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Commercial Division Opinion Suggests that Subcontractor Can Potentially Recover From General Contractor and Property Owner for Work Outside Scope of Subcontract

Suppose a property owner hires a general contractor for a time-sensitive project.  The general contractor in turn hires a subcontractor.  After the project hits some snags and delays, the property owner tries to move things along by assuring the subcontractor that it will get paid for certain additional tasks that the owner requests.  However, the subcontractor never enters into a formal written agreement covering the additional work.  If the subcontractor is not fully paid for the work, can it successfully sue the property owner, the general contractor, or both for contractual or quasi-contractual damages?  A recent decision by Justice Andrea Masley of the Commercial Division in Corporate Electrical Technologies, Inc. v. Structure Tone, Inc.[i] suggests that in certain circumstances, the answer is yes: the subcontractor can recover from the property owner or the general contractor for the additional work, even absent a written contract covering that work, based on the parties’ course of conduct.

Ahead of the 2014 holiday shopping season, Macy’s embarked on a multi-million-dollar renovation of its flagship store at Herald Square in Manhattan.  As part of this project, Macy’s hired general contractor Structure Tone, Inc. (“the GC”) to transform the store’s basement into a retail space for high-end men’s clothing and other merchandise.  STI in turn hired subcontractor Corporate Electrical Technologies, Inc. (“the Sub”), which began work in June 2014.  Over time the project became delayed, leading the Sub to submit a number of change orders for additional work and causing Macy’s to become more actively involved in the management of the project through its project manager, Erik Carlson.[ii]  After the Sub claimed to have been underpaid $1.85 million, it brought an action alleging breach of contract, quantum meruit, account stated and violations of the Prompt Payment Act against both Macy's and the GC.[iii]  Following discovery, Macy’s and the GC each moved for summary judgment dismissing these causes of action.  The Commercial Division, in a decision by Justice Masley, denied the motions.[iv]

The Commercial Division first addressed the GC’s and Macy’s motions to dismiss the Sub’s quantum meruit claim.  In support of its position, the GC submitted:  (a) a signed written subcontract, (b) a statement from a senior account executive that the GC “felt constrained to proceed under the amended terms” of the subcontract, and (c) 23 change orders submitted by the Sub.  Because even an unsigned contract may be enforceable if “there is objective evidence establishing that the parties intended to be bound” by it,[v] and because “quasi-contractual remedies such as quantum meruit are generally ‘unavailable where there exists a valid and enforceable agreement governing the particular subject matter,’”[vi] the burden accordingly shifted to the Sub on the quantum meruit claim.[vii]

The Sub, in turn, submitted an affidavit from its COO, who affirmed that the parties never entered into the written subcontract agreement because he made extensive revisions to a draft subcontract received from the GC and sent it back with his signature, but the GC had acted as if they had rejected this revised version.  The Sub also submitted an email from the GC stating: “Payments cannot and will not be processed for non-Executed Subcontracts.”  This email purportedly indicated that the GC and the Sub were not adhering to the written subcontract but rather to a different earlier agreement as to the scope and price of the Sub’s work.  Further, according to the Sub, Macy’s project manager, Carlson, had directly instructed the Sub to perform additional work beyond the scope of this original agreement and had assured the Sub that it would get paid for that work.[viii]

The Commercial Division concluded that in light of this evidence, the Sub had demonstrated the existence of factual issues requiring a trial, specifically as to the existence and scope of an agreement covering the various projects performed by the Sub.  In any event, the quantum meruit claim against the GC could proceed to trial because the GC had admitted that the Sub had performed work “outside the original scope of [the Sub’s] subcontract.”  And the quantum meruit claim against Macy’s could proceed to trial because Macy’s “may have expressly consented to pay for [the Sub’s] performance,” which meant that the usual preclusion of quasi-contract claims by a subcontractor against a property owner may not apply.  Accordingly, the Commercial Division denied the defendants’ motions for summary judgment seeking dismissal of the Sub’s quasi-contract claims.

The Commercial Division also ruled that there were issues of fact concerning the Sub’s breach of contract claim which sought delay damages.  For instance, although the documents submitted by the Sub were silent as to delay damages, the written contract submitted by the GC contained a delay-damages provision.  As a result, a jury would need to resolve the existence and scope of an agreement covering the Sub’s additional work.  Further, while the GC argued that the Sub waived its right to delay damages by signing written change orders indicating that compensation was for “all direct and indirect costs associated with each agreed upon change,” this language was too ambiguous for the court to find a binding waiver.  And although two of the Sub’s requests for payment contained more explicit language waiving delays and additional compensation, there were questions as to whether the parties’ course of conduct indicated that they did not actually intend for there to be such a waiver.[ix]

Corporate Electrical suggests that in some circumstances, a subcontractor can recover from a property owner or a general contractor for additional work beyond the scope of the initial subcontractor agreement, even in the absence of a written contract covering the additional work.  Whether the recovery of damages in such a case is possible may depend on the written evidence submitted by the parties as well as other evidence of the parties’ course of conduct.

By Benjamin F. Jackson and Stephen P. Younger

[i] No. 651444/2015, 2020 BL 13673 (Sup. Ct. Jan. 06, 2020).

[ii] Id. at *1.

[iii] Id. at *1.

[iv] Id. at *1-2, 8.

[v] Id. at *2 (quoting Flores v. Lower E. Side Serv. Ctr., Inc., 4 N.Y.3d 363, 369 (2005)).

[vi] Id. (quoting Kramer v. Greene, 142 A.D.3d 438, 441-42 (1st Dep’t 2016)).

[vii] Id.

[viii] See id. at *2-3.

[ix] See id. at *5-7.