New York Commercial and Construction Lawyer Blog

Indemnification Claim Dismissed Based on “The Work Itself” Exclusion in Construction Contract

July 20, 2021 | by Daniel E. Katz

Construction contracts typically contain clauses whereby the contractor agrees to indemnify and hold harmless the owner or design professional in the event the contractor’s negligence results in a personal injury or property damage action commenced by a non-party to the contract between the owner and contractor. Similar risk shifting generally occurs in contracts between general contractors, on the one hand, and subcontractors and design professionals. However, these clauses often contain a carve out for “the work itself,” meaning that the contractor does not owe the owner indemnification in the event the damage is to the work being performed by the contractor. This carve out is often included because the contractor’s general liability insurance will not cover damages to the work performed by the Contractor. The insurance carrier will not assume risk of damage or of defects to the work being performed, which is more typically assumed by a performance bond surety if one is in place on the project.

The exclusion of damage to “the work itself” is often included in indemnification clauses of construction contracts without much discussion or negotiation. However, it has real world consequences as is made clear in the case of County of Saratoga v. Delaware Engineers, D.P.C. 189 A.D.3d 1926, 139 N.Y.S.3d 381 (3d Dep’t 2020).

The County of Saratoga entered into a design contract with Delaware Engineers and a construction contract with Jett Industries. After the work was completed the County found that certain pumps and tanks, designed by Delaware and installed by Jett, were defective. The County then sued Delaware and Jett under various theories, and Jett and Delaware cross-claimed against each other. As part of Jett’s contract with the County, it was required to indemnify Delaware for personal injury and property damages other than for “the work itself.”

Executive Order Tolling the Statute of Limitations Cannot Serve to Revive a Mechanic’s Lien That Was Not Timely Renewed

March 29, 2021 | by Daniel E. Katz

It is often stated that the Lien Law is to be “liberally construed” so as to protect the rights of the contractors and workers who are the beneficiaries of the statutory scheme. However, certain rules are strictly enforced by the courts, and a failure to follow the strictures of aspects of the Lien Law will result in a loss of rights. The rule regarding the renewal of mechanic’s liens is an area where a party must be especially vigilant, notwithstanding the suspension of certain deadlines during the COVID-19 shutdown, as the recent case Emerald Services Corporation v. Empire Core Group LLC, (NY County Index No.: 652744/2020) makes clear.

In the Emerald Services the plaintiff filed four mechanic’s liens on December 24, 2019 and commenced a foreclosure action on June 25, 2020. However, it did not file a notice of pendency or renew its liens within one year of the filing of the liens. Accordingly, pursuant to Lien Law Section 17 and the relevant case law, the liens expired one year after their filing. The court did not have discretionary authority to rule otherwise.

Plaintiff made the argument that it moved to extend its liens, nunc pro tunc, pursuant to Executive Order 202.8, which tolled virtually all statutes of limitations as a result of COVID-19. As the court pointed out, however this executive order was superseded by Executive Order 202.67 which provided that the tolling was only effective through November 3, 2020. Because the Plaintiff moved after the tolling period had expired on November 3, it could not enjoy the benefit of that statute. In effect, the Emerald Services Court was treating Executive Order 202.8 as a suspension of the statute of limitations rather than a toll, which might have operated to waive the statute of limitations for several more months after the period ended. The issue of whether Executive Order is technically speaking a toll or a suspension has not been addressed by appellate courts, and that decision, whatever it is, will impact numerous claims under the Lien Law, and claims well beyond the scope of the Lien Law.

The Difficulties in Reducing The Value of a Mechanic’s Lien

October 30, 2020 | by Daniel E. Katz

Owner have limited rights to summarily remove a mechanic’s lien of record. Typically, Owners achieve this result by posting a surety bond with the County Clerk where the lien was filed. Owners can also summarily remove a mechanic’s lien if it contains a facial defect such as listing the wrong owner, or if the affidavit of service of the lien is not properly filed. Other than in these limited circumstances, an owner can only remove a lien in the context of a lien foreclosure action.

Owners often complain that a contractor has filed a mechanic’s lien that, in the view of the Owner, is clearly excessive. The question then arises as to how the amount of the lien can be summarily reduced, without the necessity of engaging in motion practice and possibly a trial.

The First Department addressed this question in Pizzarotti, LLC v. FPG Maiden Lane LLC __ A.D.3d ___ 129 N.Y.S.3d 771(1st Dep’t 2020). The rules cited by the First Department apply equally to attempts by owners or contractors who seek to reduce lien claims. The bottom line is that there is a basically no device to summarily reduce the amount of a mechanic’s lien outside the confines of a mechanic’s lien foreclosure action.

