Friday, June 24, 2016

Legislature seeks to define substantial completion and limit retainage

Every once in a while the New York Legislature has an idea that catches the attention of the construction industry.  Once such idea is set forth in Assembly Bill 10446 which was sent to the committe on economic development on May 27, 2016.
This proposed amendment to the General Business Law (specifically section 756) has a few interesting components:
  1. It would amend section 756 and add a definition of “substantial completion.”  The bill proposes to define substantial completion as “the state in the progress of the project when the work required by teh construction contract with teh project owner is sufficiently complete in accordance with the construction contract so that the project owner may ocupy or utilize the work for its intended use…”  This definition is not so out there or different from the generally understood meaning of the term (and some contracts even specifically define substantial completion in almost this exact manner).  However, codifying the definition of such a critical term in the construction industry is a big step.  It will be interesting to see how the committee considers this term.
  2. It would amend section 756-a of the General Business Law to allow subcontractors to submit a final invoice for payment upon reaching substantial compoletion (using the new definition).  Notably, the current version of 756-a says that a subcontractor can submit a final invoice “upon the contractor’s performance of all the contractor’s obligation under the contract.”  The current phrase is admittedly vague but the proposed definition of substanital completion isn’t exactly black and white.  One this is certain:  the new language would be far more beneficial to subcontractors.  For example, when the punch list remains outsanding the the subcontractor has not “peformed all of his obligations under the contract.”  But when the punch list is outstanding the project has most likely reached substantial completion.  This could be a diffrent of days, weeks or even months in terms of when the subcontractor would be permitted to issue a final invoice.
  3. Finally, and not least of all, the bill would amend section 756-c of hte General Business Law to put a specific fixed cap on retainage.  Currently, the law only says that retainage is limited to a “reasonable amount.”  You can almost guarnatee that the owner, general contractor and subcontractor have a different view of what exactly constitutes a reasonable amoutn.  But the revised section 756 would limit retainage to no more than 5%.
Right now the bill is in its infancy and may die in a committe somewhere along the way.  As of this writing, there are no floor votes scheduled for the bill.   But it is one that is worth keeping an eye on: espeically for subcontractors.

Monday, December 7, 2015

Case Law Update: Court holds Ohio Venue Provision in Contract Void under GOL 757

HVS, LLC v Fortney & Weygandt, Inc.
Decided 9/24/15 by the Supreme Court, Rockland County
The issue in this appeal concerns the validity of an arbitration agreement entered into by the parties.
 The parties entered into a written subcontract agreement, wherein the Plaintiff, an electrical company, agreed to furnish all labor and material necessary to complete the electrical scope of the work on the project, which was located in New York.  Delays arose during construction, the parties disputed the revised work schedule, and the Defendant terminated the subcontract and refused to permit Plaintiff to complete its work.  Soon thereafter, Plaintiff filed a mechanics lien with the Rockland County Clerk and filed a Summons and Complaint, seeking damages for breach of contract and for the foreclosure of the lien.  Defendant filed a demand for arbitration with the American Arbitration Association, arguing that pursuant to the subcontract, Cuyahoga County, Ohio, was the proper venue for arbitration.
 The Court stated that pursuant to General Obligations Law §757, unless the contract is with a material supplier, any provision in a construction contract which makes the contract subject to the laws of another state and requires any litigation arbitration to be held in another state shall be void and unenforceable.  The Court pointed to the fact that as Plaintiff was not merely a material supplier, the provision requiring that Cuyahoga County, Ohio be the forum governing disputes arising from the agreement was void and unenforceable pursuant to GOL §757.
 The Defendant argued, citing to supportive case law, that the clause preempts GOL §757 as there were numerous out-of-state entities involved in the transaction.  However, the Court was not swayed.  The Court found that unlike the case law cited to by Defendant, the Plaintiff here is a local company, obtained the majority of the materials from local suppliers, and performed all of its work in New York.  Furthermore, although there were suppliers who, as Defendant pointed out, have offices in other states, they all are present in New York as well.  Additionally, all the meetings concerning the project occurred at the project site in New York. 
 The Court related the present case to another New York case, King C Ironwork, Inc. V Burdg, Dunham & Associates Construction Corp., wherein the Judge found the arbitration provision valid except for the forum selection and choice of law provisions.  Thus, keeping in mind that the basic purpose of FAA §2 is for claims to be arbitrated rather than litigated, the Court in the present case severed the improper provision of the arbitration agreement and ordered that the parties proceed with arbitration in New York, rather than in Ohio, and stayed the lien foreclosure action pending the New York arbitration outcome.

Case Law Update: Subcontractor has no Quasi-Contract Claim Directly Against Owner

 MCM Prods. USA, Inc. v Aliusta Design

Decided November 16, 2015 at Sup. Ct., New York County

This case presented the classic issue of whether a subcontractor has a valid cause of action for unjust enrichment against the owner of property, where the governing contract was between the subcontractor and the general contractor.

