Brooklyn condominium commenced the action, alleging significant construction defects against the condo’s sponsor. Among the arguments raised in the defendant’s motion was that the plaintiff lacked capacity to sue at the time the action was filed by failing, in violation of the condo’s bylaws, to authorize the lawsuit at an appropriately noticed meeting of the condo’s board of managers. The court agreed, explaining that “the legal effectiveness of the actions of the Board depends upon the Board acting as a body within the constraints of the by-laws.” The court held that while the plaintiff undoubtedly had standing pursuant to Real Property Law § 339-dd (the Condominium Act), its failure to demonstrate that it acted as a board by voting to authorize commencement of the action necessitated a finding that it lacked capacity, and required dismissal pursuant to CPLR § 3213(a).

Board of Mgrs. Of the Clermont Greene Condominium v. Vanderbuilt Mansions, LLC, Sup Ct, Kings County, July 2, 2014, Demarest, J, Index No. 504278/2013

The NY Scaffold Law: Has the Time Come for Reform?

Posted in Labor Law 240-241

               The New York Scaffolding Law provides “absolute liability” against contractors and property owners for “elevation-related” injuries on most construction projects.  This results in employees being free of their own negligence for accidents.  The aftereffect has led to excessive insurance premiums to contractors and owners, which is detrimental to business and real estate development in New York.  Certain advocacy groups encourage people to travel to Albany to urge elected officials to reform the statute that was enacted in 1885.  Numerous articles on the subject have recently appeared in the New York Times, Newsday and the Subcontractors Trade Association Journal in support of the initiative for reform.

                The first scaffold law, a precursor of Labor Law §240 (1) was enacted 129 years ago in response to the advent of the “skyscraper”, an engineering innovation that was quickly changing the landscape of New York City.  At the time, the legislature was concerned with the increase in injuries on scaffolds due to unsafe conditions for employees who were working at high elevations.  Interestingly, the words “strict” or “absolute liability” do not appear in Labor Law §240(1) or any of its predecessors.  It was the Court, not the Legislature that began to use this terminology in 1923, holding that employers have an “absolute liability” to furnish safe scaffolding and are liable if injury results when they fail to do so.

                Today, New York is the only State with such a law on its books.  Pending reform legislation in the NYS Senate would replace “absolute liability” with a  “comparative fault” standard for claims under Labor Law §§240 and 241, in cases where the worker was, for example, violating safety standards, was intoxicated or was committing a criminal act at the time of the injury.  Under a “comparative fault standard”, the liability of the defendants would be factored into the analysis and the amount of damages would be reduced for cases in which the worker’s negligence or failure to follow safety procedures contributed to the accident.  This reform would alleviate skyrocketing insurance premiums, that not only plague contractors and property owners but also impact the cost of public projects such as bridges and local schools, all of which translates to higher taxes.

                In a recent press conference, Michael Elmendorf, President of the Associated General Contractors of NYS said, “The Scaffold Law adds 5% to the cost of a project which goes towards insurance.”  He further stated, “In the next year Governor Cuomo’s New York Works Task Force is slated to spend $20 million on capital spending.  That 5% is $1 million that is going to insurance costs because of this law and not to repair roads and bridges, or build schools and hospitals.”

                State lawmakers and labor unions are in disagreement on this reform. The opponents argue that the Scaffold Law is necessary because it keeps workers safe by holding contractors and owners accountable for dangerous work conditions that can develop due to improper training and/or defective safety equipment for their employees.  However, a study by the Albany Law School Government Law Center concluded that Occupational Safety and Health Act of 1970 (“OSHA”), not the Scaffold law, is the motivating force today behind construction safety on work sites. The OSHA Act imposes strict safety standards and severe penalties for employers who do not follow the rules to ensure a safe workplace.  Penalties can include imprisonment and/or criminal charges for serious violations.  OSHA is responsible for enforcing its standards by sending Compliance Safety and Health Officers to work sites to carry out inspection and assess fines for regulatory violations.  In addition to OSHA regulations, state and federal safety codes provide more than adequate protections for employees working at elevation-related construction sites.

