New York Law Review

Tag: construction contract

  • Watral & Sons, Inc. v. OC Riverhead 58, LLC, 9 N.Y.3d 182 (2007): Contractual Indemnification Requires Clear Proof of Negligence or Covered Damages

    9 N.Y.3d 182 (2007)

    Contractual indemnification clauses in construction contracts require clear and sufficient proof of negligence by the contractor or that the damages fall within the specific types of property damage covered by the agreement, to hold the contractor liable for indemnifying the owner.

    Summary

    Watral & Sons sought to foreclose on a mechanic’s lien for unpaid work on OC Riverhead’s property. OC Riverhead counterclaimed for indemnification, alleging damages paid to a neighboring landowner, Adchem, due to Watral’s excavation damaging an underground power cable. The New York Court of Appeals reversed the Appellate Division’s decision, holding that OC Riverhead was not entitled to contractual indemnification because there was insufficient evidence of Watral’s negligence or that Adchem sustained covered property damage. The court emphasized that indemnification requires proof that the damage was caused by the contractor’s negligence or falls within the contract’s defined scope of covered property damage.

    Facts

    OC Riverhead contracted with Watral & Sons for excavation work. During excavation, Watral’s employee damaged an underground power cable supplying electricity to Adchem, an adjacent property. The cable’s location was incorrectly marked due to prior relocation by an unidentified electrician. A second incident occurred during further excavation when the ground gave way, damaging the previously repaired cable. OC Riverhead paid Adchem for the damages and withheld the balance due to Watral, claiming Watral failed to resolve the dispute with Adchem.

    Procedural History

    Watral filed a mechanic’s lien and sued to foreclose. OC counterclaimed for indemnification. The Supreme Court ruled in favor of Watral, finding no proof of Watral’s negligence. The Appellate Division modified, holding Watral liable for indemnification under a broader interpretation of the contract. Watral appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Watral & Sons was required to indemnify OC Riverhead for damages paid to Adchem under subparagraph 4.18.1 of the construction contract, requiring proof of Watral’s negligence.

    2. Whether Watral & Sons was required to indemnify OC Riverhead for damages paid to Adchem under subparagraph 10.2.5 of the construction contract, pertaining to damage to specific types of property.

    Holding

    1. No, because there was insufficient proof that Watral’s negligence caused the damage to the cable, especially considering the cable had been relocated by others.

    2. No, because there was no evidence that Adchem suffered damage to the specific types of property covered under clause 10.2.1.3; the damages appeared to be purely economic injury not covered by the contract.

    Court’s Reasoning

    The court reasoned that under subparagraph 4.18.1, indemnification required proof that Watral’s negligence caused the damage. The stipulated facts indicated the cable’s mislocation was due to an unidentified electrician, not Watral. The court noted, “the parties stipulated that the electrical cable servicing the Adchem property was not where it was supposed to be, but ‘had been relocated by others’ before Watral began work.” Therefore, there was no basis to conclude Watral was negligent. As for subparagraph 10.2.5, the court found its reach limited to damage to specific types of property as defined in clause 10.2.1.3, such as trees, shrubs, and utilities. The court observed that the only property damaged was the cable itself, and there was no evidence Adchem suffered damage to its own property, only potential economic losses. The court stated that “[t]here is no evidence…as to whether Ad-chem actually suffered any damage to its own property as a result of the damage to the cable, or, instead, sustained purely economic injury” which is not covered. Because OC Riverhead failed to demonstrate either Watral’s negligence or covered property damage, the court reversed the Appellate Division and reinstated the Supreme Court’s judgment in favor of Watral.

  • Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006): Choice of Law and Enforceability of ‘Pay-If-Paid’ Clauses

    Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006)

    New York’s public policy against “pay-if-paid” clauses in construction contracts, while strong, is not so fundamental as to override a contractual choice-of-law provision selecting the law of a state where such clauses are enforceable.

    Summary

    Welsbach Electric Corp., a Delaware subcontractor, sued MasTec North America, Inc., a Florida general contractor, for non-payment. The subcontract contained a “pay-if-paid” clause, stipulating that Welsbach would only be paid if MasTec received payment from the owner, Telergy. The contract also specified that Florida law would govern. Telergy became insolvent and failed to pay MasTec, which in turn refused to pay Welsbach. New York’s Lien Law § 34 prohibits waiving the right to file a lien. The Court of Appeals held that although New York generally prohibits “pay-if-paid” clauses, the parties’ choice of Florida law was enforceable because New York’s policy was not so fundamental as to override the parties’ contractual agreement. Sophisticated parties knowingly chose another state’s law and should be held to their bargain.

