A Quarterly for the Real Estate, Design, and Construction Industries
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- Tears For Sears
- New York Says No To "Pay-When-Paid"
- The Expert's Role in Construction Related Disputes
Tears for Sears
By: Jeffrey A. Hill, Esq.
On April 12, 1996, an international group of architects, engineers and planners confirmed that Chicago is, in fact, the "Second City". On that day, the Council on Tall Buildings and Urban Habitat removed the "tallest building in the world" label from Chicago's Sears Tower and bestowed it upon the Petronas Twin Towers in Kuala Lumpur, Malaysia. The 1,483-foot-tall Petronas Twin Towers, designed by Cesar Pelli and Associates and scheduled for completion by the end of 1996, rise 33 feet above their Sears counterpart.
Ironically, the Sears Tower's fall from grace was due in part to a rule established by the building's designer. The late Fazlur R. Khan, partner of architect Skidmore, Owings & Merrill, established that the height of a building is the distance from the sidewalk to the structural top. Following this rule, the Council did not include the Sears Tower's antenna base in calculating the building's total height.
The Petronas Twin Towers, whose mechanical/structural engineer is Flack + Kurtz, a client of Barry B. LePatner & Associates, will eventually receive a taste of its own medicine. The Shanghai World Financial Center, a 1,509-foot project located in Shanghai, China, is scheduled to be completed in 2001.
New York Says No to "Pay-When-Paid"
By: Jeffrey A. Hill, Esq.
On December 7, 1995, the New York Court of Appeals addressed an old, established practice of the construction industry. In West-Fair Electric Contractors v. Aetna Casualty & Surety Company (1), New York's highest court ruled that "pay-when-paid" provisions typically found in contracts between general contractors and subcontractors violate public policy and were therefore unenforceable. The Court's decision was based upon its belief that such provisions run afoul of certain sections of New York's Lien Law which seek to protect providers of labor and materials on real property improvements by prohibiting a waiver of their right to file mechanic's liens.
"Pay-when-paid" provisions shift the risk of an owner's inability or failure to pay from the general contractor to its subcontractors by removing a general contractor's obligation to pay its subcontractors until it receives payment from the owner.
Thus, subcontractors who have provided labor or materials on a job may not get paid by the general contractor until the general contractor is paid by the owner. Under these circumstances, the subcontractors suffer the loss when an owner fails to pay its general contractor.
In West-Fair, the court held that "pay-when-paid" provisions could not coexist with the language of Section 34 of New York's Lien Law, which states that "any contract, agreement or understanding whereby the right to file or enforce [any mechanic's lien] is waived, shall be void as against public policy and wholly unenforceable" (2).
The court ruled that "pay-when-paid" provisions, by creating a condition precedent to a subcontractor's payment and requiring subcontractors to assume the risk of an owner's default, thwarted the legislative intent of the Lien Law which is to protect those parties who furnish work, labor and services or provide materials for the improvement of real property.
The West-Fair decision primarily affects the relationship between general contractors and their subcontractors.
By voiding "pay-when-paid" provisions, the ruling forces general contractors to satisfy their contractual payment obligations to their subcontractors regardless of whether or not the owner has paid its construction bill. As a result, general contractors must now reach into their own pockets to pay their subcontractors when an owner defaults. This result could spell trouble for owners as well.
Facing greater financial exposure in the event of an owner default, general contractors (and their sureties) will undoubtedly step up their investigations into the financial condition of owners and their ability to pay for project costs prior to executing a construction contract. Property owners and developers desirous of building on or renovating their properties may feel the effects of the West-Fair decision in the form of a more thorough inquiry into their construction finances. General contractors, wary of financially unstable owners, may become more selective in deciding with whom they contract. In addition, sureties will increase their investigative efforts before issuing payment bonds on a project.
By its decision in West-Fair, New York's highest court has afforded subcontractors long-overdue protection in the battle over "pay-when-paid" provisions.
At the same time, however, it has placed increased financial burdens on general contractors which, in turn, will expose owners and developers to greater scrutiny of their financial health. The issues decided in West-Fair are likely to be revisited in New York and will most certainly be debated in other courts across the country.
(1) 87 N.Y.2d 148, 638 N.Y.S.2d 394 (1995).
