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New York Construction Law

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. General Contractor

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. 1099 form

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. 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.