    Facts

    Telergy hired MasTec to build a fiber optic network. MasTec subcontracted the electrical work to Welsbach. The subcontract contained a “pay-if-paid” clause, making payment to Welsbach contingent on MasTec receiving payment from Telergy. The subcontract also stipulated that Florida law would govern the agreement. Telergy terminated its contract with MasTec due to insolvency, leaving MasTec unpaid. Consequently, MasTec did not pay Welsbach for the work performed. Welsbach sued MasTec for the unpaid balance.

    Procedural History

    Welsbach sued MasTec in New York. MasTec asserted affirmative defenses based on the “pay-if-paid” clause and the choice of Florida law. Welsbach moved for partial summary judgment, arguing the clause violated New York Lien Law § 34. MasTec cross-moved for leave to amend its answer. Supreme Court struck MasTec’s affirmative defenses, but the Appellate Division affirmed. MasTec appealed to the New York Court of Appeals.

    Issue(s)

    Whether New York’s public policy against “pay-if-paid” clauses, as expressed in Lien Law § 34, is so fundamental that it overrides a contractual choice-of-law provision selecting the law of a state where such clauses are enforceable?

    Holding

    No, because New York’s public policy, while strong, is not so fundamental as to override the parties’ contractual agreement to apply Florida law, where “pay-if-paid” clauses are enforceable.

    Court’s Reasoning

    The Court acknowledged that New York generally enforces choice-of-law clauses if the chosen law has a reasonable relationship to the parties or transaction. While freedom to contract is not unlimited, courts typically only refuse to enforce agreements that are illegal or violate a fundamental principle of justice. The Court emphasized that the public policy exception is reserved for foreign laws that are “truly obnoxious” (Cooney v. Osgood Mach., 81 N.Y.2d 66, 79 (1993)).

    The Court distinguished Lien Law § 34 from other areas where a fundamental public policy would override choice of law, such as human rights or anti-discrimination laws. The Court noted the historical context of mechanics’ liens, which did not exist at common law and were initially waivable. The court emphasized that Lien Law § 34 deals with risk allocation under a construction contract and is not of the same fundamental nature as laws protecting civil rights. The Court stated that “Section 34 seeks to protect New York subcontractors from the oppressive use of bargaining power.”

    Considering that both parties were sophisticated commercial entities that knowingly and voluntarily entered into the subcontract, the Court concluded that the “pay-if-paid” clause was not “truly obnoxious” as to void the parties’ choice of law. Welsbach failed to meet the “heavy burden” of proving that applying Florida law would be offensive to a fundamental public policy of New York. The Court observed that neither party was a New York corporation, which further diminished the weight of New York’s public policy concerns in this particular case. The ruling emphasizes the importance of upholding contractual agreements between sophisticated parties even if those agreements conflict with a state’s general public policy, unless that policy is deemed truly fundamental.

  • Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006): Choice of Law and Enforceability of Pay-If-Paid Clauses

    7 N.Y.3d 624 (2006)

    When a contract contains a choice-of-law provision, New York courts will generally honor that provision unless the foreign law violates a fundamental public policy of New York; Lien Law § 34, which prohibits waivers of mechanics’ liens, does not represent such a fundamental public policy as to override a contractual choice of law favoring a state where “pay-if-paid” clauses are enforceable.

    Summary

    Welsbach Electric Corp., a subcontractor, sued MasTec North America, Inc., a general contractor, for breach of contract after the owner of a construction project became insolvent and failed to pay MasTec. The subcontract between Welsbach and MasTec contained a “pay-if-paid” clause and specified that Florida law governed the agreement. Florida law enforces pay-if-paid clauses, while New York law, under Lien Law § 34, deems such clauses void as against public policy. The New York Court of Appeals held that the choice-of-law provision should be enforced because New York’s public policy against pay-if-paid clauses, as expressed in Lien Law § 34, is not a sufficiently fundamental policy to override the parties’ contractual choice of Florida law. This decision underscores that not every difference between New York and foreign law constitutes a violation of fundamental public policy.

    Facts

    Telergy Metro LLC hired MasTec North America, Inc. to build a fiber optic network. MasTec then subcontracted with Welsbach Electric Corp. for electrical work. The subcontract included a “pay-if-paid” clause, making MasTec’s payment to Welsbach contingent on MasTec receiving payment from Telergy. The agreement also stated that Florida law would govern the contract. Telergy terminated its contract with MasTec due to insolvency, resulting in MasTec not being fully paid. Consequently, Welsbach was not paid for its work and sued MasTec to recover the unpaid balance.

