Preparation for and Avoidance of Construction Claims

A. Typical Construction Disputes

B. Contractual Protection and Remedies

C. Claim Notice Provisions

D. Failure to Procure Insurance

E. Construction Claim Avoidance Techniques

F. Dispute Resolution: Arbitration vs. Litigation

Appendix

A – New York Housing Merchant Implied Warranty

B – Long Island Builder Institute Inc.’s current standards and new standards under consideration

C – American Institute of Architects document synopsis

D – Punch List Resolution Form

A. Typical Construction Disputes

Construction disputes are often some of the most complicated and intricate forms of litigation pending in the courts of the State of New York. Every perceivable individual and/or entity which has had some contact with a construction project is a perceivable plaintiff and/or defendant. While every construction dispute is unique and certainly not “typical”, understanding usual owner and contractor disputes and claims encountered is a logical starting point.

The Owner

1. Acceptance of Final Payment as Release of Claim

Typical private contracts between an owner and a general contractor state that the acceptance of final payment will operate as a bar and release of any claim which the general contractor may have against the owner, unless a verified statement is submitted within a specified period of time after receipt of the final payment. In many instances, the specified period of time is forty days after the mailing of final payment. A simple objection letter will not satisfy the requirement of a verified statement and thus waiver of the claim has been upheld.

2. Owner Affirmative Claim of Delay

Many private construction contracts have liquidated damage clauses contained within. The clauses provide that if the contractor is delayed in completing the contract via contractor caused problems, the owner can assess liquidated damages in a set amount for each day the performance is late. However, a liquidated damage clause will only be valid and enforceable if a court determines that the clause is not a penalty. If the damages projectively suffered by the owner are difficult to ascertain and also if the clause does not set up damages which are disproportionate to the actual damage incurred, the clause will be upheld. Where a contractor abandons a project, an owner will not be limited to the liquidated damages clause and will be allowed to pursue actual damages as typical liquidated clauses do not limit the amount of actual damages that a plaintiff owner may recover upon a contractor’s abandonment.

3. Delayed Damages where there is no Liquidation Clause

Where there is no liquidated damage clause for delay, and there is no end date for the project specified, performance has to be completed within a “reasonable” time. Determination of what exactly is reasonable time will be left up to the arbitrator or judge. In situations where there is a set completion date or the contract indicates that “time is of the essence”, the arbitrator or court will adhere to the specified end date in the contract.

4. Owner’s Right to Terminate

In many contracts, the owner retains the right to terminate a contractor for delay in performance . In many instances, the contract sets forth a precise and specific completion schedule and notice provisions. The owner must be careful to serve a proper termination for delay notice pursuant to the contract language upon the contractor.

5. Owner Claim for Defective Construction

An owner will be entitled to reasonable, foreseeable damages if the contractor performs defective construction. An owner will be entitled to the cost to cure and the differences in the value of the contractor’s work that was defectively performed and the manner in which it should have been performed.

6. Limitations of Time in Which to Commence Suit

Generally, the Statute of Limitations begins to run on completion of construction and, in many instances, upon receipt of a Certificate of Occupancy. Owners must be aware that the periods of time in which they may commence suit against those involved in the project for any legal theory may be lost if not timely filed.

7. Breach of Warranty/Guarantee

In most instances, a warranty (work performed) and a guarantee (future defects) will be issued to the owner by the contractor, manufacturer, etc. Many of the warranty provisions are governed by Uniform Commercial Code Section 2-313 to 2-316.

8. Action against Performance Bond

Many construction projects require that the contractor obtain a performance bond in which a surety guarantees to the owner that a contractor will perform the provisions of the contract. It is important to note that limitation periods contained in the bond are strictly adhered to and are typically one to two years. Additionally, bond claims usually contain specific notice provisions that again must be adhered to.

9. Labor and Material Payment Bond

The payment bond guarantees payment to the subcontractors and material men in the event that they are not paid by the contractor. In these types of bonds, a surety guarantees to the owner that the claims of subcontractors will be paid by the general contractor. Subcontractors may sue to recover on this bond notwithstanding that they are not the named parties to the contract or to the bond itself. However, most subcontractors are required to give notice within ninety days of the accrual of their claim and to commence an action on the bond within one year of the accrual of the claim. Failure to comply with this provision may result in the subcontractor losing their right to commence an action against the surety on the labor and material payment bond.

10. New Home Warranty

In the case of home construction, New York imposes the warranty on the sale of all such homes codified in Section 777 of the New York State General Business Law.[1] In Section 777-A, a Housing Merchant Implied Warranty is implied in the contract or agreement for the sale of the new home and survives the passing of title. The warranty indicates that (a) one year from and after the warranty date, the home will be free from defects due to failure to construct in a skillful manner; (b) two years from and after warranty date, the plumbing, electrical, heating, cooling and ventilation systems to the home will be free from defects due to failure by the builder to have installed such systems in a skillful manner; and (c) six years from and after the warranty date, the home will be free from material defects. However, a builder or seller of a new home may exclude or modify all warranties by clear and conspicuous terms contained in the written contract or agreement only if the buyer is offered a limited warranty. The Long Island Builder’s Institute has also drafted their own set of standards which in many instances are incorporated into the warranty and guarantee portions of a construction contract by builders on Long Island.[2]

The Contractor

1. Delay Damages

A contractor may collect damages against an owner for delay if the contractor is able to establish that the owner or the owner’s agents were at fault and that the conduct was “unreasonable”. Notably, an owner will not be responsible for reasonable delays as it must be shown that the delay was caused by unreasonable conduct.

