Construction Contracts

So long as a contract contains what is mandatory, and does not contain what is prohibited, then everything else is permitted.  What that means for the parties to any construction contract is that there are almost infinite possibilities as to what the contractual relationship may look like.  Over the years, some redundant forms of contractual relationships have come into existence, including:

  • Fixed Price & Fixed Schedule Contracts
  • Reimburseable (i.e., T&M) Contracts
  • Combined Fixed Price & Reimburseable Contracts
  • Cost Plus Fee Contracts
  • Guaranteed Maximum Price Contracts
  • Target Price Contracts
  • Contracts with Performance Incentives

Whether the size of the project is a multi-year development at Hudson Yards or a relatively short three (3) month capital improvement of an existing office or retail space, owners, general contractors, subcontractors and even material suppliers or specialty vendors are faced with a multitude of issues and questions when taking on construction projects over $50,000, including:

  • Scope of Work
  • Drawings & Specifications
  • Terms of Payment & Cash Flow
  • Schedule
  • Insurance & Indemnity
  • Bonds & Guarantees
  • Dispute Resolution
  • Change Orders
  • Damages
  • Warranties
  • Termination & Suspension
  • Force Majeure
  • Site Conditions

Damages for Delays

On extremely rare occasions, some construction projects may experience a delay or run over their originally agreed-upon schedule, milestone dates, or date for final completion.  The previous sentence was a joke.  Construction projects commonly experience delays, sometimes throughout multiple points in the project schedule.  Even with one or more dedicated project managers between the general contractor and subcontractor, and an owner’s representative or construction manager, as one foreman put in rather nicely and in PG-13 terms, “Stuff happens.”

Some delays are excusable (not only between reasonable people, but in the eyes of the law as well).  For example, acts of God (i.e., force majeure), labor strikes and labor disputes, regulatory approvals (e.g., obtaining final sign-offs not due to the fault of any party to the project) , and sovereign acts that interfere with construction (e.g., war, embargo, aggressive trade regulation, state seizure).

Some delays, however, are not excusable in the eyes of the law.  For example, owner interference, denial of access, delayed notice to proceed, delays in inspection or approval, defective design, contract changes and extras, and changed conditions.  Unfortunately, private parties enjoy freedom of contract, which often means that parties in a weaker bargaining position often “agree” to contractual terms that are owner or contractor friendly (in the prime contract) or general contractor or subcontractor friendly (in the subcontract).  One such term is the “No Damage for Delay” provision, which, depending on the way it’s drafted, can either be unenforceable, or have limited remedies available for the aggrieved party.

Practice Commentary: in this area of construction contract litigation, when it rains, it usually pours.  Contractor-friendly agreements usually contain a generous liquidated damages clause, no notice provisions (which effectively allows for what’s known as “sandbagging”), and no waivers.  Owner-friendly agreements usually contain unreasonably short “booby-trap” notice provisions sprinkled throughout the agreement that spring up in the most unsuspecting of ways during a dispute.  Those provisions impose burdensome and unrealistic obligations on the contractor to notify the owner of all the details of any claim that would entitle the contractor to a claim for payment or damages, within 24 hours, in complete detail, itemized down to the penny, and with the 4K HD video sent via certified mail return-receipt requested, or else any claims are forever waived.

Defects & Failures

This aspect of the contracting phase of a project usually goes ignored or overlooked until the project is “completed” and the owner first steps foot into what he or she believes to be a fully finished project only to discover a design defect, a defect in the construction (i.e., workmanship) itself, faulty or improper materials, or improper installation.

More often than not, responsibility for defects and failures is “divided” between the owner and contractor, between the general contractor and subcontractor, or between multiple subcontractors (depending on the nature of the defect or failure).  Contractually, parties may be interested in pursuing relief against a performance bond or insurance policy.  Express warranties, guarantees, waiver provisions and exclusive remedy provisions within the agreement are obviously highly litigated issues at such point.

Practice Commentary: defects and failures give rise to multiple causes of action sounding in negligence (3 years), breach of contract (6 years, unless shorter period by contract), and breach of implied warranties (4 years).  Therefore, it is important to identify and preserve as many potential avenues of recovery as possible as soon as a defect or failure becomes apparent as there is no “starting from the date it was first discovered” rule.

Excavation & Underpinning

When an adjoining property owner wants to commence excavation or “break ground,” he or she is often frustrated to discover that it’s not as easy and quick as simply calling over a construction crew and ordering them to start digging.  Many things can go wrong during an excavation, including hitting unmapped public utility service lines and causing structural damages to the neighboring buildings as a function of eroding the soil and other natural foundational support neighboring properties rely upon.  As is usually the case, the party seeking to excavate usually will have the obligation to construct and maintain what is known as “underpinning” for the benefit of neighboring properties during the duration of the construction.

