Articles Posted in Construction Litigation

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.