    Procedural History

    Welsbach sued MasTec in New York. MasTec asserted affirmative defenses based on the pay-if-paid clause and the applicability of Florida law. The Supreme Court struck these affirmative defenses, holding that the pay-if-paid clause violated New York’s Lien Law § 34. The Appellate Division affirmed. MasTec appealed to the New York Court of Appeals.

    Issue(s)

    Whether New York’s public policy against “pay-if-paid” clauses, as articulated in Lien Law § 34, is so fundamental that it overrides a contractual choice-of-law provision selecting the law of a state (Florida) where such clauses are enforceable.

    Holding

    No, because Lien Law § 34, which deals with risk allocation in construction contracts, does not embody a public policy so fundamental as to override the parties’ contractual choice of law. Therefore, the Florida law, which enforces pay-if-paid clauses, should be applied.

    Court’s Reasoning

    The Court of Appeals began by acknowledging the general principle that choice-of-law provisions are enforceable if the chosen law bears a reasonable relationship to the parties or the transaction. However, this freedom is limited by the public policy exception, which allows courts to refuse enforcement of foreign laws that violate a fundamental principle of justice, good morals, or deep-rooted tradition. The court emphasized that this exception is reserved for truly obnoxious foreign laws, quoting Cooney v. Osgood Machinery, Inc., “plainly not every difference between foreign and New York law threatens our public policy. Indeed, if New York statutes or court opinions were routinely read to express fundamental policy, choice of law principles would be meaningless.”

    The court examined the history and policy considerations underlying Lien Law § 34. It noted that mechanics’ liens are statutory creations, not common-law rights, and that New York courts historically enforced lien waivers. While the current version of Lien Law § 34 prohibits such waivers, the court found that this prohibition does not represent a fundamental public policy concern of the same magnitude as, for example, anti-discrimination laws. The court distinguished the case from those involving fundamental rights, stating that Lien Law § 34 deals primarily with risk allocation under a construction contract. It noted that both parties were sophisticated commercial entities who knowingly agreed to the subcontract, including the choice-of-law provision. Applying Florida law would not be “truly obnoxious” in this context. Therefore, the court concluded that Welsbach had not met the “heavy burden” of proving that applying Florida law would offend a fundamental public policy of New York.

  • C.S.A. Contracting Corp. v. New York City School Construction Authority, 5 N.Y.3d 189 (2005): Accrual of Claims in Public Works Contracts

    5 N.Y.3d 189 (2005)

    A contractor’s claim against the New York City School Construction Authority accrues when its damages are ascertainable, typically upon substantial completion of work or submission of a detailed invoice, not when payment is denied, unless the Legislature amends the Public Authorities Law similarly to the Education Law.

    Summary

    C.S.A. Contracting Corp. sued the New York City School Construction Authority (SCA) for breach of contract, seeking payment for asbestos abatement work. The Court of Appeals affirmed the dismissal of the case because C.S.A. failed to file a notice of claim within three months of the claim’s accrual, as required by Public Authorities Law § 1744(2). The court held that the claim accrued when the work was substantially completed and a detailed invoice was submitted, not when the SCA denied payment. The Court declined to extend the Education Law’s later accrual date (date of payment denial) to cases involving the SCA, stating that such a change must come from the legislature.

    Facts

    In 1993, C.S.A. Contracting Corp. contracted with the New York City School Construction Authority (SCA) for asbestos abatement work at various schools. On December 3, 1993, C.S.A. submitted a payment request of $151,994.96 for extra work at PS 29 in Staten Island. The SCA approved the request in February 1994 but, in April 1994, refused payment, alleging overcharges on a separate project at Bushwick High School. C.S.A. contended it filed a notice of claim in May 1994 and later a notice of dispute on June 30, 1994. A formal notice of claim for $595,850 was filed September 21, 1994, covering work at PS 29, additional costs for work above 14 feet, and wet cleaning/encapsulation expenses.

    Procedural History

    C.S.A. commenced a breach of contract action in April 1995. The SCA asserted C.S.A.’s failure to properly serve a timely notice of claim as an affirmative defense and counterclaimed for overpayment at Bushwick High School. At trial, C.S.A. lacked documentary evidence of the May 1994 notice. The Supreme Court dismissed the complaint due to C.S.A.’s failure to submit a timely notice of claim, and severed the SCA’s counterclaim. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the dismissal.