                At this juncture, the battle lines are drawn between the unions on one side and the contractors and owners on the other. The unions do not want reform because they claim that the current law protects their members against catastrophic injuries.  Some lawmakers appear hesitant to embrace reform because they feel the current law reinforces project safety and because they claim there are no actual statistics that prove the law is driving up insurance premiums.  The owners want safe projects, but at the same time are fighting to control the escalating cost of construction.  Most contractors are faced with a risk/reward situation on every bid they submit, knowing that having proper insurance could result in the loss of project bids against other contractors due to the high cost of the insurance premiums while their competitors have substandard (and cheaper) insurance, giving them an unfair competitive advantage. On the other hand, having less costly (and risky) insurance could result in a claim that could wipe out a longstanding company.

                The question that must be answered is whether the costs associated with the Scaffold Law are hampering development – and if so, by how much?  The bottom line is this – it is not 1929 in New York. Is it finally the time to reform the Scaffold Law?

This article has been authored by Donna Mulato, a law student extern at Farrell Fritz, PC, edited by Jason Samuels.


City’s Countersuit Strategy to Exploit DBE Fraud Backfires – Perini Corp. v City of New York, 2013 NY Slip Op 31879(U) (Sup Ct, NY County 2013)

Posted in DBE / MWBE

In an effort to prohibit discrimination and to further participation of contractors owned or controlled by women and minorities in government-funded construction projects, many state and federal government contracts, including in New York, require participation by disadvantaged business enterprise (“DBE”) contractors.  In recent years, DBE programs have fallen prey to fraudulent practices by DBE and non-DBE contractors alike who conspire with each other to feign compliance with DBE requirements.  A recent decision from Justice Freed of the Supreme Court, New York County presents an interesting case-in-point.

In the late 1990s, the City of New York (“the City”) sought bids on the reconstruction of the Honeywell Street and Queens Boulevard Bridges.  Because the U.S. Department of Transportation (“US DOT”) provided the majority of funding for the project, the general contractor receiving the contract was required to hire a certain percentage of DBE subcontractors for the project.  In 1999, the City awarded the Perini Corporation with the contract based on Perini’s plan for meeting DBE requirements, which Perini had submitted to the City during the bidding process.

In 2003, Perini sued the City for $16 million in equitable adjustments in connection with certain work conditions and related delays on the project.  In December 2008, while Perini’s lawsuit against the City was pending, two former Perini officers were indicted on charges alleging that they conspired with DBE and non-DBE subs to implement the DBE program fraudulently.  The indictment was unsealed in March 2009 just as the parties were wrapping up the discovery phase of the lawsuit.

In September 2009, the City sought to assert counterclaims against Perini based on the indictment and to extend the discovery phase of the lawsuit, presumably to uncover further evidence of Perini’s alleged DBE-related fraud.  In March 2010, the Court granted the City’s motion over Perini’s opposition, and the parties spent another two years in discovery on the City’s counterclaims.

In or around June 2012, Perini moved to dismiss the City’s counterclaims on statute-of-limitations grounds.  Based on documents presumably disclosed after the court’s decision allowing the City to assert its counterclaims and extending the discovery phase of the lawsuit, Perini argued that the City knew or should have known about the alleged fraud by as early as 2001.  Among the documents relied upon by Perini were: (i) a November 2002 letter from the City’s engineer documenting an investigatory meeting with the NY City and State Departments of Transportation and stating that Perini “contrived paperwork in an effort to prove higher DBE participation”; and (ii) a September 2004 US DOT press release stating that Perini’s “scheme involved [a DBE sub] acting as a ‘front’ DBE under three NY City DOT construction projects in which [a non-DBE sub] actually performed the subcontracted work, while [the DBE sub] submitted fraudulent invoices for the associated labor and materials to Perini.”

The Court granted Perini’s motion and dismissed the City’s counterclaims, finding that the City “failed to address or refute their knowledge of the US DOT press release or [the engineer’s] inspection reports which were sufficient to have put a reasonable person under a duty to make inquiry regarding the alleged fraudulent scheme.”  Because a fraud claim must be asserted within two years of the date the fraudulent act was or could have been discovered, the City’s counterclaims were time-barred.