A redundant critical point in the entire process is the initial letter or notice to the neighboring property owner(s).  In New York City, Section 3309.1.1 of the Building Code governs the requirements applicable to the written notice.  Section 3309.1.1 requires (among other things) that the notice must describe, “the nature of the work, estimated schedule and duration, details of inspections or monitoring to be performed on the adjoining property, protection to be installed on the adjoining property, and the contact information for the project.”  Nassau and Suffolk county towns and villages have nearly identical provisions in their respective building codes.

Practice Commentary: for parties performing the excavation, it is obviously extremely important that comprehensive, proper and timely notice is given to the neighboring property owners.  Otherwise, the door remains open to “strict” liability for any resulting property damages.  For neighboring property owners, keeping complete evidence is obviously extremely important.  Consider keeping a folder with the original envelope and letters received via physical mail, and saving or archiving e-mails.  It’s not a good idea to go to any lawyer saying, “I remember receiving a letter some time ago.  Don’t know what I did with it.  Maybe youcan find it.”  Unfortunately, these communications are private (not public), and there is no requirement that the written notices sent to owners be filed in some public repository (e.g., like a deed or mortgage) that is later searchable.

Trust Fund Diversion

Similar, although not completely identical, to attorney escrow accounts, general contractors handling funds received by owners in connection with work performed by a subcontractor are (in the eyes of the law) holding onto “trust funds.”  What that means, in simple terms, is that the general contractor is holding onto money that belongs to someone else (i.e., other people’s property).  Generally, when you take someone else’s money and use it on yourself or for other third parties, the law generally considers that theft, which is criminal.  In short, that is how Article 3-A of the Lien Law is structured.

Trust fund diversion litigation is not as clean and quick as other kinds of construction litigation.  The claim is essentially one member of the class of beneficiaries bringing forth a complaint on behalf of the entire class of beneficiaries. See e.g. Access Plumbing Corp. v. 1184 Brighton Dev., LLC, 2011 NY Slip Op 50599(U) (Kings County, 2011).  Due to the procedural requirements in properly commencing these kinds of actions, it is usually considered a last resort “nuclear” option.  It is common for the local District Attorney’s office to get involved, as the State is interested in prosecuting the criminal aspect of the underlying facts.

Practice Commentary: relationships drive the decision as to whether to bring these kinds of cases forward.  For example, if a large subcontractor like the plumbing or electrical trade has the largest amount of pending/unperformed work from the general contractor, and the painter is seeking $3,000 for services rendered and billed, it’s not uncommon to see “political” pressure between the trades seeking to make someone like the painter whole without resorting to litigation in order to save and maintain the business relationship with the general contractor.

Practice Commentary: for general contractors, especially outside of Manhattan, the common pitfall seems to be failure to comply with Section 76 of the Lien Law.  Compliance must be both accurate, complete, and timely.  Failure with respect to any shortcoming in the response to the subcontractor(s) can have both civil and criminal consequences.  It’s important to recognize that Section 76 demands are not negotiable and cannot simply be delayed or ignored.

Prompt Payment Act

The more free the market, the more free the people.  New York State’s experience expressly rejects that idea.  The Prompt Payment Act was necessary to correct the natural failures of the free and unregulated market in the construction industry.  Absent any regulatory protection for subcontractors, material suppliers and other small business owners, owners and general contractors dictated “take it or leave it” terms on large construction projects.  The New York State Legislature stepped up to the plate and passed a series of regulations aimed at protecting the party consistently on the very bottom of the bargaining power totem pole: subcontractors.

The games general contractors would play (before the Act) were:

  • Pay when paid provisions;
  • Delayed approval or disapproval of invoice;
  • Bad faith disapproval of invoice;
  • Zero interest on delayed payments;
  • Unilatterally deducting “back charges,” “chargebacks,” or liquidated damages;
  • Making a NY project subject to the laws of another state;
  • Forcing a NY dispute to be argued in a different state;
  • Prohibiting suspension of performance;
  • Not offering expedited arbitration as an option.

The Prompt Payment Act’s key provisions are contained within GBL 756756-a756-band 757.  The Prompt Payment Act is applicable to any “written or oral agreement for the construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement, or relating to the excavation of or other development or improvement to land, and where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds one hundred fifty thousand dollars.”

Practice Commentary: painters, carpenters, drywall fitters, HVAC and fire alarm vendors, etc. are often surprised to learn that the Prompt Payment Act is actually applicable to their project.  The law doesn’t require that the individual subcontractor’s portion of the work equals or exceeds $150,000.  The law only requires that the aggregate cost for the entire construction project equals or exceeds $150,000.