New York Law Review

Tag: construction contracts

  • Bovis Lend Lease LMB, Inc. v. Lower Manhattan Development Corp., 3 N.Y.3d 480 (2004): Indemnification Agreements Must Expressly Name Indemnitees

    Bovis Lend Lease LMB, Inc. v. Lower Manhattan Development Corp., 3 N.Y.3d 480 (2004)

    An indemnification clause in a contract will be strictly construed, and a party seeking indemnification must be unambiguously identified in the contract as an intended beneficiary of the indemnification obligation.

    Summary

    This case addresses the scope of an indemnification clause in a renovation contract. VEH, a contractor, agreed to indemnify the Port Authority, the building owner, and its “agents.” Bovis, a construction manager for the Port Authority, sought indemnification from VEH after an employee of VEH was injured and sued both the Port Authority and Bovis. The Court of Appeals held that Bovis was not entitled to indemnification because the contract did not unambiguously identify Bovis as an intended beneficiary of the indemnification clause. The court emphasized that indemnity agreements must be strictly construed and cannot be expanded beyond their express terms.

    Facts

    The Port Authority contracted with VEH for heating and ventilation work at One World Trade Center. The Port Authority also contracted with Bovis for construction management services for the same project. A VEH employee was injured on the job and sued the Port Authority and Bovis, alleging negligence and Labor Law violations. The Port Authority then initiated a third-party action against Bovis, who in turn sued VEH, seeking contractual indemnification based on the indemnity clause in the VEH-Port Authority contract.

    Procedural History

    The Supreme Court granted VEH’s motion to dismiss the third-party complaint against it, finding that Bovis was not entitled to indemnification. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    Whether Bovis, as a construction manager for the Port Authority, qualifies as the Port Authority’s “agent” under the indemnification clause of the contract between VEH and the Port Authority, thereby entitling Bovis to indemnification from VEH.

    Holding

    No, because the indemnification clause did not unambiguously identify Bovis as an intended beneficiary of the indemnification obligation. The contract language was not clear enough to create an obligation to indemnify Bovis. The Court declined to rewrite the contract to include an obligation the parties did not explicitly include.

    Court’s Reasoning

    The Court of Appeals emphasized that indemnification agreements must be strictly construed. Quoting Hooper Assoc. v AGS Computers, 74 NY2d 487 (1989), the Court stated, “[w]hen a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed.” The Court reasoned that if the Port Authority and VEH intended to include Bovis as a potential indemnitee, they should have explicitly stated so in the contract. The Court noted that while the contract referred to the “construction manager” multiple times, it did not refer to the construction manager as an agent of the Port Authority in the indemnification clause. The Court also pointed out that in a section of the contract prohibiting VEH from giving gifts to Port Authority, the terms “agent” and “construction manager” were used as separate classifications. The Court further noted that its holding was in keeping with the Omnibus Workers’ Compensation Reform Act of 1996, which limits employers’ liability to third parties for injury to their employees, unless the employer “expressly agreed” to indemnify the claimant. The Court emphasized the need for the indemnification contract to be clear and express to further the spirit of the legislation. There were no dissenting or concurring opinions.

  • A.H.A. General Contracting, Inc. v. New York City Housing Authority, 88 N.Y.2d 22 (1996): Enforceability of Notice Provisions in Public Contracts

    88 N.Y.2d 22 (1996)

    In public works contracts, strict compliance with notice and reporting requirements is a condition precedent to recovery for extra work, unless the public entity’s misconduct specifically prevented or hindered the contractor’s ability to comply with those requirements.

    Summary

    A.H.A. General Contracting sued the New York City Housing Authority (NYCHA) for breach of contract, seeking payment for alleged extra work performed under two construction contracts. NYCHA moved for summary judgment, arguing A.H.A. waived its claims by failing to comply with contractual notice and reporting requirements. A.H.A. countered that NYCHA acted in bad faith, excusing its noncompliance. The Court of Appeals held that A.H.A.’s failure to strictly adhere to the notice provisions barred its recovery, as NYCHA’s alleged misconduct did not prevent A.H.A. from complying with those requirements. The case underscores the importance of adhering to contractual conditions precedent in public works projects.