Plato v DASNY: Narrowing Exceptions to the Enforceability of No-Damage for Delay Clauses

Posted in Construction Contracts

“No-damages-for-delay” or “exculpatory” clauses in construction contracts between owners and general contractors are designed to protect owners from exposure caused by the delays that often occur on construction projects.  Contractors and subcontractors, in turn, often include such clauses to protect themselves from like exposure.

The Court of Appeals generally affirmed the enforceability of such clauses more than 25 years ago in Corinna Civetta Const. Corp. v City of New York, 67 NY2d 297 (1986).  The High  Court also affirmed the existence of certain exceptions to the general rule: (1) When delays were not contemplated at the time of contract; (2) Delays so unreasonable to be considered abandonment of the contract; (3) Delays caused by a breach of a fundamental obligation under the contract; and (4) Delays through bad faith, fraudulent misrepresentation, willful or grossly-negligent conduct.

Since Corinna, New York courts have revisited time and again the question of how narrowly these exceptions should be interpreted.  According to the Second Department in Plato Gen. Const. Corp. v Dormitory Authority of State of New York, 89 AD3d 819 (2d Dept 2011), exculpatory clauses are alive and well, remain broadly applicable, and are difficult to defeat by invocation of an exception.

Plato involved the renovation of the Brooklyn College Library under a $20 million contract between plaintiff Plato General Construction Corp. as “Contractor” and defendant Dormitory Authority of the State of New York as “Owner.”  The parties entered into the contract on May 20, 1999, which provided for completion of the renovation by March 20, 2001.

The contract contained the following exculpatory clause:

No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner’s discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.

Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.

The contract also entitled DASNY to liquidated damages from Plato of $1,000 per day for every day beyond the completion date and required Plato to submit all change orders to DASNY for its approval.

Plato did not turn over the renovated library until August 28, 2002, more than 17 months after the completion date.  The belated delivery of the premises was caused by, inter alia, delayed installation of Con Ed chiller lines, delayed access to the site due to a failure to vacate the premises, termination and replacement of the initial HVAC contractor and redesign of related drawings, and asbestos abatement work.

Plato sued DASNY to recover approximately $16 million in delay damages.  Relying on the exculpatory clause, DASNY denied liability and counterclaimed for approximately $400,000 in liquidated damages measured from the completion date to the date the library was turned over, less a 115-day extension granted by DASNY through the approval of change orders submitted by Plato.

The trial court awarded Plato approximately $10 million, finding among other things, that DASNY could not rely on the no-damage-for-delay language because: (1) DASNY’s approval of change orders in connection with the delays constituted a waiver; (2) DASNY breached the contract by failing to meet its obligations regarding, inter alia, scheduling and coordination of the work, provision of a competent HVAC contractor and design, and timely removal of materials from the premises; and (3) Some of the delays, including the installation of the chiller lines and asbestos abatement, were not contemplated at the time of contract.

The Second Department reversed, vacating the $10 million judgment in favor of Plato and awarding DASNY $179,000 on its counterclaim.  Specifically, the Second Department held that Plato’s allegations regarding DASNY’s failure to properly schedule and coordinate the work amounted to “poor planning and administration, which would not render inapplicable the no-damages-for-delay clause.”  The Court also held that the change-order requirements necessarily meant that the parties had contemplated delays at the time of contract.  Finally, while the Court acknowledged that DASNY’s approval of change orders “constituted a waiver of the no-damages-for-delay clause with respect to the delays specified in those change orders,” evidence of concurrent delays caused by Plato precluded any recovery.  Thus, the Court concluded that “the award of delay damages to Plato was not warranted by the facts, and must be set aside.”

             The moral of this story is that even under the most seemingly extreme circumstances, an exception to a no-damage-for-delay provision in a contract may in fact be out of reach.  Owners and contractors alike should be aware of the risk involved in including these provisions in their contracts.

The U.S. Government’s Recent Crackdown on Employer Misclassifications of Workers: What it Means for New York Construction

Posted in Labor & Employment in Construction

Currently, many employers throughout the U.S. Economy classify workers as “1099” independent contractors to reduce labor costs. By classifying a worker as an “independent contractor” instead of as an employee, employers avoid having to pay payroll taxes, the expenses associated with workers’ compensation and unemployment, employee benefits, and the time and money associated with administering and complying with various state and federal employment mandates regarding employees.  However, employers cannot simply designate a worker as an independent contractor as a way to avoid financial obligations.  Rather, the worker must actually be an independent contractor based on the criteria set forth in the applicable state and federal regulations.

