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STA LEGAL LOG – February 2021

 

SCA’s Attempted Dismissal of Contractor’s Claims Defeated

– Claims Survived!

By Henry L. Goldberg, Esq., STA General Counsel and Robert J. Fryman, Esq

 



Henry L. Goldberg
Special Counsel for Infrastructure and
Private Sector Construction

Robert J. Fryman, Esq
Partner and Chair of the
Construction Practice Group

In a highly significant recent case, the New York City School Construction Authority (“SCA”) attempted to dismiss a subtractor’s claims seeking nearly $2.9M in extra work and $2M in delay damages. However, the state court hearing the case rejected the SCA’s typical contractor lack-of-notice arguments.

Prior STA-Sponsored Legislative Victory Against SCA Notice-Type Defenses

Many of you who are frequent readers of this column are familiar with the STA’s historic battle with the SCA over its excessive use of contractual and/or statutory notice – type defenses. These defenses have nothing whatsoever to do with the merits or reasonability of a subcontractor’s claim. As part of that battle, we had coined the derisive acronym “COFED” (“Contractor Forfeiture Enhancement Device”) to disparagingly refer to such abusively used notice provisions.

You may also recall the STA’s successful legislative campaign to define the term “accrual” (of a claim) found in the SCA’s enabling statutes (notably Public Authorities Law §1744). “Accrual” is a term many attorneys likely would not be able to properly define. How could a subcontractor be expected to do so? However, the vague term “accrual” was used against claimants as an ambiguous notice trigger required for all claims against the SCA. Legislation championed by the STA now clearly defines “accrual” as simply the denial of a claim. This new case clearly demonstrates the salutary impact of this STA-sponsored reform legislation. Today, because of this, all claimants against the SCA, such as the claimant in this case, have a much better chance of having their claim fairly resolved.

The SCA’S “COFED” Arguments

In the current case, the SCA’s argument was a litany of typical “lack of notice” type arguments based on when the SCA contended that the contractor knew or should have known that its demands for payment had been denied (i.e. when the claims “accrued”).

For example, the SCA, without success, argued:

  • SCA’s issuance of a unilateral change order, together with copies of the email exchanges and correspondence between the SCA and the contractor, showed that they had failed to reach an agreement on the proposed change order, which constituted a denial of payment;
  • SCA’s response to the contractor’s request for information (“RFI”), seeking direction as to whether it was to demolish certain structural steel contained within a stone parapet, which directed the contractor to remove the parapet wall down to the existing roof deck, constituted a denial of any claim for payment for the removal of the structural steel; and
  • SCA’s response to contractor’s RFI seeking direction as to whether it was to remove all steel plates and concrete that had been found beneath the roofing surface, directing the contractor to perform the work “per contract-based scope” constituted an express denial for payment of any additional funds.

Court Rejects SCA’s Arguments of Early Claim “Accrual” for Notice Purposes

However, in its decision, the court rejected all of the SCA’s arguments as to when the contractor’s claims “accrued.” The court held: … “contrary to SCA’s contentions, a change order proposal is not a request for final payment and, therefore, its rejection does not trigger the running of the applicable limitations.”  The court continued, stating, “even less does an answer to an RFI, directing the contractor to perform certain work, allow the contractor to ascertain its damages, and a claim does not accrue until damages can be ascertained.”

Interestingly, with regard to the SCA’s contentions that its frequently used “unilateral” change order constituted a denial of a contractor’s demand for payment, the court rejected the SCA’s argument stating that it “ignores the fact that, pursuant to the governing contract, a unilateral change order is not a denial of payment but, is, rather, a preliminary cost estimate, pending negotiation of a final change order.”

The court also rejected the SCA’s contentions that the contract documents unambiguously provided that the stone parapets on the roof, together with their embedded and hidden structural steel, were to be razed. The court noted that there was no indication from the contract documents that the embedded structural steel was to be removed and that contractor had no reason to ask “whether a hidden impediment, that would raise the cost of such removal, was present.”

Lastly, the court also rejected the SCA’s argument that several of the claims brought by contractor were untimely because they were not commenced within the one-year limitation period set forth in Public Authorities Law §1744. The court rejected this SCA argument, finding that it rested entirely upon the SCA’s other unsuccessful arguments discussed above, as to when the claims “accrued,” which the court had otherwise rejected (e.g., that a unilateral change order and the SCA’s response to an RFI constituted denials to a demand for payment).

MHH Commentary

This case is noteworthy for its thorough analysis, and detailed rejection, of commonly used SCA contractual notice defenses regarding timeliness of contractor claims. Public owners, particularly the SCA, often do not follow the procedures of their contracts, but do not hesitate to raise arguments as to the contractor’s failure to precisely follow their contract requirements, particularly as to notice.

Cases such as this are highly fact specific, but often arise in the same, or virtually identical, construction contexts as meticulously described by the court herein.

This case truly provides a breath of fresh air. The court even refused to dismiss the contractor’s claim against the SCA for breach of the implied covenant of “good faith and fair dealing” which, as a matter of law, must be read into every contract, public of private.  The court rejected the SCA’s argument that it could freely issue unilateral change orders. Rather, it accepted the contractor’s argument that the SCA’s right to issue unilateral change orders was limited to situations where the additional work would cost less than $50,000 and that the SCA, in bad faith, issued unilateral change orders which required the contractor to expend/advance sums greatly in excess of that amount.

For those of us who are in the trenches every day doing battle with public owners, cases such as this are far too infrequent. This judge got it. Going forward, judicial precedent such as this should provide an expanded opportunity for any contractor or subcontractor doing work for the SCA to seek a fair and just resolution of its claims. As indicated, the STA-sponsored legislative reform of the Public Authorities Law, with regard to the previously exploited confusion over the term “accrual,” in this case, made all the difference.

If you have any questions relating to the preservation and/or timeliness of claims against the SCA or any other public agency, please feel free to contact us. Keep in mind that public contracts are permeated with COFEDs of all types, whether related to notice issues or other obstacles to having a claim fairly resolved. Know your contract requirements upfront and be vigilant in ensuring your own careful compliance.

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Mr. Goldberg is Special Counsel for Infrastructure and Private Sector Construction at Moritt Hock & Hamroff LLP. He can be reached at hgoldberg@moritthock.com or (516) 873-2000. Mr. Fryman is a Partner and Chair of the Construction Practice Group at the firm and can be reached at rfryman@moritthock.com or (516) 873-2000.