    Issue(s)

    Whether C.S.A.’s notice of claim was timely filed pursuant to Public Authorities Law § 1744(2), requiring it to be presented within three months after the accrual of the claim.

    Holding

    No, because C.S.A.’s claim accrued when its damages were ascertainable, which was upon substantial completion of the work and submission of a detailed invoice in December 1993, and the notice of claim was not filed within three months of that date.

    Court’s Reasoning

    Public Authorities Law § 1744(2) requires a detailed written notice of claim within three months of accrual as a condition precedent to an action against the SCA. The Court relied on the precedent set in Matter of Board of Educ. of Enlarged Ogdensburg City School Dist. [Wager Constr. Corp.], 37 NY2d 283, 290 (1975), stating, “it generally has been recognized that damages are ascertainable once the work is substantially completed or a detailed invoice of the work performed is submitted”. The Court found C.S.A.’s work was completed, and a detailed invoice submitted, before December 1993. The Court rejected C.S.A.’s argument that the claim accrued only when the SCA denied payment in April 1994, noting that while the Legislature amended Education Law § 3813(1) to reflect this rule for school districts, it did not similarly amend Public Authorities Law § 1744(2). Therefore, the Wager ruling stands for Public Authorities Law cases, absent legislative action.

    Judge R.S. Smith concurred, expressing his view that the Wager decision was based on “questionable logic” and has led to “unfortunate results,” as it requires a contractor to submit a claim before there is any reason to expect litigation. He pointed out that the Legislature addressed this issue in Education Law § 3813(1) but has not done so in Public Authorities Law § 1744(2). Judge Smith argued, “The courts’ interpretation… makes no sense”.

  • Oriskany Central School District v. Edmund J. Booth Architects, 85 N.Y.2d 995 (1995): Statute of Limitations in Construction Contracts

    85 N.Y.2d 995 (1995)

    In construction contracts containing both an arbitration clause and a statute of limitations clause tied to substantial completion, a certificate of suitability and acceptance can serve as a substitute for a certificate of substantial completion, triggering the statute of limitations, even if a formal certificate of substantial completion was never issued.

    Summary

    Oriskany Central School District contracted with Edmund J. Booth Architects for reroofing services. The contract included an arbitration clause for disputes, barred if legal proceedings would be time-barred, with the statute of limitations commencing at substantial completion. The school district sued the architect for breach of contract due to latent defects more than six years after accepting the work, arguing no formal certificate of substantial completion existed. The Court of Appeals held that the signed Certificate of Suitability and Acceptance of Building served as a substitute, triggering the statute of limitations, thus barring the action. CPLR 205(a) was inapplicable because the original action was time-barred.

    Facts

    1. On June 1, 1984, Oriskany Central School District (plaintiff) contracted with Edmund J. Booth Architects (defendant) for architectural services for reroofing two schools.
    2. The contract contained an arbitration clause for disputes, but barred demands made after the statute of limitations for legal proceedings had expired.
    3. Paragraph 11.3 of the contract stated the statute of limitations would begin running no later than the date of substantial completion.
    4. The architect never issued a formal Certificate of Substantial Completion.
    5. On December 18, 1985, both parties signed a “Certificate of Suitability and Acceptance of Building for Pupil Occupancy,” stating the project was completed per drawings and specifications.
    6. On January 9, 1986, the architect signed an Application and Certificate for Payment, indicating work completion and final payment eligibility.
    7. On January 27, 1986, the Board of Education accepted the building for pupil occupancy.
    8. On April 8, 1992, the school district sued the architect for breach of contract, alleging latent roof defects.

    Procedural History

    1. April 8, 1992: School District filed a lawsuit against the Architect for breach of contract.
    2. April 28, 1992: Architect answered, asserting a statute of limitations defense.
    3. July 8, 1992: Architect moved to dismiss, arguing arbitration was the proper remedy.
    4. July 22, 1992: Architect requested the motion be converted to compel arbitration.
    5. August 18, 1992: School District cross-moved to dismiss the statute of limitations defense.
    6. February 22, 1993: Architect formally demanded arbitration.
    7. July 12, 1993: Supreme Court stayed the action and directed arbitration, finding the statute of limitations hadn’t expired.
    8. Appellate Division reversed, citing the Certificate of Suitability and acceptance date, deeming the action time-barred.
    9. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the “Certificate of Suitability and Acceptance of Building for Pupil Occupancy” can substitute for a formal Certificate of Substantial Completion to trigger the statute of limitations in a construction contract with an arbitration clause.
    2. Whether CPLR 205(a) applies to revive a claim that was already time-barred.

