By Henry L. Goldberg, Legal Counsel, Subcontractors Trade Association
Partner, Moritt Hock & Hamroff LLP

It has long been recognized that the processing of change orders at the NYC SCA is particularly problematic.

When it comes to extra or additional work, typically, the SCA informally “directs” the work to be performed verbally at the project level, in meeting minutes or by email. However, this procedure often degenerates into an adversarial “72-hour notice,” threats of back charges, or even threat of default and a premature demand upon a contractor’s surety.

The “disputed work” provision of the standard SCA contract appears to leave the contractor with little alternative but to promptly perform the disputed work in the hopes of being properly and fairly paid later. Inconsistently, however, the SCA contract speaks of the contractor’s need for a written Notice of Direction (NOD) in order to pursue a claim.

The problem with this is fundamental. NODs are rarely issued contemporaneously with the SCA’s original directive to perform the disputed work.  Instead, NOD’s are often issued well after the work had already been performed. In an unfair “Catch 22,” therefore, a claim for the disputed work will be deemed waived if an NOD is not issued.

Does the SCA actually have the right to compel performance of disputed work before issuing an NOD? The SCA believes so.

Under Article 8 (“Disputes”) of the standard SCA Contract, a contractor must obtain an NOD from the SCA in order to file a claim for compensation for any disputed work.  Article 8 would seem to support the SCA’s position that a contractor must immediately respond to any order of the SCA, even without the issuance of an NOD.

However, in a recent New York appellate court decision, it was found that the “disputed work provision” of the SCA contract requires the issuance by the SCA of a formal NOD before a contractor could be terminated for refusing to perform disputed work.

In this case handled by my partner, Rob Fryman, a general contractor had entered into a contract with the SCA for the modernization of a school, which included replacement of the existing roofing system.  After much of the roofing work had already been completed, the SCA determined that extensive areas of the new roof were installed improperly and directed the General Contractor to remove and replace these areas of the roof. The “direction” from the SCA came in the form of a harsh 72-hour notice by which the SCA threatened to have the work performed by an emergency contractor and back charged against the general contractor should it fail to proceed immediately.

The general contractor disagreed with the SCA’s contentions that the roof was installed improperly. However, it provided the SCA’s 72-hour notice, together with its own order, to its subcontractor to commence the work ordered by the SCA.  However, Subcontractor refused to perform until the general contractor provided a change order for payment of the disputed work.  As a result, the general contractor terminated the subcontractor for default for refusing to perform the disputed work and engaged another roofing subcontractor to correct and complete the subcontractor’s scope of work.

The appellate court interpreted the SCA’s own “disputed work provision” to ascertain whether the subcontractor was properly terminated for refusing to perform the disputed work in the absence of an NOD. The court did not think so.

There is no mention in Section 8.01(A) (SCA’s “disputed work provision”) of the need for an NOD to trigger the contractor’s obligation to perform disputed work. It only states that the contractor shall “promptly comply with the SCA’s direction to perform the Work…and…proceed diligently with respect to any…disputed matter.”  However, the appellate court focused instead on the second paragraph of Article 8, Section 8.01(B) which sets out the contractor’s need for an NOD in order to pursue a claim.  The Court found that the subcontractor:

…was justified in refusing to continue performing work that it deemed outside the scope of the contract, absent a notice of direction (NOD) from the SCA, or in this case, the general contractor. This would have fairly protected the subcontractor’s right to claim additional compensation for that work.

This decision is the first of which we are aware to establish that the SCA must first issue an NOD in order to compel performance of disputed work. It could be a “game-changer.” Even if the SCA attempted to modify the language of its contract in an attempt to avoid this “ray of fairness” from seeping into the administration of its projects, the court’s decision, based on fundamental fairness and sound logic, should survive.

Goldberg Commentary:

In view of this significant appellate decision, to preserve your claim rights, always issue a clear, written demand for a formal NOD before commencing disputed work ordered by the SCA.

Refusing a public owner’s order to proceed with disputed work is never an easy issue to resolve. However, the appellate court, in this case, “got it,” and reason and common sense prevailed. The prospect of a subcontractor being without any recourse in the absence of an NOD, after the ordered work was satisfactorily performed, was simply unacceptable to the appellate court.

Please feel free to contact me, or my partner, Rob Fryman, at 516-873-2000 if you have any questions or wish to discuss your rights under the SCA’s contract.

Robert J. Fryman, a Partner with Moritt Hock & Hamroff, LLP, assisted with the preparation of this article.