    Facts

    A.H.A. General Contracting was awarded two construction contracts by the New York City Housing Authority for work on Jennings Street and Hoe Avenue. The contracts contained clauses requiring the contractor to provide timely written notice and detailed documentation for any claims of “extra work”. A.H.A. claimed that NYCHA directed it to perform extra work with the understanding that change orders would be issued later. NYCHA later rescinded two change orders after the work was commenced claiming the work was contract work. A.H.A. subsequently submitted claims for extra work totaling approximately $1 million but failed to provide the daily written statements and documentation required by the contract.

    Procedural History

    A.H.A. sued NYCHA for breach of contract and unjust enrichment. The Supreme Court granted NYCHA’s motion for summary judgment, dismissing A.H.A.’s claims. The Appellate Division modified, denying NYCHA’s motion, finding a triable issue of fact as to NYCHA’s bad faith. The Appellate Division certified the question of whether its order was properly made to the Court of Appeals.

    Issue(s)

    Whether a contractor’s failure to strictly comply with notice and reporting requirements in a public works contract is excused by the public entity’s alleged bad faith, even if that bad faith did not prevent the contractor from complying with the notice provisions.

    Holding

    No, because strict compliance with notice and reporting provisions is a condition precedent to recovery, and the contractor’s non-compliance is only excused if the public entity’s misconduct actively prevented or hindered the contractor’s ability to comply with those provisions.

    Court’s Reasoning

    The Court of Appeals reversed the Appellate Division, holding that the notice and reporting requirements were conditions precedent to suit, not exculpatory clauses. The Court emphasized that a party cannot insist upon a condition precedent when its non-performance has been caused by that party. However, the relevant inquiry is not simply the public entity’s bad faith, but whether the alleged misconduct prevented or hindered the contractor’s compliance with the notice and reporting requirements. The Court found that A.H.A. failed to demonstrate how NYCHA’s rescission of change orders, inclusion of additional drawings, or alleged waiver based on past practice prevented it from complying with the contract’s notice requirements. The Court also noted the strong public policy considerations favoring scrutiny of bad faith claims when contractors seek to excuse noncompliance with notice provisions in public contracts, as these provisions protect the public fisc and the integrity of the bidding process. As the Court stated, “[t]hose arguments are even further flawed. There is no showing in the record that the prior agreements contained the same requirements, and no showing that the alleged past practice was the same.” Therefore, NYCHA’s summary judgment motion should have been granted.

  • Valentin v. City of New York, 83 N.Y.2d 28 (1993): Rejection of “Preindemnification” Doctrine in Insurance Coverage Disputes

    Valentin v. City of New York, 83 N.Y.2d 28 (1993)

    New York rejects the “preindemnification” doctrine, which would automatically place the insurance coverage of a construction site owner (vicariously liable) ahead of the contractor’s insurance (primarily liable), in favor of common-law indemnification principles and the antisubrogation rule.

    Summary

    These consolidated cases involve disputes among insurance carriers over liability for employee work site injuries. The central issue is whether New York recognizes “preindemnification,” where a contractor’s purchase of insurance for a site owner automatically makes that policy primary, even if the contractor was the primary wrongdoer. The Court of Appeals rejected this doctrine, emphasizing that simply requiring a contractor to obtain insurance does not waive the owner’s right to common-law indemnification. The Court also applied the antisubrogation rule to prevent an insurer from seeking subrogation against its own insured.

    Facts

    Several construction contracts required contractors to indemnify property owners (City or State) for claims arising from the contractor’s work and to procure Owners’ and Contractors’ Protective (OCP) insurance naming the owner as the insured. Separately, the contractors also held General Contractor Liability (GCL) insurance policies. In each case, a worker was injured, and the injured party sued the owner of the premises, who in turn sought indemnification from the contractor. The insurance companies then disputed which policies should cover the losses. The OCP policies had lower premiums than the GCL policies, suggesting the parties anticipated the OCP would primarily cover the owner’s own negligence.

    Procedural History

    In Valentin and Prince, the lower courts dismissed the owner’s third-party claims for indemnification based on the preindemnification doctrine. The Appellate Division reversed, but certified a question to the Court of Appeals. In North Star, the Appellate Division granted Continental’s motion, holding that the exclusions in the GCL policy rendered it inapplicable to the loss, and that the $1 million OCP policy could not be applied to the settlement. The Court of Appeals consolidated the cases to address the preindemnification doctrine.