Continuous Treatment Doctrine Applied To Sustain a Claim Against Architect

July 31, 2020 | by Daniel E. Katz

There is a three year statute of limitations for malpractice claims against architects and other design professionals. These claims generally begin to accrue upon the completion of the work in issue. However, a cause of action against a design professional may be tolled based upon the “continuous treatment” doctrine if the plaintiff can show it relied upon a continuous course of service related to the original work performed. The Second Department recently issued an opinion which applied this doctrine to uphold, at the pleading stage, a claim based upon a contractual relationship which started more than ten years before the legal action was commenced.

In Anderson v. Pinn, 2020 WL 3554992, 2020 N.Y. Slip Op. 03636 (2^nd Dep’t) the Plaintiff entered into a contract in 2005 with an architecture firm for the design of a construction project. Because Plaintiff lost its funding for the project, the physical construction work apparently stopped in 2008. Prior to that time, Plaintiff had discovered that the utilities in the two buildings being constructed would have to be installed separately. The Architect, according to the Complaint, stated this has been an “oversight” on its part, but that subdividing the property “would not be a problem.”

In 2015 and 2018, Plaintiff and the Architect entered into a new contract for the project. The Architect filed numerous unsuccessful applications with the Department of Buildings for the subdivision. The Architect died, and never completed the project.

When Is an Arbitration Award Final?

June 25, 2020 | by Daniel E. Katz

In American International Specialty Lines Insurance Company v. Allied Capital Corporation the New York Court of Appeals wrestles with a simple yet significant question: When is an arbitration award truly final such that it may not be altered? 2020 N.Y. Slip Op. 02529 (2020).

The matter arose out of dispute between an insurer and its insureds that was adjudicated in arbitration. By way of background, the insureds had previously settled a federal qui tam action involving allegations of their participation in loan origination fraud.

Following this settlement, the insureds sough payment from their insurer for their defense costs and indemnification for the settlement. When the insurer denied coverage, the insureds demanded arbitration based on the insurer’s alleged breach of two relevant insurance policies.

Due Process at Risk in Arbitration Proceedings

June 16, 2020 | by Robert J. Howard

The Appellate Division, Second Department, has handed down an opinion telling a cautionary tale to would-be parties who are considering contracts containing broad arbitration agreements. Litigants in court have the right to rely on a broad array of rights under the Constitutionally protected right to “due process.” In Matter of New Brunswick Theological Seminary v. Van Dyke, 2020 N.Y. Slip Op. 03114, the Court emphasized just how far an unwary litigant can waive those protections in arbitration.

The New Brunswick matter concerned a dispute between a registered financial broker and a former client which was governed by an arbitration agreement. The broker claimed that she did not know that an arbitration had been filed against her until after an award was granted in favor of the former client on default. When the former client went to court seeking to convert the arbitrator’s award into an enforceable money judgment, the broker cross-moved to vacate the award on the grounds that the procedures set forth in the arbitration agreement for giving notice of the commencement of the arbitration violated her due process rights.

Ordinarily, due process does not require actual notice of an action or proceeding. It does, however, require such procedures which are “reasonably calculated” to result in actual notice. The notice provisions in the arbitration agreement provided for notice by certified mail at a specified residential address. The broker contended that this was not “reasonably calculated” to result in actual notice because the former client knew or should have known that the broker spent prolonged periods away from her residence The broker also argued that the former client knew how to reach her by email.

NYCHA Construction Contracts Are Traps For The Unwary

May 21, 2020 | by Daniel E. Katz

Public owners often utilize notice of claims and contractual notices to bar otherwise valid claims for relief. The New York City Housing Authority (“NYCHA”)is no different, and requires any potential claimant to be especially vigilant in preserving rights to monetary damages. The First Department recently upheld NYCHA’s assertion of these defenses and sustained the dismissal of a complaint by a surety acting in place of a contractor. Colonial Surety Co., v. New York City Housing Authority, 182 A.D.3d 517, 120 N.Y.S.3d 772 (1st Dep’t 2020).

The NYCHA contract under review stipulated that notices of claim be filed within twenty (20) days of accrual.. The Court here found, consistent with prior caselaw, that the claim had accrued when the NYCHA had informed claimant in writing that it intended to substantially decrease its scope of work. Unfortunately, claimant here did not file its notice of claim until two and one half years later, and after the underlying project had been substantially complete.

