Articles Posted in Construction Law

Construction contracts typically contain detailed requirements regarding both the contents of documents which must be submitted during the course of a project, and when they must be submitted. It is often difficult to know when the content and the timing of these documents must strictly follow the letter of the contract, and when these requirements are more lax. All contracting parties should be aware, however, that when it comes to notices of termination, it is best to follow the terms of the contract carefully. If one does not, with certain narrow exceptions, the termination is likely to be found wrongful. The opinion in D. Owens Electric, Inc. v. J.W. Mays, Inc.  61 Misc.3d 1225(A) (Sup. Ct. Dutchess County 2018) is instructive on this point.

In D. Owens, J.W. Mays, Inc. (“Mays”) was the owner of the premises in question. Mays retained D. Owens Electric, Inc. (“Owens”) to perform certain demolition and roof work.

According to Mays’ contract with Owens, Mays was obligated to provide Owens with a written notice that it had failed to properly perform the work prior to a termination. In addition, pursuant to Mays’ contract with Owens, only the owner of Mays, or such other person designated in the Contract at the time of signing, was authorized to terminate the Contract by registered or certified mail.

Contractor’s mechanic’s liens are based upon work actually performed (and unpaid). Often, contractors rely upon the payment requisitions they submitted to the owner to establish the claimed value of the work. Requisitions that were never submitted to or considered by an owner can also be used by a contractor on occasion to support its lien claim. That circumstance was addressed by the First Department in Ferro Fabricators, Inc. v. 1807-1811 Park Avenue Development Corp. 165 A.D.3d 572, 86 N.Y.S.3d 54 (1 st Dept. 2018).

The defendant in Ferro moved for summary judgment on, among other things, its counterclaim that Plaintiff’s mechanic’s lien was willfully exaggerated and thus subject to dismissal pursuant to Lien Law §39 and 39-a. Defendant pointed to the seventh payment requisition Plaintiffs had submitted, which alleged the work was only 78% complete. In opposition to the motion, however, Plaintiff provided the court with a subsequent (eighth) requisition, which had never been submitted to Defendant, but which alleged that 97% of the work was complete. Under those circumstances, the First Department held that the trial level court had properly denied Defendant’s summary judgment motion because there were disputed issues of material facts regarding the amount of work performed.

By its holding, the Court re-confirmed the long standing rule that a lienor is not strictly bound and limited by the requisitions it submitted during the course of the performance of its work. Any work which was performed after the last requisition was submitted may also form the basis of a lien. Indeed, the First Department specifically rejected Defendant’s argument that the work referenced in the eighth requisition should not be included in the lien claim merely because it was never submitted. In other words, while the timely submission of a requisition can often aid

Construction companies, especially those engaged in large public works or private development projects, sometimes form joint ventures to pool their resources and perform work on jobs that  might be beyond their individual financial capabilities or technical expertise. Typically, the joint venture is formed for an individual project. As a result, the formation of the joint venture is often  not addressed with the same degree of formality and care as when a corporate entity is formed on a more permanent basis. Recently, in Slabakis v. Schik, 164 A.D.3d 454, 84 N.Y.S.3d 45 (1 st Dep’t 2018), the First Department addressed the requirements of forming a joint venture in the context of a dispute as to whether a proper joint venture had been formed.

The plaintiff in Slabakis alleged there was an oral joint venture agreement, and sued the defendant, its purported joint venture partner, for breach of contract, breach of fiduciary duty and related  wrongs. Defendant moved to dismiss, alleging that the complaint did not adequately allege the existence of a joint venture agreement. The trial level court denied the motion, holding that there was an issue of fact as to the viability of the complaint.

On appeal, the First Department reversed and dismissed the complaint, holding that the pleading was defective in two material respects. First, the Slabakis complaint failed to contain a mutual  promise that profits and losses would be shared to some degree. Instead, it indicated that all of the losses would be solely borne by the defendant. This was “fatal” to plaintiff’s claim that a joint  venture was created.

