The COVID-19 pandemic has lasted two years, and while offices, projects, and the rest of life begin to return to pre-pandemic normal, the construction material supply chain and costs have not. In fact, it appears as though the impact on projects of material costs and delivery difficulties will be an issue going forward for the foreseeable future.

But do you know what will happen on your project if and when material prices increase? How are material delays dealt with? Even if these issues are specifically identified and accommodated for in the contract, the question remains to whether the contract is fair and reasonable or not –a reasonable contract will lead to a better project without delays, disruptions, and unwanted claims.

The standard form AIA contracts, which many in the construction industry use without second thought, fail to clearly and sufficiently account for these variables. For both price escalation and supply chain concerns, there is not a one-size-fits-all solution.

A good rule of thumb for allocating controllable risks is that the party that is in the best place to adjust and account for it should be the one to bear that risk. However, when dealing with supply chain disruptions and material price escalations, neither party is truly in a position to account for all of that risk. Therefore, the parties will need to determine before the project starts who can bear what risk, who can account for that risk, and what should the limit of that risk be.

When entering a construction contract now with a time horizon of more than a few months, and particularly one with long-lead deliverable materials, the parties need to ask themselves a number of questions, including:

  • Can the owner or contractor mitigate the risk of price escalation or material delays in some way?
  • What are the real costs of extended project duration?
  • If the risks are to be shared, how should that risk be capped?
  • Is there a reasonable assessment of the time and cost risks for material costs increases and supply chain delays? If so, can a fund be established with shared savings to incentivize timely and cost-effective completion?
  • Are there alternate materials that can be provided for to complete the project? If so, how willing is the owner/developer/end use to accept these alternates?

It is also important to remember that, as we are all aware of the ongoing impact of COVID and the interconnected nature of the global supply chain where a single ship running aground can delay delivery of goods worldwide for weeks or the Russian invasion of Ukraine can increase the costs of on-site heating for concrete formwork, these risks may no longer be “unforeseen.” It is, therefore, inappropriate to simply rely on a force majeure clause to provide the contractor with any relief for material costs or supply impacts it did not account for.

Finally, while the instinct is to protect yourself as much as possible, and place all risk on the other party, balance and fairness must be considered. A contract that places all the risk on either the owner or the contractor will likely lead to more claims, project interruptions, and a worse experience for all – if you can get the other side to sign the contract in the first place.

On February 3, 2022, New Jersey’s Appellate Division issued a decision for publication addressing the scope of the common law litigation privilege and, among other things, whether that privilege attaches to the filing of a notice of lis pendens. This article will explore the basic concepts of portions of this somewhat complicated case.

Let’s start with the basics.

  • Litigation Privilege – protects a party engaged in a legal proceeding from claims of defamation based on communications or submissions to a court relating to that legal proceeding.
  • A Notice of Lis Pendens – an official notice to the public filed with the county land records that a lawsuit involving a claim to real estate has been filed.
  • When a litigation is filed that may affect the ownership or other rights in real property, the party filing such action must also file a notice of lis pendens with the county clerk of the county in which that real property is located.

Why? The notice of lis pendens puts the public on notice that the filing party is seeking to “enforce a lien upon real estate or to affect the title to real estate or a lien or encumbrance thereon.”  A party acquiring an interest in that real property after the filing of a lis pendens notice takes its interest subject to the outcome of the litigation named and described in the lis pendens notice.

Now to discuss the recent Appellate Division decision…

The decision in Brown v. Brown, Docket No. A-0384-21 (February 3, 2022), is rooted in a probate litigation.  The decedent owned real property in Asbury Park that was leased to a Burger King.  Under a settlement agreement, the decedent’s wife was to receive payments for life out of the rental income from the property and decedent’s children took ownership of the property.  Many years later, while the children were attempting to sell the property, the wife filed a lawsuit to enforce the settlement, along with a notice of lis pendens – a red flag for a property for sale.

The court dismissed the wife’s case and the associated lis pendens was discharged. The children later sold the property – then turned around and sued the wife for, among other things, tortious interference with contractual relationship, claiming her lawsuit and lis pendens notice caused the ultimate sale price to decrease substantially.

After the wife applied to the court to dismiss the children’s claims against her, the trial court held, among other things, that the litigation privilege did not apply at all to her notice of lis pendens and allowed the tortious interference claims to stand.