    Issue(s)

    1. Whether requiring a contractor to procure insurance naming the owner as an insured constitutes an automatic waiver of the owner’s right to common-law indemnification, up to the policy limits (i.e., whether the “preindemnification” doctrine is valid).

    2. Whether the antisubrogation rule applies when an owner and contractor are insured under two policies covering the same risk, issued simultaneously by the same insurer.

    Holding

    1. No, because requiring a contractor to obtain insurance does not automatically waive the owner’s right to common-law indemnification. The contracts explicitly reserved the owners’ right to indemnification.

    2. Yes, because the public policy considerations preventing an insurer from recouping proceeds from its own insured and avoiding conflicts of interest are equally applicable whether there is a single policy or two policies covering the same risk.

    Court’s Reasoning

    The Court rejected the preindemnification doctrine, stating that any notion of waiver is contradicted by the plain language of the contracts, which explicitly reserve the owners’ right to indemnification from the contractor. It also noted the disparity in premiums paid for the policies, signaling that indemnification was contemplated by the parties. The Court found that preindemnification was not supported by the policy arguments underlying Pennsylvania Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465 (1986), because it is potentially broader than the antisubrogation rule. The Court also reasoned the vicariously liable owner is entitled to recover the entire amount paid, so there is no “mitigation” of the right to be indemnified. Citing Pennsylvania Gen., the Court stated, “an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered”. The Court extended this rule to situations where an owner and contractor are insured under two policies covering the same risk, issued simultaneously by the same insurer because the potential conflict of interest and the insurer’s ability to manipulate the litigation were the same as in the single policy situation. In North Star, however, the antisubrogation rule did not apply because exclusions in the GCL rendered that policy inapplicable to the loss.

  • Cromwell Towers Construction Co. v. Florence & George Plastering Co., 78 N.Y.2d 1096 (1991): Enforceability of Insurance Procurement Agreements in Construction Contracts

    Cromwell Towers Construction Co. v. Florence & George Plastering Co., 78 N.Y.2d 1096 (1991)

    An agreement to procure insurance in a construction contract is distinct from an agreement to indemnify or hold harmless and does not violate General Obligations Law § 5-322.1, even if the insurance policy covers the promisee’s own negligence.

    Summary

    This case clarifies the distinction between agreements to indemnify and agreements to procure insurance within the context of New York’s General Obligations Law § 5-322.1. Cromwell Construction, a general contractor, sought indemnification from its subcontractor, Hudson Steel, after Hudson’s employee was injured and Cromwell was found partly liable. Cromwell argued that Hudson breached their contract by failing to procure insurance covering Cromwell’s liability. The New York Court of Appeals held that Hudson’s agreement to obtain insurance for Cromwell was enforceable and did not violate General Obligations Law § 5-322.1, even though the insurance would cover Cromwell’s own negligence. The Court emphasized that procuring insurance is different from indemnifying or holding harmless, and such agreements are consistent with public policy.

    Facts

    Cromwell Construction, Inc. (general contractor) hired Hudson Steel Fabricators & Erectors, Inc. (subcontractor) for work on property owned by G. W. Lisk Co., Inc.
    Hudson’s employee was injured on the job and received a settlement against Cromwell and Lisk.
    The jury apportioned negligence: Cromwell (12%) and Hudson (88%).
    The subcontract between Cromwell and Hudson required Hudson to maintain insurance policies to protect both parties from bodily injury claims arising out of the work.

    Procedural History

    The trial court granted summary judgment to Cromwell in its third-party action against Hudson, based on Hudson’s failure to procure the required insurance.
    The Appellate Division affirmed the trial court’s decision, holding that the insurance procurement provision did not violate General Obligations Law § 5-322.1.
    Hudson appealed to the New York Court of Appeals.

    Issue(s)

    Whether a contractual provision requiring a subcontractor to maintain insurance coverage for the general contractor against personal injury claims violates General Obligations Law § 5-322.1 when the injury is caused, in part, by the general contractor’s negligence.

    Holding

    No, because General Obligations Law § 5-322.1 only prohibits agreements to indemnify or hold harmless, and an agreement to procure insurance is distinct from such agreements.