Plaintiff’s claims were also barred because the NYCHA had found that Plaintiff had defaulted in its contractual obligations. Pursuant to the NYCHA contract, in those circumstances Plaintiff could not properly maintain a plenary action for monetary damages. Instead it was required to commence an Article 78 proceeding, which imposes a far higher burden of proof on a claimant.

Flanking the Corporate Shield of a Home Improvement Contractor

May 12, 2020 | by Robert J. Howard

A recent decision handed down by the Suffolk County Supreme Court (Hon. Sanford Neil Berland, J.) in the matter of Sweeney v. Waitz and Artisan Builders of the North Fork, Inc. (66 Misc.3d 384) reminds us of the rights and risks that homeowners and home improvement contractors must confront when the home improvement contractor is doing business in the corporate form.

Many are familiar with the principle that an individual who incorporates a business generally has no personal liability for the obligations of the corporation. Incorporation creates a legal entity which is distinct from the individual incorporator. When transacting business, the individual acts in the capacity as an agent for the corporation. So long as the homeowner is made aware that the individual is acting as an agent on behalf of the corporate entity and the individual has not specifically agreed to personally assume any obligations, the individual cannot be held liable for the obligations of the company.

In Sweeney, the homeowner filed an action against the corporate defendant and its individual/principal in connection with a home improvement contract for the renovation of a personal residence. The individual defendant made a motion for summary judgment asking the Court to dismiss the claims which were asserted personally against the individual based on the principle that an individual acting as an agent for a disclosed principal generally has no personal liability. The individual defendant established that he always disclosed that he was acting as an agent for the corporate principal and that he never assumed any personal liability.

Damages for Willfully Exaggerated Mechanic’s Liens Unavailable for Mechanic’s Liens that Are Prohibited by Enforceable Agreements

May 4, 2020 | by Megan Gardner

The Second Department recently found, in Degraw Construction Group, Inc. v. McGowan Builders, Inc., 178 A.D.3d 770, 114 N.Y.S.3d 395 (2d Dep’t 2019), that a lienor cannot be held liable for willfully exaggerating a mechanic’s lien if the mechanic’s lien is impermissible in the first place. DeGraw confirms that Lien Law Section 39-a remedies are only available if the subject mechanic’s lien is otherwise valid. Thus, if a mechanic’s lien is filed in contravention of an enforceable agreement precluding it, as it was in DeGraw, remedies for willfully exaggerated liens are unavailable.

In Degraw, a subcontractor and general contractor entered into a settlement agreement which provided that if either party breached the agreement, the other party’s sole remedy would be to enforce the agreement. Nonetheless, when the general contractor failed to make certain payments under the agreement, the subcontractor filed mechanic’s liens against the relevant properties and commenced lien foreclosure actions.

The general contractor moved for summary judgment, which the trial court granted, finding that the mechanic’s liens were invalid because they were barred by the settlement agreement. That court awarded the general contractor damages representing the amount of premiums for the bonds given to discharge the mechanic’s liens. The general contractor appealed, claiming it was also entitled to additional damages and attorneys’ fees based on its claim that the subcontractor willfully exaggerated the mechanic’s liens.

The Challenge of Proving Willful Exaggeration Under The Lien Law

April 27, 2020 | by Steven Cramer

In J. T. Magen & Co., Inc. v. Nissan North America, Inc., 178 A.D.3d 466 (First Dep’t 2019), the court applied some basic principles concerning willful exaggeration under the Lien Law to an unusual set of facts. While the court did not explicitly refer to Lien Law Section 39, it underlies the entire case. Section 39 permits a court to cancel a mechanic’s lien that is found to have been willfully exaggerated.

The unusual facts are these: defendant Nissan sought to dismiss plaintiff contractor J. T. Magen’s (“JTM”) lien foreclosure action where JTM’s lien was filed against the entire building in which both Nissan and a non-party, BICOM, had leasehold interests. To confuse matters, JTM’s construction contract was with non-party BICOM only, but called for JTM to perform construction work on both BICOM’s and Nissan’s spaces.

Nissan argued that the lien was willfully exaggerated because JTM failed to differentiate and apportion its lien based on the work it performed for the two separate tenants, Nissan and BICOM. Nissan also claimed JTM had walked off the job before it ever performed any work on Nissan’s space, so that Nissan did not benefit from the work that was the basis for JTM’s lien.