On appeal, however, the Appellate Division explained that the common law litigation privilege does in fact apply to statements contained within a notice of lis pendens, which merely recite the basic allegations of the complaint in the underlying litigation (which are protected by the privilege). But that privilege does not apply to the act of filing the notice of lis pendens. Thus, the filing party is not protected by privilege from claims of an unauthorized, inaccurate or false filing of a notice of lis pendens.

In reviewing the facts of the case, however, the Appellate Division determined that the wife did have the right to file her notice of lis pendens.  The court found that the filing was proper – and not tortious – because the wife, although seeking money damages for breach of a settlement agreement (not an appropriate basis to file a lis pendens), also sought to impose a constructive trust or equitable lien on the property’s sale proceeds and she had an interest in the lease encumbering the real property.

Then the court’s decision took a twist.

In a footnote, the court recognized other possible arguments, not raised on appeal, that could possibly be made to defend completely against a subsequent action for damages resulting from the filing of a lis pendens notice:

(1) the lis pendens statutory scheme presupposes that a challenge to the filing of a lis pendens notice occur in the action identified in the notice, so the entire controversy doctrine may bar a subsequent lawsuit relating to the lis pendens notice filing; and

(2) because the filing of a notice of lis pendens is governed by statute, and the mechanism by which a party may seek to discharge the notice is contained within the statutory scheme, which does not provide for the recovery of damages, common law claims for damages may be preempted by the statutes.  It should be noted that construction lien claims in New Jersey, also filed with the county clerk against the real property land records, are also governed by a specific statutory scheme, and, unlike the lis pendens statutes, that scheme specifically provides for the possible recovery of damages and attorneys’ fees to an aggrieved party if the lien was improperly filed, as more particularly set forth in the Construction Lien Law. Thus, the legislature could provide for such remedies in the lis pendens statutes, but as yet, has not.

Why is this footnote interesting?  If the arguments in the footnote were to be adopted by the courts, then you may never be liable for damages for the wrongful filing of a lis pendens notice unless the statute is amended. If the statutory scheme does actually preempt all common law claims relating to the filing of a lis pendens notice, then there seemingly would be no situation in which the wrongful filing of a notice of lis pendens may result in liability for damages – despite there being no litigation privilege protecting the filing of a lis pendens notice.  However, as the court did not decide that issue, parties filing notices of lis pendens should proceed with caution where there is an issue as to whether such a filing is appropriate in connection with the underlying litigation.

Key Takeaways

  1. When to file a lis pendens, and when not to.
    1. When to file: When you have filed a legal action to “enforce a lien upon real estate or to affect the title to real estate or a lien or encumbrance thereon.” This language was read fairly broadly by the Appellate Division in Brown.
    2. When not to: When the underlying legal action does not seek relief that would implicate a legal or equitable interest in real property.
  2. Potential consequences to filing lis pendens that may ultimately be improper.
    1. Because the act of filing a lis pendens is not protected by the litigation privilege, if a lis pendens is wrongfully filed, it could subject the filing party to a claim for damages by a party that has been injured by the filing.
    2. However, in the Brown decision, the court noted that, although the issue was not argued in that appeal, it is possible that a court may find that an action or claim for damages was not permitted at all based on the wrongful filing of a lis pendens because the lis pendens statute provides a remedy for a party to seek an expedited discharge of the lis pendens – but does not provide for the recovery of damages.

A universal vaccine mandate comes to New York employers courtesy of New York City’s Department of Health and Mental Hygiene.

Compliance in Your Office

Effective this week, in accordance with the Commissioner of the New York City Department of Health and Mental Hygiene’s December 13, 2021 Order, all private employers with employees or workplaces in New York City may not permit any employee to come to a worksite in NYC unless that employee shows proof of at least their first COVID-19 vaccination. Proof of second vaccination must be provided within 45 days – February 10, 2022.

The Order does permit limited exceptions for either a disability under the Americans with Disabilities Act or for a sincerely held religious belief, observance, or practice under Title VII of the Civil Rights Act. If an employer can provide a reasonable accommodation without incurring undue hardship, it must do so if an employee requests an exemption on either of these permitted bases. Regular testing is not an available alternative.

Per the Order, vaccination and accommodation status records must be kept in writing but confidential and separated from the employee’s personnel file.

Compliance with the Order will be crucial for all employers in the city, as each must display an Affidavit of Compliance effective immediately.

The City may impose fines of $1,000.00 and up for violations related to failure to display the Affidavit of Compliance or maintain adequate records. However, the City recognizes that compliance may not be possible immediately, and so has stated that it is willing to work with employers who are working in good faith to comply. Accordingly, fines in the near future are unlikely in such events.