    Court’s Reasoning

    The Court of Appeals reasoned that General Obligations Law § 5-322.1 explicitly addresses agreements to indemnify or hold harmless, not agreements to purchase or maintain insurance. The statute renders void agreements “purporting to indemnify or hold harmless the promisee against liability for damage arising out of bodily injuries to persons * * * contributed to, caused by or resulting from the negligence of the promisee, his agents or employees”.
    The court emphasized a “well recognized” distinction: “Whereas the essence of an indemnification agreement is to relieve the promisee of liability, an agreement to procure insurance specifically anticipates the promisee’s ‘continued responsibility’ for its own negligence for which the promisor is obligated to furnish insurance”.
    The Court cited legislative history indicating that the statute targeted “’broad form hold-harmless’ clauses” that caused contractors to “assume liability for the negligence of others”. The legislature understood that liability protection insurance was less expensive than hold-harmless coverage and expected insurance-procurement agreements to continue in construction contracts.
    The Court referenced prior decisions like Board of Educ. v Valden Assocs., 46 NY2d 653, 657, and Hogeland v Sibley, Lindsay & Curr Co., 42 NY2d 153, 160 which upheld similar agreements.
    Because Hudson breached its agreement to procure liability insurance covering Cromwell, it was liable for the resulting damages, including Cromwell’s liability to the injured employee. The court explicitly stated that “To the extent that Patenaude v General Elec. Co. (147 AD2d 335) is to the contrary, it should not be followed.”

  • NAB Construction Corp. v. City of New York, 75 N.Y.2d 164 (1990): Enforceability of Engineer’s Determination Clauses in Construction Contracts

    NAB Construction Corp. v. City of New York, 75 N.Y.2d 164 (1990)

    An engineer’s determination clause in a construction contract is only binding on factual disputes within the engineer’s expertise, not on legal matters of contract interpretation, unless the contract explicitly and unequivocally states otherwise.

    Summary

    NAB Construction Corp. sued the City of New York and the New York City Transit Authority for breach of contract, seeking damages for additional expenses incurred due to unanticipated subsurface conditions and disputed work. The contract contained Article 24, which stated that the Transit Authority’s chief engineer’s determinations would be final and conclusive. The City argued that this provision precluded judicial review of the engineer’s decisions. The New York Court of Appeals held that Article 24 was not an explicit and unequivocal agreement for alternate dispute resolution on legal matters, and therefore, the engineer’s determinations were not binding on legal issues of contract interpretation.

    Facts

    NAB Construction entered into a contract with the City of New York and the Transit Authority in 1973 to construct a section of the Second Avenue Subway. Article 24 of the contract stipulated that the Transit Authority’s chief engineer would determine various aspects of the work and that their decisions would be final. During construction, NAB Construction encountered unanticipated subsurface conditions, leading to claims for additional compensation, which the chief engineer denied. NAB Construction then commenced an action for breach of contract to recover damages for the disallowed claims.

    Procedural History

    NAB Construction filed suit in 1979. In 1980, the defendants answered the complaint. More than five years later, the defendants sought to amend their answer to assert that the chief engineer’s determinations were final and precluded further litigation. The trial court initially denied the motion, citing prejudice to NAB Construction due to the delay. Upon renewal, the trial court again denied the motion, holding that the proposed defense was insufficient as a matter of law. The Appellate Division affirmed this conclusion, and the City appealed to the New York Court of Appeals.

    Issue(s)

    Whether Article 24 of the construction contract constituted an alternate dispute resolution agreement that bound the contractor to the chief engineer’s determinations on legal issues of contract interpretation, precluding judicial review.

    Holding

    No, because Article 24 did not explicitly and unequivocally state that the chief engineer’s determinations would be binding on legal matters of contract interpretation.