(2) N.Y. Lien Law § 34 (McKinney 1996).
The Expert's Role in Construction Related Disputes
By: Ronald B. Feingold, Esq.
The value and benefit of the use of experts in the litigation and/or mediation and arbitration of owner-contractor disputes and lawsuits was clearly demonstrated in our firm's recent involvement in a New York Supreme Court lawsuit. Our client, an Upper West Side Synagogue, asserted breach of contract and negligence claims against the general contractor and the project's architect, seeking to recover damages sustained as the result of the collapse of a ceiling during a construction project. Approximately 170 square feet of the ceiling in the Synagogue's Sanctuary collapsed over the Bimah, resulting in property damage, repair and restoration costs, as well as expenses for the relocation of the Congregation to a new place of worship.
Our law firm was retained by the Congregation immediately after the ceiling collapse to investigate the cause of the collapse and to help determine the repairs necessary to restore the ceiling to its pre-collapse condition. Our initial efforts were directed at recovering insurance proceeds from the Synagogue's general liability carrier.
We concluded after our review of the Congregation's insurance policy, that there was insurance coverage for collapse. A claim notice was delivered to the insurer, seeking coverage for the loss under the policy.
The insurer initially denied coverage, alleging an exclusion under the policy.
Extensive negotiations ensued and our firm found it necessary, after one year of negotiations, to commence a lawsuit against the insurer. Shortly after its commencement, a negotiated settlement was effected for over One Million Dollars; an amount less than the actual damages sustained.
All efforts after this settlement were then directed at prosecuting the Congregation's claims against the project's general contractor and architect for the amount of damages which exceeded the sum settled for with the insurer. This lawsuit was recently settled just prior to trial and included the Project's subcontractors who were brought into the lawsuit by the general contractor.
These favorable settlements would likely not have occurred without our retention of a forensic structural engineering expert early on in the case.
We retained an engineer immediately after the ceiling collapse.
Pursuant to our request, our expert visited the premises a few days after the collapse, taking photographs and videotaping the existing conditions in the entire Sanctuary and the ceiling. These photographs proved to be critical later on in helping to demonstrate what we believed to be (i) were the causes of the collapse and (ii) the present condition of the portion of the ceiling that did not fall.
We were able to more readily demonstrate the actual damage to the Sanctuary by having the insurer and opposing counsel examine the over one hundred photographs of the post-collapse conditions and the various components of the structural elements, as well as view the videotape. The photographs and the videotape and the expert's report, when studied together, were instrumental in illustrating the contractor's negligence in its construction methods and procedures.
Our engineer undertook an intensive examination of the ceiling and its components over a five month period.
Scaffolding covering the entire Sanctuary area from the floor to the ceiling was erected to enable the inspection of the ceiling, which was paid for, through our efforts, by the insurer. Our expert prepared a written report of his findings, concluding that the collapse was caused by contractor error. The means, methods, techniques and procedures utilized by the contractor in the field contributed to the collapse.
This report, given to the insurer, ultimately played a key role in convincing the insurer to cover the loss. A summary of the report was also submitted to opposing counsel in the construction lawsuit, again playing a pivotal role in helping to exact proceeds from the settling contractors and the architect.
Also invaluable were our own personal consultations with our expert, who helped us to understand the cause of the collapse and the construction methods that should have been implemented by a prudent contractor, using the customary standard of care.
The value in hiring the expert early on in the case, at its beginning stages, proved to be vital in effectuating the most favorable results for the Congregation.
Our engineer was called upon to undertake his investigation just days after the collapse. This early retainer helped us to negotiate with effectiveness with the Congregation's insurer and exact the most beneficial results in a settlement.
We were able to approach our meetings and negotiations with the insurer from a position of strength. We already had in hand our expert's photographs and video of the site, as well as his opinions and conclusions, which all helped to demonstrate to the insurer that the collapse was a covered loss under the policy.
Much too frequently, plaintiffs' counsel hesitate to hire an expert until months after the commencement of a lawsuit, thereby losing the momentum and advantage that is generally gained by hiring the expert early on, immediately after the accident. The impetus we gained at the initial stages sustained us through the construction dispute and helped us to realize a most successful recovery for our client.
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