New York Commercial and Construction Lawyer Blog

May 21, 2020

NYCHA Construction Contracts Are Traps For The Unwary

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.

May 12, 2020

Flanking the Corporate Shield of a Home Improvement Contractor

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.

May 4, 2020

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

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.

April 27, 2020

The Challenge of Proving Willful Exaggeration Under The Lien Law

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.

April 20, 2020

Validity Of No Damage For Delay Clause In Construction Contracts

By Trista W. McConnell

It is becoming increasingly evident that “no-damage-for-delay” provisions in construction or building contracts will be strictly enforced except in rare instances. This principle was recently reiterated by the First Department in WDF Inc. v. Turner Constr. Co., 177 A.D.3d 513, 112 N.Y.S.3d 133 (1st Dept. 2019), which held that a prime contractor’s internal e-mail assessing potential delay damages was irrelevant to the enforceability of the broad no-damages-for-delay clause in the subcontract. Id., 177 A.D.3d at 514. The Court rejected the argument that the email constituted a party admission of liability, stating that it was apparent from the email that the prime contractor was assessing the costs claimed by the subcontractor, rather than the viability of the subcontractor’s claims under the terms of the subcontract. Id. Based on this reasoning, the Court stated that “[t]he fact that [the prime contractor] evaluated whether [the subcontractor] incurred delay damages is irrelevant to the enforceability of the no-damages-for-delay clause.” Id.

The First Department also noted that the case was “strikingly similar” to a separate action brought by the subcontractor seeking delay damages, wherein the Court concluded that alleged poor administration or planning was insufficient to overcome a no-damages-for-delay clause in a construction contract. WDF, Inc. v. Trustees of Columbia Univ. in the City of N.Y., 170 A.D.3d 518, 96 N.Y.S.3d 42 (1st Dept. 2019). As a result, the Court found that the no-damage-for-delay provision in the contract was still applicable, as a matter of law.

Recent standard construction contracts issued by the City of New York for its public projects have eliminated the no-damages-for-delay clause, although they still have stringent notice provisions. Nonetheless, many construction contracts with private owners contain this provision. Contractors presented with this kind of exculpatory clause should attempt to remove this language or at least limit the terms.

April 13, 2020

Contractors Cannot Use Contractual Limitations Periods to Wholly Preclude Actions

By Daniel J. Swayze

Digesare Mechanical, Inc. v. U.W. Marx, Inc. stands for the principle that while parties are free to contract to to shorten the six-year statute of limitations period for breach of contract they cannot use such a limitation to effectively preclude such a claim in its entirety. 176 A.D.3d 1449, 112 N.Y.S.3d 306 (3d 2019).

The case effectively concerned a dispute between a subcontractor and a contractor in which the subcontractor alleged that the contractor had not fully paid it for work completed on a project. The relevant subcontract contained a limitations period provision stating that the subcontractor was required to bring any claim within six months of its last day of work.

Additionally, the subcontract contained a provision providing that the subcontractor would be paid by the contractor when the contractor was paid by the owner. The court determined that this provision was a permissible pay-when-paid provision rather than an unenforceable pay-if-paid clause. However, it was the combination of the pay-when-paid provision in conjunction with the shortened contractual limitations period that rendered the limitations clause unenforceable.

January 2, 2020

Second Department Upholds Mechanic’s Lien for Pre-Construction Services

By Daniel E. Katz

The New York Lien Law provides broad categories for the type of work, labor, or services for which a contractor can file a mechanic’s lien if it is not paid. Owner’s typically argue that a contractor, construction manager, or design professional which perform preconstruction services cannot file a mechanic’s lien if it is unpaid. Not surprisingly, contractors, construction managers, and design professionals take the opposing position. Courts have continued to grapple with this issue. The Second Department recently adopted a nuanced opinion, finding that certain preconstruction services were lienable, but others were not. This blog also updates a previous posting of ours (September 27, 2018), where we discussed the lower court opinion which is now the subject of this appeal.

In Old Post Road Associates, LLC v. LRC Construction, LLC, 177 A.D.3d 658 (2d Dept. 2019), a construction manager, LRC Construction, LLC (“LRC”), filed a mechanic’s lien based upon the preconstruction services it had performed. The owner (“Old Post Road”) moved to dismiss the lien pursuant to Lien Law Section 19(6) because it alleged the services in question did not permit a lien, and thus the lien contained a “facial defect.” Lien Law Sections 2(4) and 3 state, in substance, that a lien may only be filed if the work, labor or services were for “demolition, erection, alteration or repair of any structure” which constitutes a “permanent improvement” upon the property in question. Drawings, plans, or specifications prepared by an architect, engineer, or designer can also qualify in certain instances.

Old Post Road argued in support of its application that LRC’s lien included a claim for services such as consulting for construction phasing and the preparation of budgets. Various cases support the conclusion that those services are not lienable. (see, e.g., Goldberger-Raabin, Inc. v 74 Second Ave. Corp., 252 N.Y. 336, 341-342 (1929).

December 23, 2019

Prompt Payment Act Right to Arbitration Upheld

By Daniel E. Katz

As we previously noted (Blog of June 1, 2018), the Prompt Payment Act (“PPA”) has had less of an impact on payment disputes for construction projects in New York than many originally anticipated. Judge Jed Rakoff of the Southern District of New York recently issued an opinion that may breathe some life to the statutory scheme in certain circumstances.