    Court’s Reasoning

    The court reasoned that an alternate dispute resolution agreement, like an arbitration agreement, must be clear, explicit, and unequivocal. Referencing Matter of Waldron [Goddess], 61 NY2d 181, 183-184, the Court emphasized that parties consenting to arbitration surrender many normal rights under the law. The Court found that Article 24, read in the context of the entire contract and its historical application, did not meet this standard. The court noted that similar clauses had been interpreted as binding only on factual disputes within the engineer’s expertise, such as measurement, quantity, and quality of materials, but not on legal matters. Additionally, the contract contained provisions, particularly in Chapter Five, which governed “Payments to Contractor”, contemplated the possibility of the contractor bringing a breach of contract claim in court, further undermining the City’s interpretation of Article 24. The court quoted Rentways, Inc. v O’Neill Milk & Cream Co., 308 NY 342, 347 to emphasize the importance of reading the clause in the context of the entire contract. The court concluded that it was a “natural and unstrained reading” that the courts would have jurisdiction over a breach of contract claim. The Court referenced O’Brien v Mayor of City of N. Y., 139 NY 543, observing that the language in Article 24 has been found in city contracts for over a century. The fact that the city, the drafter of the contract, did not initially assert this interpretation for over five years after the litigation began also weighed against the city’s argument. Because the court found Article 24 not to be an explicit and unequivocal agreement for alternate dispute resolution, it did not address whether such a procedure would be enforceable as a matter of public policy.

  • Board of Educ., Union Free School Dist. No. 3, Town of Huntington v. Delle Cesa, 40 N.Y.2d 648 (1976): Enforceability of Insurance Procurement and Waiver Clauses in Construction Contracts

    Board of Educ., Union Free School Dist. No. 3, Town of Huntington v. Delle Cesa, 40 N.Y.2d 648 (1976)

    A contractual provision requiring a party to a construction contract to procure insurance coverage for all parties and containing a mutual waiver of rights for damages covered by that insurance does not violate General Obligations Law § 5-323, provided there is no indication of overreaching or unconscionability.

    Summary

    This case concerns the validity of clauses in a construction contract requiring the owner to obtain insurance covering fire and other perils on the entire structure and a mutual waiver of rights for damages covered by that insurance. After a fire caused damage, the insurer, as subrogee, sued the contractor and subcontractors. The defendants argued the contractual provisions barred the suit. The New York Court of Appeals held that such clauses are enforceable, as they require insurance procurement rather than exemption from liability, and do not violate General Obligations Law § 5-323 or public policy when there is no overreaching.

    Facts

    The Board of Education (owner) entered into a construction contract that contained two key provisions: First, the owner was required to provide fire, extended coverage, vandalism, and malicious mischief insurance on the entire structure to 100% of its insurable value. Second, the owner, contractor, and all subcontractors waived all rights against each other for damages caused by fire or other perils covered by the required insurance, except for rights to the insurance proceeds.

    During the project, a fire broke out, allegedly due to the negligence of the contractor or subcontractors, causing damage to the building. The owner’s insurer paid for the damages and then, as a subrogee of the owner, brought an action against the contractor and subcontractors to recover the amount paid.

    Procedural History

    The lower court’s decision is not explicitly mentioned but the case reached the New York Court of Appeals after an appeal regarding the validity of the contractual provisions as a defense to the action by the insurer. The Court of Appeals reviewed the relevant statute and contractual language to determine enforceability.

    Issue(s)

    Whether a contractual provision requiring an owner to procure insurance coverage for all parties involved in a construction project and containing a mutual waiver of rights for damages covered by that insurance violates Section 5-323 of the General Obligations Law, which prohibits contractors from exempting themselves from liability for negligence.

    Holding

    No, because the contractual provision requires insurance procurement rather than exemption from liability, and such provisions do not violate General Obligations Law § 5-323 or any other public policy in the absence of overreaching or unconscionability.

    Court’s Reasoning

    The court reasoned that Section 5-323 of the General Obligations Law does not prohibit contractual provisions that require one party to a contract to provide insurance for all parties involved. The court distinguished between provisions that seek to exempt a party from liability and those that simply require insurance coverage.

    The court stated, “Insofar as damages for injuries are in fact compensable under an insurance policy mandated by contract, a provision waiving all rights to recover for those same injuries other than from the proceeds of the insurance policy does not constitute a violation of the statute.”

    The court emphasized the importance of freedom of contract, stating that absent overreaching or unconscionability, parties are free to allocate risk through insurance and waivers. The court cited Hogeland v Sibley, Lindsay & Curr Co., 42 NY2d 153, in support of the principle that such provisions do not violate public policy.

    The court found no indication of overreaching or unconscionability in the case, thus upholding the validity of the contractual provisions. The practical effect is to allow parties to construction contracts to allocate risk to insurance companies, thereby avoiding litigation among themselves for damages covered by the insurance.