Enforcing mechanic’s lien rights raises several issues which are distinct from the ability to simply file a mechanic’s lien. For example, a subcontractor must generally show that a “lien fund” existed between the owner and contractor at the time it filed its lien in order to successfully foreclose. Peri Formwork Systems, Inc. v. Lumbermens Mutual Casualty Co., 65 A.D.3d 533, 884 N.Y.S.2d 129 (2d Dep’t 2009); See also Van Clief v. Van Vechten 130 N.Y. 571 (1892). Some courts have recognized an exception when the general contractor issues back charges to a subcontractor after termination. See Spectrite Design LLC v. Elli N.Y. Design Corp., (16 Civ. 6154, N.Y.L.J. 120279380599) (S.D.N.Y., Decided July 26, 2017). Other courts have recognized that if payments are made by the owner in bad faith, and before they were otherwise due, a lienor’s ability to foreclose its mechanic’s lien should not be prejudiced. See Glens Falls Portland Tenant Co. v. Schenectady County Coal Co., 163 A.D. 757, 759-763, 149 N.Y.S. 189 (3d Dep’t 1914); Lawrence v. Dawson, 34 A.D. 211, 212-215, 54 N.Y.S. 647 (2d Dep’t 1898). The bad faith exception to the lien fund rule was recently addressed by the First Department in 3-G Services Limited v. SAPV/Atlas 845 WEA Associates NF, L.L.C., 162 A.D.3d 487, 79 N.Y.S.3d 24 (1st Dep’t 2018).

In 3-G, the owner moved to dismiss plaintiff subcontractor’s lien foreclosure claim by submitting proof that the owner had paid the contractor in full at the time the plaintiff’s lien was filed. Owner had terminated the contractor for convenience prior to the filing of the subcontrator’s lien, and issued final payment to the contractor at that time.

Plaintiff raised several grounds in attempt to show owner’s bad faith. It alleged that owner knew that the general contractor owed monies to the subcontractor when it terminated the general contractor for convenience, that the owner made an advance payment to the general contractor to avoid the Lien Law, and that owner opted to terminate general contractor for convenience when it could have terminated it for cause.

Not all work performed at or related to a construction project can form the basis of a mechanic’s lien. Rather, one can only lien for work performed or materials furnished on a privately owned project for the “improvement of real property” as set forth in Lien Law § 3. Generally speaking, only work which contributes to a “permanent improvement” of the property in question is lienable  (Lien Law § 2(4)). Sometimes, however, work is performed even before any activities actually commence on a construction site, and the issue arises whether that work is lienable in any  circumstances. That matter was recently addressed by Justice Terry J. Ruderman of the Westchester Supreme Court in Matter of Old Post Road Associates, LLC, 60 Misc. 3d 391, 77 N.Y.S.3d 283  (Sup. Ct. Westchester Co. 2018).

In Old Post Road, LRC Construction LLC (“LRC”) performed pre-construction management services for a planned project in Rye, New York. Among other things, LRC updated the budget for the  project and attended meetings to discuss phasing in connection with a site plan approval application. LRC was eventually terminated and filed a mechanic’s lien for $250,000. Thereafter, Old Post Road Associates LLC (“Owner”) commenced a special proceeding to summarily discharge the mechanic’s lien pursuant to Lien Law § 19 because the work in question was allegedly not lienable.

Pursuant to Lien Law § 19, a lien may only be dismissed if “it appears from the face” of the lien that it is invalid. Owner here alleged it met this standard in its special proceeding because LRC’s lien merely alleged it performed “pre-construction management services.”

Parties to contracts and courts continue to grapple with the distinctions between and among contribution, contractual indemnification and common law indemnification in a commercial/construction setting. A good example is the recent case of Matzinger v. MAC II (S.D.N.Y. 17 Civ. 4813, July 17, 2018).

Plaintiffs, the Matzingers, were the owners of a residential apartment in New York City. They retained Defendant MAC II, an interior design firm, to manage and oversee the renovation of their apartment. MAC II did not perform any actual construction work. Instead, through a series of purchase orders, it hired Fanuka to act as the general contractor. MAC II also hired TecDsign to install various audio-visual equipment. After the Matzingers moved into their apartment, they discovered various construction defects and incomplete work.

Accordingly, in 2017, the Matzingers sued MAC II, Fanuka and TecDsign for breaches of contract and related claims. Fanuka and TecDsign successfully moved to have the contract claims dismissed because they had no privity with Matzinger. After other claims were dismissed, The Matzingers’ only remaining claim was breach of contract against MAC II.