    Holding

    1. Yes, because the Certificate of Suitability and Acceptance served as an appropriate substitute, as the work was substantially complete according to the contract documents.
    2. No, because CPLR 205(a) only applies to timely actions dismissed without prejudice, not to actions already barred by the statute of limitations.

    Court’s Reasoning

    The Court reasoned that while no formal Certificate of Substantial Completion was issued, the signed “Certificate of Suitability and Acceptance of Building for Pupil Occupancy” served as a valid substitute. This certificate indicated the project was completed according to the drawings and specifications. The Court referred to paragraph 8.1.3 of the General Conditions, defining substantial completion as when “construction is sufficiently complete…so the Owner can occupy or utilize the Work…for the use for which it is intended.” Since the school district accepted the building and occupied it for its intended purpose, the work was deemed substantially complete. The court emphasized that both parties signed the Certificate of Suitability and Acceptance, and the architect also signed an Application and Certificate for Payment, indicating completion. Because the lawsuit was filed more than six years after this date, it was time-barred. The Court also dismissed the school district’s reliance on CPLR 205(a), which provides a six-month extension to refile a dismissed action, stating that this provision does not apply when the original action was already barred by the statute of limitations. The agreement between the parties demonstrated their intent to start the statute of limitations running upon substantial completion, regardless of the formal issuance of a specific certificate.

  • Christa Construction, Inc. v. Board of Education, 82 N.Y.2d 1031 (1993): Enforceability of Arbitration Agreements in Public Contracts

    Christa Construction, Inc. v. Board of Education, 82 N.Y.2d 1031 (1993)

    Arbitration is a favored method of dispute resolution in New York, and public policy exceptions to enforcing arbitration agreements are narrowly construed.

    Summary

    Christa Construction sought arbitration with the Board of Education over disputes arising from a school improvement contract, including issues related to change orders and payment. The Board of Education resisted, arguing that the arbitration agreement was unenforceable on public policy grounds under Education Law § 1718 (1), because enforcing change orders through arbitration would result in expenditures exceeding lawfully appropriated amounts. The Supreme Court ordered arbitration, the Appellate Division reversed, but the New York Court of Appeals reversed the Appellate Division, holding that the matter was subject to arbitration and did not violate public policy. The Court emphasized New York’s strong policy favoring arbitration and the narrow scope of public policy exceptions.

    Facts

    Christa Construction, Inc. contracted with the Board of Education to perform school improvements. The contract was amended by several change orders. Disputes arose concerning the contract balance, change orders, and extra work performed. Christa Construction sought to resolve these disputes through arbitration, as provided in the contract.

    Procedural History

    The Supreme Court denied the Board of Education’s motion to stay arbitration and ordered the parties to proceed with arbitration. The Appellate Division reversed the Supreme Court’s order, staying arbitration. The Court of Appeals granted leave to appeal and reversed the Appellate Division’s order, reinstating the Supreme Court’s decision to compel arbitration.

    Issue(s)

    Whether an arbitration agreement between a construction company and a Board of Education is unenforceable on public policy grounds when the Board claims that enforcing the agreement would result in expenditures exceeding lawfully appropriated amounts.

    Holding

    No, because arbitration is a favored method of dispute resolution in New York, and the public policy exception raised by the Board of Education does not apply in this case.

    Court’s Reasoning

    The Court of Appeals emphasized the strong public policy in New York favoring arbitration as a means of dispute resolution, citing Matter of Weinrott [Carp], 32 NY2d 190, 199 and Sablosky v Gordon Co., 73 NY2d 133, 138. The Court noted that New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration, citing Matter of 166 Mamaroneck Ave. Corp. v 151 E. Post Rd. Corp., 78 NY2d 88, 93. While acknowledging that arbitration can be challenged on public policy grounds as in Hirsch v Hirsch, 37 NY2d 312, 315, the Court stated that this is a limited exception. The Court found that the Board of Education’s argument that enforcing the change orders through arbitration would violate Education Law § 1718 (1) did not qualify for the public policy exception, citing Matter of Port Wash. Union Free School Dist. v Port Wash. Teachers Assn., 45 NY2d 411, 418 and Matter of Board of Educ. v New York State Pub. Empl. Relations Bd., 75 NY2d 660. Therefore, the Court held that the arbitration agreement should be enforced.

