In this all too familiar fact pattern, a subcontractor on a public works project was not paid for additional work and was also delayed in its work. After the sub’s claim was rejected, it filed a lien which the prime bonded off. The sub then filed suit against the prime and payment bond for interference, delay and/or acceleration damages, and the value of the extra work. This is a particularly instructive decision worth absorbing.

AAI’s complaint contained the following five causes of action:

FIRST – breach of subcontract for failing to pay contract balance including extra work;

SECOND – breach of subcontract for failing to pay delay damages;

THIRD – recovery under payment bond for both extra work and delay damages;

FOURTH – foreclosure of mechanic’s lien on public works project; and

FIFTH – enforcement of trust claim under Lien Law Article 3-A.

AMCC filed a motion to dismiss AAI’s complaint in its entirety on the grounds that AAI failed to comply with the dispute resolution provision (“DRP”) in the subcontact; failed to comply with the notice of claim requirements in the subcontract; and failed to plead in its complaint that it had complied with the DRP. In response AAI argued that the provision in the DRP making AMCC the sole arbiter of all claims and disputes was void as against public policy, and that the restrictions in the subcontract on AAI’s payment bond and lien rights were also void.

FIRST AND SECOND CAUSES OF ACTION – BREACH OF CONTRACT:

The court granted AMCC’s motion to dismiss AAI’s causes of action based upon breach of the subcontract. The court upheld the terms of the DRP even though they were “clearly one-sided,” citing Westinghouse Elec. Corp. v. NYC Transit Auth, 82 NY2d 47 (1993). As in Westinghouse, the court found that AAI “had accepted the terms of the contract ‘with its business eyes open’.” Therefore the court would not interfere with the terms of the subcontract.

Under the facts of this case, the court as dicta noted that AAI had given timely notice of its claim to AAI. However, the court also stated that it would have dismissed the first cause of action because of AAI’s “failure to plead compliance with such notice, which is a condition precedent to suit under the terms of the subcontract.” [Now there’s a malpractice trap for unobservant counsel].

The court also noted that because of it holding the no-damage-for delay defense was moot. However, the court did state that had it been necessary, it would not have granted AMCC’s motion because AAI had sufficiently pleaded exceptions to no-damage-for-delay found in Corinno Civetta Constr. v. City of NY, 58 NY2d 377 (1983).

THIRD CAUSE OF ACTION – PAYMENT BOND CLAIM:

The court denied AMCC’s and Liberty Mutual’s motion to dismiss the suit against the payment bond stating:

“Defendants’ attempt to apply the notice and alternative dispute resolution procedures in the subcontract to defeat plaintiff’s rights under State Finance Law §137 is clearly in contravention of the public policy reflected in the statute and repeatedly recognized in the caselaw.”

In its decision the court relied upon the holding in Dutchess Quarry & Supply Co. v. Firemen’s Ins. Co., 190 A.D.2d 36, 39, that “a payment bond cannot dilute the protection of State Finance Law §137 ‘by imposing notice conditions precedent to payment which are more onerous than that required by [that statute]’.”

AMCC attempted to distinguish Dutchess on the grounds that the offending language was in the payment bond, while the additional requirement in this case was in the subcontract. The court rejected this argument stating, “However, AMCC’s attempt to apply conditions precedent to suit set forth in the subcontract and not contained in the statute, is equally offensive to the public policy expressed in the statute regardless of which party created the conditions.”

The court also stated: “Consistent with State Finance Law §137, the payment creates an independent obligation,  not contingent upon the terms of the subcontract, to pay for labor and materials provided under the subcontract, subject only to defeasance upon payment by the contractor.”

As a consequence AMCC did not gain much by its motion to dismiss. Even though the court dismissed AAI’s causes of action against AMCC based upon straight breach of contract, it permitted AAI’s cause of action against AMCC and Liberty Mutual, as principal and surety on the payment bond, for both extra costs and delay damages.  Of course if Liberty Mutual sustained any loss or expense it would look to AMCC for reimbursement.

What the dismissal of the first two causes of action did gain AMCC was an escape from liability for AAI’s damages for breach of contract beyond AAI’s additional costs for labor and material, which is all that is covered under a payment bond. Payment bonds do not cover all damages due to breach of contract.

FOURTH AND FIFTH CAUSES OF ACTION – FORECLOSE OF MECHANIC’S LIEN AND ART. 3-A TRUST CLAIM

The Court also denied AMCC’s motion to dismiss AAI’s Lien Law related causes of action stating:

“Clearly, the contractual language requiring service of a notice of claim in compliance with very specific requirements, compliance with the dispute resolution procedures set forth in [the subcontract], and the pleading of such compliance as conditions precedent  to the prosecution of any ‘action or proceeding’ against [AMCC], upon which defendants rely, is void and unenforceable as contrary to public policy with respect to [AAI’s] fourth and fifth causes of action premised upon [AAI’s] right to enforce its lien.”

Additionally the court AMCC’s motion to dismiss AAI’s Art. 3-A claim stating:

“The Dispute Resolution Procedure in the subcontract, in which AMCC, as the statutory trustee, is given the right to act as sole arbiter, violates the principles of trusteeship as reflected in the Lien Law by creating an inherent conflict between AMCC’s duty to the trust beneficiaries and its own self-interest and is, therefore, unenforceable as an impediment to [AAI’s] right to bring an action under article 3-A of the Lien Law.”