Until recently, employers frequently misclassified (intentionally or unintentionally) workers as independent contractors when those workers really should have been classified as W-2 employees.  However, the Obama administration recently made it a priority to crack down on employers that misclassify employees as independent contractors.  This led to a joint effort between the U.S. Department of Labor and the IRS which has resulted in several recent lucrative judgments and demands against employers, particularly against those employers in construction and construction related industries.  For example, on May 9, 2013, the U.S. Department of Labor announced it had recovered more than $1 million in back wages for workers at a Kentucky-based cable installation company that was misclassifying its workers as independent contractors.  In discussing this outcome, acting Secretary of Labor Seth D. Harris explained that “[t]he misclassification of employees as independent contractors cheats workers of wages and benefits to which they would otherwise be entitled to under the law, subsequently hurting our economy. It also leads to unfair competition because businesses that play by the rules operate at a disadvantage to those that don’t.”

As the Obama administration and the federal government continue to tighten its grip on construction industry employers and employers in general with regard to this issue, it is essential that management for New York construction companies have a full understanding of the State and Federal criteria for determining whether workers are employees or independent contractors.  As seen in the above mentioned case, failure to make the correct classification could expose a business to significant financial liability.  This is especially true in the construction industry where contracting and subcontracting are the norm and often the lines between employee and independent contractor are blurred.  The applicable New York criteria are set forth in the New York Construction Industry Fair Play Act, a summary of which can be found here.  The applicable Federal criteria is set forth in the Fair Labor Standards Act, a summary of which can be found here.  Companies that are unsure as to whether their workers should be classified as employees or independent contractors should consult with their attorneys immediately.


Architectural Liability is Limited in Certain Scenarios

Posted in Architects & Engineers

A recent decision by a judge in a Brooklyn, New York court, highlights the inability of a condominium to sue the sponsor’s architect for design and construction defects arising from the construction of a new luxury condominium.  The condominium sued the sponsor and the architect claiming that it began receiving complaints from unit owners subsequent to the closing on the first unit, including leaks, HVAC problems, improper roofing, missing pavers, improper drainage and other defects.  The Court in Board of Managers of NV 101 N 5th Street Condo. v. Morton, et al. (2013 NY Slip Op 50575[U] [ Sup Court Kings County 2013]) dismissed all of the claims against the architect.

Under its agreement with the sponsor, the architect inspected the building and issued a report.  It also issued an “Attorney General’s Report” which was intended to be part of the Offering Plan presented to potential purchasers, which contained certain statutorily required language.  The condominium brought three claims against the architect based on those reports: (i) breach of contract based on its being a beneficiary of the contract between the sponsor and the architect; (ii) negligent misrepresentation and (iii) professional malpractice.

The Court found that the condominium’s breach of contract claim was predicated on an allegation that the architect’s reports omitted facts and that certain representations made were untrue.  However, the Court found that those statements were all required disclosures by law, and any claims based on those statements were preempted by the law in New York.  The Court also found that the unit owners were not intended third-party beneficiaries of the sponsor’s contract with the architect, and not in privity (having a direct contract) with the architect, necessary elements for a breach of contract claim.  The Court further found that the breach of contract claim was merely a restatement and duplicative of the professional malpractice claim, providing an additional reason for its dismissal.

As to the negligent misrepresentation claim, the Court found that it too was a restatement of the professional malpractice claim.  The Court also held that the negligent misrepresentation claim failed because the condominium could not show privity, or a relationship so close to approach that of privity, necessary for a negligent misrepresentation claim.

Last, the Court dismissed the professional malpractice claim because the condominium failed to allege that the architect performed any actions or inactions that caused the defects.  Rather, the condominium’s entire claim was based on the architect’s alleged misstatements in his reports which the Court found cannot be used to create a private right of action.

In sum, it is very difficult for a condominium to bring claims against the sponsor’s architect.  These claims may be dismissed because the statements made are required by New York law and the law bars a lawsuit against the architect, and because the condominium lacks a direct contract with the architect.