  • Carnegie Hall Corp. v. Beinner Waterproofing, 74 N.Y.2d 907 (1989): Interpreting Subrogation Waivers in Construction Contracts

    Carnegie Hall Corp. v. Beinner Waterproofing, 74 N.Y.2d 907 (1989)

    A subrogation waiver in a construction contract, where the owner agrees to waive rights against the contractor for damages covered by insurance, typically applies only to the specific “Work” defined in the contract, not to damages to other parts of the property.

    Summary

    Carnegie Hall Corp. contracted with Beinner Waterproofing for corrective work on its building. A fire caused damage beyond the scope of the contracted work. Carnegie Hall’s insurer, as subrogee, sued Beinner for negligence. The central issue was whether a subrogation waiver clause in the contract barred the insurer’s claim for damages to areas outside the “Work.” The New York Court of Appeals held that the waiver applied only to damages within the defined “Work,” allowing the insurer to pursue claims for damages to other parts of the building. The Court emphasized interpreting the contract to reflect the parties’ allocation of risk and insurance responsibilities.

    Facts

    Carnegie Hall Corp. (owner) contracted with Beinner Waterproofing (contractor) for corrective work on the exterior walls and parking garage floor of Carnegie Towers.
    The contract, a standard AIA form, defined the “Work” as corrective work to masonry and concrete portions of exterior walls and the parking garage floor.
    The contract included insurance provisions requiring the contractor to maintain liability insurance for damages *other than to the Work itself,* and the owner to maintain property insurance *upon the entire Work at the site.*
    A fire occurred in a shed constructed by the contractor, causing damage to interior hallways, apartments, and the building’s exterior, totaling approximately $140,000.

    Procedural History

    Carnegie Hall’s insurer paid for the loss and sued Beinner as subrogee.
    Beinner moved to dismiss based on the subrogation waiver clause in the contract.
    Supreme Court granted the motion and dismissed the complaint.
    The Appellate Division modified, reinstating the complaint to the extent it sought damages outside the contractual work. The Appellate Division certified the question to the Court of Appeals.

    Issue(s)

    Whether the subrogation waiver clause in the construction contract bars the subrogation claim of the owner’s insurer for damages caused by the contractor to areas of the building outside the defined limits of the “Work.”

    Holding

    No, because the subrogation waiver clause only applies to damages to the specific “Work” defined in the contract, not to other parts of the building, as indicated by the plain language of the agreement and the intended allocation of risk between the parties.

    Court’s Reasoning

    The Court interpreted Article 17.6, the waiver clause, which waived rights for damages caused by fire “to the extent covered by insurance obtained pursuant to this Article or any other property insurance applicable to the Work.”
    The Court reasoned that the waiver applied only to insurance the owner obtained for the “Work” itself, protecting the contractor’s limited interest in that specific part of the building.
    “It makes no difference whether the policy under which subrogation is sought is one which the owner purchased specifically to insure the Work pursuant to article 17.3 or some other policy covering the owner’s property in which the owner has also provided coverage for the Work. In either event, the waiver clause, if given its plain meaning, bars subrogation only for those damages covered by insurance which the owner has provided to meet the requirement of protecting the contractor’s limited interest in the building — i.e., damages to the Work itself.”
    The Court emphasized that the contractor was required to obtain liability insurance for damages *other than to the Work itself* (Article 17.1).
    The Court distinguished *Trump-Equitable Fifth Ave. Co. v H.R.H. Constr. Corp.*, where the contract involved the construction of an entire building, requiring the owner to procure insurance for the entire building, thus extending the subrogation waiver to all damages.
    The dissenting judge argued that the waiver should bar any action by the owner or its subrogee for property damage covered by the owner’s first-party coverage, regardless of whether it was directly part of the “Work”, to promote certainty and avoid litigation. The dissent cited cases where similar clauses were interpreted to bar subrogation actions, emphasizing the intention to have one party provide insurance for all parties involved.

  • Sisters of St. John the Baptist, Providence Rest Convent v. Geraghty Constructor, Inc., 67 N.Y.2d 997 (1986): Scope of Arbitration Clause

    Sisters of St. John the Baptist, Providence Rest Convent v. Geraghty Constructor, Inc., 67 N.Y.2d 997 (1986)

    When a broad arbitration clause exists in a contract, disputes relating to extra work allegedly authorized and required for the completion of the contract fall within the scope of the arbitration clause, even if the extra work is claimed to be outside the original scope of the agreement.