In Maple Drake Austell Owner LLC v. D.F Pray Inc., 19 CV 5930, S.D.N.Y 7/15/19, the contractor (“Pray”) sought expedited arbitration with the owner of the project (“Maple”) regarding a payment dispute. Because Maple refused to pay the full amount of a payment requisition, Pray issued a Notice of Complaint to Maple pursuant to the PPA and served a demand for expedited arbitration. Maple then filed an application in court seeking a stay of the arbitration. The court granted an interim stay pending further briefing on Maple’s preliminary injunction application.

In support of its application, Maple argued that the PPA mandatory arbitration provisions only applied to the undisputed invoices. Furthermore, because the contract between Maple and Pray only called for arbitration “upon mutual agreement of the parties,” Maple argued that the contract overrode the PPA. Certain New York state court decisions were consistent with Maple’s contention. Turner Construction Co. v. JoA Concrete Corp., 44 Misc. 3d 217, 984 N.Y.S.2d 579 (Sup. Ct. N.Y. Co. 2014); Southgate Owners Corp v KNS Building Restoration Inc., 2013 WL5869618 (Sup. Ct. N.Y. Co 2013). However, the Third Department had issued a more recent and contrary opinion in Matter of Capital Siding & Construction, LLC, 138 A.D.3d 1265, 31 N.Y.S.3d 230 (3d Dept. 2016). The Capital Siding Court held that the PPA applied to disputed invoices and that a contract could not override the PPA. Because the Capital Siding opinion was the only New York State appellate authority on the subject, Judge Rakoff held that he was obligated to follow its interpretation. Even if it were not binding, however, he stated that requiring arbitration of disputed invoices was consistent with the meaning and intent of the PPA. Accordingly, the arbitration was directed to go forward.

August 12, 2019

RPAPL Section 881 Litigation Continues Apace

By Daniel E. Katz

Due, in part, to increased construction activity, a renewed focus on project safety, and owners becoming more aware of their rights and remedies, Real Property Action and Proceedings Law (“RPAPL”) Section 881 continues to generate litigation and court decisions construing various provisions of the statute. Two recent decisions are of special note.

In Cucs Housing Develop. Fund Corp. IV. V. Aymes, 2019 WL 934935, 2019 N.Y. Slip Op. 30450 (Sup. Ct. N.Y. Co. Feb. 26, 2019), Judge Melissa A. Crane granted a developer the right to underpin its neighbor’s building, even though such access constitutes a permanent encroachment. While many practitioners and developers believe RPAPL Section 881 does not authorize a trespass of this nature, Justice Crane found to the contrary.

The specific facts of the case undoubtedly had something to do with the result. The petitioner-developer was in the early stages of building an affordable housing project to address the homelessness problem in New York City. The plans in question were approved after a two-year review process by the New York City Department of Buildings. The respondent-neighbor owned a vacant and unused building, without active utilities or security. When questioned at a hearing as to why he opposed the underpinning application, the neighbor, appearing pro se, responded, “I don’t have to have a reason… I just don’t want underpinning.” Furthermore, the Court found there was no feasible alternative to the underpinning, and that in cases such as Madison 96 Associated LLC v. 17 East 96th Owners Corp, 121 A.D.3d 605, 608, 995 N.Y.S.2d 553 (1st Dep’t 2014) and Matter of Tory Burch LLC v. Moskowitz, 146 A.D.3d 528, 43 N.Y.S.3d 901 (1st Dept’t 2017) the First Department seemed to recognize that underpinning could be authorized if it was “virtually unavoidable” or if the “reasonableness and necessity of the trespass” was clearly demonstrated. Accordingly, the Cucs Court authorized the underpinning.

May 30, 2019

RICO Based Construction Claim Dismissed

By Daniel E. Katz

Disputes between owners of construction projects and contractors occasionally include allegations of fraud and intentional wrongdoing. In these instances, it is sometimes tempting to include a claim for civil liability under the Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”). Successful prosecution of a civil RICO violation includes the recovery of treble damages and attorneys’ fees, among other things. However, successful RICO claims in the civil context are relatively rare. The courts have interpreted the RICO statute to make it exceedingly difficult for a construction law dispute to turn into a recoverable RICO violation. The case of Grace International Assembly of God v. Festa, (17-CV-7090)(E.D.N.Y. April 1, 2019) highlights the difficulties in bringing a civil RICO case.

In Grace, the Plaintiff retained defendant Falcon General Construction Services Inc. (“Falcon”) to act as its general contractor for a project involving Grace’s religious sanctuary. Defendant Festa, the president and sole shareholder of Falcon, met with representatives of Grace and allegedly made numerous fraudulent misrepresentations which Grace divided into two different categories. One set of misrepresentations related to the need for advance payment of certain monies, the use of those monies on the project, and the progress of the construction on the project (“The Project Invoices Fraud Scheme”). According to Grace, it relied on the misrepresentations of defendants when it made payments to them. Furthermore, according to Grace, defendants improperly failed to make payments to subcontractors who had fully performed their work while representing to Grace that those payments had been made (the “Subcontractor Nonpayment Fraud Scheme”).

After Grace terminated defendant Falcon from the project, it commenced a legal action in the federal district court for the Eastern District of New York, alleging, in part, the two related schemes referenced above. Plaintiff also relied on the same basic set of facts to allege various state law contract and fraud-based claims.