2. Owner Liability for Defective Plans and Project Design

An owner may be liable to a contractor for damages incurred where such are caused by defective plans and specifications. Additionally, a contractor will not be able to recover against an owner where the contractor was well aware that the plans were deficient and/or defective and the contractor actually began to perform construction regardless of this known problem. In fact, a contractor who proceeds to construct based upon knowingly defective plans and specifications, may step into the shoes of the owner and architect and become equally liable for such deficiencies.

3. Owner’s Liability for Issuance of Excessive Change Orders

An owner may be held liable for delay damages which result from the issuance of excessive amounts of change orders which delay project completion and interfere with the progression of construction. However, a contractor is assumed to expect a reasonable amount of redesign and changes on site. Notably, while the contractor will be compensated for their time and materials for acting upon the change order, in some instances, the contractor is entitled to compensation for impact costs caused by the inefficiencies of having to perform the extensive amount of change order work. However, where the changes are due to unknown project conditions, a contractor may not successfully seek such delay damages.

4. Owner Misrepresentation

In a situation where an owner is aware of a project condition but fails to disclose and/or misrepresents the presence of such condition to the contractor, damages may be claimed. Thus, where an owner who possesses superior knowledge which it fails to disclose and damages result, the owner may be responsible for those damages that result from the failure to disclose. For example, in a situation where a contractor is delayed based upon undisclosed buried power lines or oil tanks which were known to the owner, the owner’s failure to disclose may make them liable for resulting damages. However, where the contractor knew or should have known about the undisclosed conditions, the contractor’s claim will be rejected.

5. Unit Price Claims and Changed Conditions

In the unit pricing scenario, a contractor agrees to be paid at the agreed upon unit price multiplied by the amount of units performed. In most scenarios, unit pricing contracts concern placing asphalt or pouring concrete, or in typically measurable scenarios. In some situations, where the unit pricing fluctuates, the contractor may be entitled to damages. The contractor bidding on unit price work generally takes into account the expected quantity in formulating the unit price. If the units are substantially below the estimate given by the owner, the contractor will lose substantially based upon their expected overhead, profit and other indirect costs that have been spread out.

B. Contractual Protection and Remedies

1. In many instances, the contract is prepared by an owner with the general contractor and/or professional preparing the specific scope of work provision. The majority of most construction projects in New York now utilize the standard American Institute of Architects (“AIA”) forms, which are tailored towards the specific party and project needs. It is important to remember that the drafter of any specific or special provisions in a contract will be construed against them if the language is ambiguous or contains discrepancies.

Annexed as Exhibit “C” is a list of the descriptions of the various types of contracts available through the AIA. The AIA contracts are broken down into series: The A series for the owner/contractor, the B series for the architect/owner, the C series for the architect and other professionals such as engineers, the CM series for the construction manager, the D series for the architect and the industry, the DB series for the design build situation, the G series for the construction administration, the ID series for the interior project documentation, the INT series for the international project documentation.[3]

2. Contractual Provisions

1. Define contract documents

2. Scope of work

3. Date of commencement

4. Substantial completion

5. Contract sum

6. Concealed conditions

7. Change in work/change orders

8. Progress payments/schedule of values

9. Final payment

10. Termination

11. Lien release/waivers

12. Dispute resolution

13. Insurance

14. Warranty

C. Claim Notice Provisions

Each insurance agreement operates as a separate contract and must be carefully reviewed. Every insurance agreement contains specific notice provisions whereby coverage is lost if timely notice is not provided.

What constitutes timely notice is a hotly debated and litigated topic in the courts of the State of New York. Generally, if a party encounters a perceivable loss that could be covered by insurance, notice should be provided. Importantly, notice must be provided to the entity listed on the insurance policy, which is usually the insurance company and the broker, certified return receipt requested.

Failure to properly place an insurance company on notice may lead to the eventual denial of coverage. In the event that coverage is denied, in many situations the uncovered party will necessarily commence a declaratory judgment action against the insurance company to obtain defense and indemnity coverage, while fighting off the claims of the other parties who seek to hold the now uninsured party liable. The costs associated with this dual litigation defense problem can be exorbitant and thus knowledge of each insurance agreement is essential.

D. Failure to Procure Insurance

Prior to the commencement of each and every construction project, the respective entity, be it the owner, general contractor or major subcontractor, should review all insurance requirements and make sure that each and every policy is in place, and all required entities are listed as additional/named insureds.

In many contracts, the failure to procure insurance may or may not be waived if it is not in place prior to the commencement of construction.

Most contracts include indemnification and hold harmless provisions which place the financial burden for the specified construction dispute upon the entity whose responsibility it was to obtain insurance. Thus, even if you have failed to obtain insurance, the construction parties will still be able to look to you for indemnification and payment with the obvious exorbitant costs.

E. Construction Claim Avoidance Techniques

1. Daily/weekly site meetings with minutes

2. Daily log review

3. Correct change order procedure

4. Correct invoicing procedure

5. Open lines of communication

6. Punch list resolution form[4]

[1] See Appendix A, New York Housing Merchant Implied Warranty.

[2] See Appendix B, Long Island Builder’s Institute current standards and proposed.

standards.

[3] See Appendix C, American Institute of Architects document synopsis.

[4] See Appendix D – Punch list resolution form.

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