    Summary

    Sisters of St. John the Baptist (Petitioner) contracted with Geraghty Constructor, Inc. (Respondent) for convent renovations. A dispute arose over cost overruns, with Respondent claiming the work was outside the original contract and demanding arbitration. Petitioner sought to stay arbitration, arguing the work wasn’t authorized. The Court of Appeals held that the dispute fell within the broad arbitration clause covering disputes “arising out of, or relating to, the Contract Documents”. The court emphasized that the arbitration clause applied not only to the original agreement but also to modifications and changes, making arbitration the proper forum for resolving the dispute.

    Facts

    Respondent contracted with Petitioner to renovate a convent for a stipulated sum, with allowances for changes. The contract contained a broad arbitration clause for all disputes arising from the contract. As renovations progressed, modifications were made due to unforeseen conditions. Respondent submitted payment applications, receiving a substantial amount for labor and materials. A dispute arose concerning cost overruns; Respondent claimed that certain labor and materials were outside the scope of the agreement and demanded arbitration for the unpaid balance.

    Procedural History

    Respondent filed a notice of intention to arbitrate. Petitioner sought a stay of arbitration. Special Term granted the stay, which the Appellate Division affirmed. The New York Court of Appeals reversed the Appellate Division’s order, denying the stay of arbitration.

    Issue(s)

    Whether a dispute over extra work allegedly authorized and required for the completion of a construction contract falls within the scope of a broad arbitration clause in that contract, even if the extra work is claimed to be outside the original scope of the agreement.

    Holding

    Yes, because the arbitration clause provided broadly for arbitration of all disputes “arising out of, or relating to, the Contract Documents,” and those documents included not only the original agreement and plans but also later modifications and written changes. Given these defined terms, disputes relating to extra work allegedly authorized and required for execution and completion of respondent’s renovation of the convent arise out of or relate to the “Contract Documents” and thus fall generally within the arbitration clause.

    Court’s Reasoning

    The court emphasized that its role is limited to determining whether the parties agreed to arbitrate and whether the dispute falls within the scope of the arbitration agreement. The court’s inquiry ends once it establishes a relationship between the dispute’s subject matter and the underlying agreement to arbitrate. Interpretation of specific contract terms is left to the arbitrators.

    The court noted that the arbitration clause was broad, encompassing all disputes “arising out of, or relating to, the Contract Documents.” The “Contract Documents” included not only the original agreement but also later modifications and written changes. The court reasoned that disputes over extra work, even if outside the original agreement’s scope, still relate to the “Contract Documents” because the parties provided for “changes in the scope of work.”

    The court addressed the lower courts’ reliance on the Respondent’s statement that some work was outside the original agreement, clarifying that the possibility of changes in the scope of work brought it under the arbitration clause. The court also stated that submitting to arbitration did not equate to acknowledging liability for costs exceeding the stipulated sum.

    The court directly quoted the contract language to support its conclusion: “The Work comprises the completed construction required by the Contract Documents and includes all labor necessary to produce such construction, and all materials and equipment incorporated or to be incorporated in such construction.”

  • State of New York v. Lundin, 60 N.Y.2d 987 (1983): Statute of Limitations for Contract Claims Begins at Substantial Completion

    State of New York v. Lundin, 60 N.Y.2d 987 (1983)

    A cause of action for breach of contract accrues, and the statute of limitations begins to run, when the contract is substantially completed, regardless of when the final payment is due or made.

    Summary

    The New York Court of Appeals held that the State’s breach of contract claim against a contractor, Lundin, was time-barred because the action was commenced more than six years after Lundin substantially completed the work, even though the final payment and related disputes occurred later. The court reasoned that the cause of action accrued upon substantial completion, not upon final payment or resolution of payment disputes. This case clarifies that the focus for statute of limitations purposes is on when the work was done, not when the money was (or wasn’t) paid.

    Facts

    In April 1967, the plaintiff, was awarded a contract to build an ice skating rink at Clove Lake Park in Staten Island. The contract was a unit-price contract, meaning the actual cost was to be determined after construction. The contractor did not present the premises for a final inspection until September 28, 1971. In January 1978, the plaintiff commenced an action seeking to recover for extra materials, additional work, losses due to project delays, and alleging a total breach of contract.

    Procedural History

    The defendant answered and asserted that the action was barred by the Statute of Limitations. Both the Supreme Court and the Appellate Division denied the defendant’s motion to dismiss the complaint. The Court of Appeals reversed, granting the motion to dismiss.

    Issue(s)

    Whether a breach of contract action accrues, for statute of limitations purposes, upon substantial completion of the contract or upon the final determination of payment owed under the contract.