Here, Plaintiff, the owner of the property at issue, hired and entered into a contract with a general contractor, A.J.S. Project Management Inc. (“AJS”).  AJS then hired various subcontractors, with whom Plaintiff had no contractual relationship with, to assist on the construction on the property.  Certain subcontractors filed mechanic’s liens on the property, based off of money owed to them by AJS.  Plaintiff brought suit seeking a declaratory judgment that Plaintiff is not liable to the subcontractors for any money due and owing between them and AJS.  One of the subcontractors, Hudson Concrete Publishing Inc. (“Hudson”) alleged certain counterclaims against Plaintiff, including a claim for unjust enrichment, wherein Plaintiff moved to dismiss Hudson’s counterclaims for failure to state a cause of action.  This decision addresses the Plaintiff’s motion to dismiss.

The Court explained that, as a general rule, a quasi-contractual claim, such as unjust enrichment, is ordinarily precluded where there is the existence of a valid and enforceable contract which governs the events arising out of the same subject matter.  This general rule is applicable to claims brought against non-signatories, precluding quasi-contract claims being brought against third party non-signatories to a contract that covers the same subject matter of the claim. 

Under a quasi-contract claim, “if services were performed at the behest of someone other than the Defendant, the Plaintiff must look to that person for recovery.”  Thus, it is not enough that the Plaintiff received a benefit from Hudson.  The Court ruled that where an express contract exists between the general contractor and the subcontractor, the mere owner of the property where the work is being done may not be held directly liable to the subcontractor under a quasi-contract theory “unless he assented to such an obligation.”  Thus, the sole remedy of a subcontractor lies against the general contractor with whom the contract was entered into with.



Hudson admitted to being hired by AJS, the general contractor, and failed to assert allegations linking Plaintiff to the services it alleges to have performed on Plaintiff’s property.  As Hudson sought payment for services performed under its contract with AJG, the claim is governed by the terms under that contract, thus the quasi-contract claim against the Plaintiff must fail.  

Case Law Update: Contractor's Performance Not Excused

City of Troy, N.Y. v 1776 Sixth Ave., Troy, LLC
Decided November 12, 2015 at App. Div. 3rd Dep’t.
The issue here was whether the language of the contract excused Defendant’s performance by the requisite deadline.  The parties entered into a lease wherein the Defendant was to install an elevator within the premises by March 1, 2009.  Pursuant to the letter of intent entered into by the Plaintiff and Defendant, the parties were to work together to identify a suitable location for the elevator. In addition to the letter, an addendum was also subsequently added to the original contract, requiring Plaintiff to provide Defendant with proposed layout plans from Plaintiff’s engineering department and a proposed location for the elevator. Defendant failed to meet the elevator installation deadline.
Plaintiff brought suit to recover¸ inter alia, its monthly rental payments.  Defendant argued that its obligation to perform prior to the installation deadline was excused as, pursuant to the letter of intent and the subsequent amendment, Plaintiff delayed in submitting the location proposals. 
The court found that, contrary to Defendant’s argument, neither the letter of intent nor the subsequent amendment excused its performance of installing the elevator prior to the deadline.  The deadline was an unequivocal term listed in the original contract, not conditioned upon Plaintiff’s approval of the elevator’s location nor upon the submission of the proposed layout plans. 

Thursday, January 22, 2015

Case Summary: U.W. Marx, Inc. v. KoKo Contr. Inc. (conditions precedent in construction contract)

The Appellate Court affirmed the holding of the lower court, finding in favor of Koko Contracting, Inc.  U.W. Marx, Inc. was the general contractor on a construction project and entered into a subcontract with Koko for roofing work.  Marx failed to pay Koko for 3 consecutive months, wherein Koko, on October 31, 2007, ceased performance on the roof.  Marx gave Koko 3 days’ notice to cure its alleged default (failing to provide workers) wherein, on November 6, 2007, Koko provided Marx with the 7 days’ notice of its suspension of work based on nonpayment as called for in a section of the subcontract.


Marx argued that Koko should be precluded from recovery due to its non-compliance with the provision in its subcontract (a standard provision clause drafted by the American Institute of Architects) which required 7 days’ notice to be given prior to ceasing performance of the contract.  The Court held that Marx’s material breach, i.e. non-payment, was an “uncured failure of performance,” and therefore Koko was relieved from its remaining obligations under the contract.  Essentially, Marx’s material breach excused Koko from any of its own obligations set forth by the contract.  Furthermore, the Court explained that such a provision is not meaningless, as it is there to protect the subcontractor and to compensate it in the event it has to stop work for lack of payment and then remobilize. 

Decided 1/21/15 at App. Div. 2d Dept.