    Holding

    No, because a cause of action in contract accrues when a breach occurs, and in construction contracts, the breach typically occurs when the work is substantially completed, regardless of when payment is finalized or disputes are resolved.

    Court’s Reasoning

    The Court of Appeals determined that the State’s cause of action accrued when the contractor substantially completed the work in 1971. The court emphasized that “a cause of action accrues when a breach of contract occurs.” The court rejected the argument that the cause of action accrued when the final payment was determined or when the State disputed the amount owed. The court reasoned that the liability arose out of the contract and the alleged improper performance thereof, and not out of the nonperformance of payment. The court distinguished between a suit on “liability arising out of the contract” and one for “nonperformance of payment,” stating that the gravamen of any contract action is that one party claims that it is owed certain obligations because of the agreement and that the other party has not performed those obligations. A dissenting opinion argued that the cause of action for payment does not accrue until the owner refuses to pay all that was requested, viewing the owner’s audit and determination of payment as a condition precedent to the contractor’s right to sue for final payment. However, the majority did not accept this argument. The court found the action was commenced more than six years after the completion, it was time-barred.

  • Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 33 (1983): Enforceability of ‘No-Damage-For-Delay’ Clauses

    Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 33 (1983)

    A ‘no-damage-for-delay’ clause in a construction contract is enforceable unless the delays were caused by the contractee’s bad faith, deliberate intent, or gross negligence.

    Summary

    Kalisch-Jarcho, Inc. sued the City of New York for breach of contract, alleging delays caused by the city’s actions during a construction project. The contract contained a ‘no-damage-for-delay’ clause. The trial court instructed the jury that Kalisch-Jarcho could recover if the delay was caused by the city’s ‘active interference.’ The Court of Appeals held that the ‘no-damage-for-delay’ clause was enforceable unless the delays were caused by the city’s bad faith, deliberate intent, or gross negligence, and that the trial court’s ‘active interference’ charge was insufficient.

    Facts

    Kalisch-Jarcho, Inc. contracted with the City of New York for the heating, ventilating, and air-conditioning component of the new police headquarters for $8,033,000. The contract completion time was set at 1,000 days, but the project was delayed by 28 months. Kalisch-Jarcho alleged that the delays were caused by the city’s revisions of plans, failure to coordinate contractors, and other interferences. The contract contained Article 13, a ‘no-damage-for-delay’ clause, stating, “The Contractor agrees to make no claim for damages for delay in the performance of this contract occasioned by any act or omission to act of the City or any of its representatives…”

    Procedural History

    Kalisch-Jarcho sued the City of New York for $3,311,960 in damages. The trial court instructed the jury that Kalisch-Jarcho could recover if the delay was caused by the city’s “active interference.” The jury returned a verdict for Kalisch-Jarcho. The Appellate Division affirmed. The City of New York appealed to the Court of Appeals.

    Issue(s)

    Whether the trial court erred in instructing the jury that Kalisch-Jarcho could recover delay damages despite the ‘no-damage-for-delay’ clause, based only on a finding of ‘active interference’ by the City of New York.

    Holding

    No, because a ‘no-damage-for-delay’ clause is enforceable unless the delays were caused by the contractee’s bad faith, deliberate intent, or gross negligence, and the trial court’s ‘active interference’ charge was insufficient to establish such conduct.

    Court’s Reasoning

    The court held that ‘no-damage-for-delay’ clauses are enforceable, especially in contracts between sophisticated parties like a large contractor and a large city. The purpose of such clauses is to avoid vexatious litigation and discourage dilatoriness. The court recognized an implicit obligation of fair dealing in the contract. However, the court stated that an exculpatory agreement, no matter how unqualified, will not exonerate a party from liability under all circumstances. Specifically, it will not apply to exemption of willful or grossly negligent acts. An exculpatory clause is unenforceable when the misconduct smacks of intentional wrongdoing, such as fraud, malice, bad faith, or gross negligence. The court found that the trial court’s charge of “active interference” was insufficient to establish the level of misconduct necessary to overcome the ‘no-damage-for-delay’ clause. The court stated, “[U]nless Kalisch-Jarcho proved that ‘the City acted in bad faith and with deliberate intent delayed the plaintiff in the performance of its obligation’, the plaintiff could not recover.” The court reasoned that “active interference” does not connote willfulness, maliciousness, abandonment, bad faith, or other theories that demonstrate intent. The court reversed the Appellate Division’s order and granted a new trial.