Managing Project Sites

While this applies to all employers, it is particularly troublesome for the construction industry where any particular jobsite will have multiple companies together at the same time and place, each with little to no real oversight over the internal machinations and workings of the others on site. Certainly, one trade contractor’s failure to have sufficient labor forces on site due to this new and speedily imposed requirement can negatively impact the project schedule.

The confidentiality obligation presents a problem for prime contractors, who may have difficulty verifying that any particular tradesman on a jobsite is, in fact, vaccinated. Rather, they would be forced to rely on an Affidavit of Compliance from each trade. While the Order does not require that prime contractors ensure their trades are in compliance with the Order, the prime contract may take steps to ensure that all trades are fully compliant with all laws. Accordingly, project owners, prime contractors, and trade unions may wish to impose their own vaccination requirements and verification programs independent of the City’s Order.

Conclusion

First, all employers should have already taken prompt action to establish vaccination requirements and appropriate accommodations where permitted. Even if, as is possible, the incoming administration amends or rescinds the Order in the coming weeks, such programs will help to ensure compliance in the interim.

Further, in the construction industry in particular, where reasonable accommodations that do not pose a hardship to the employer are limited, following the city’s requirements here presents the safest path to maintaining workforce efficiency and overall compliance. That does not mean, however, that no other options are available, and all employers should consider how their home office and field personnel can be accommodated.

Finally, any employer whose operations may be affected by the Order should consider the cost and time impact to the progress on each of their projects. To the extent a change request or claim should be presented to an owner or superior contractor, it should be presented in a timely manner to preserve all available rights.

For additional information on the ongoing changes we are seeing with COVID-related workplace mandates, click here.

On January 1, 2022, an expansion of prevailing wage law in New York will become effective.  The new law will significantly increase the universe of construction projects subject to prevailing wage requirements.

In brief, when a project is subject to prevailing wage requirements, workers must be paid set hourly wage rates and hourly benefit amounts as determined by the fiscal officer of each New York county.  These rates are substantially higher than minimum wage and also traditionally far greater than average non-union rates largely due to the added benefits amount.

Under the Budget Bill, S.7508-B A.9508-B, signed into law by former Governor Cuomo on April 3, 2020, workers must be paid prevailing wages on “covered projects,” which refer to  “construction work done under contract which is paid for in whole or in part out of public funds where the amount of all such public funds, when aggregated, is at least thirty percent of the total construction project costs” and “where such project costs are over five million.”

Previously, projects were subject to prevailing wage requirements only if a public entity was a party to a construction project and the purpose of the work was to benefit the public.

The law broadens the definition of “public funds” from the traditional definition of direct public investment.  “Paid for in whole or in part out of public funds” refers to money from the following sources:

  1. “The payment of money, by a public entity, or a third party acting on behalf of and for the benefit of a public entity, directly to or on behalf of the contractor, subcontractor, developer or owner that is not subject to repayment;”
  2. “The savings achieved from fees, rents, interest rates, or other loan costs, or insurance costs that are lower than market rate costs; savings from reduced taxes as a result of tax credits, tax abatements, tax exemptions or tax increment financing; savings from payments in lieu of taxes; and any other savings from reduced, waived, or forgiven costs that would have otherwise been at a higher or market rate but for the involvement of the public entity;”
  3. “Money loaned by the public entity that is to be repaid on a contingent basis; or”
  4. “Credits that are applied by the public entity against repayment of obligations to the public entity.”

Under the new law, the definition of “public entity” is broadened to include “the state,” “a local development corporation,” “a municipal corporation,” “an industrial development agency,” “any state, local or interstate or international authorities” and “any trust created by any such entities.”

Therefore, by broadening the scope of projects deemed to have a sufficient public connection, it is expected that more construction projects will now be subject to prevailing wage requirements.

Additionally, the law imposes new responsibilities on owners and developers regarding prevailing wage.  These responsibilities include (1) certifying under penalty of perjury that prevailing wages are required on the project; (2) retention of original payroll records after completion of the project, which will be subject to inspection by the Commissioner of Labor upon demand; and (3) compliance with the objectives and goals of the Minority- and Women-Owned Business Enterprises (MWBE) program pursuant to Executive Law Art. 15-A, and the Service-Disabled Veteran-Owned Businesses program pursuant to Executive Law Art. 17-B.

While the law requires payment of prevailing wage where “total project costs” exceed $5,000,000, it does not define “total project costs” or “construction project costs.”  Therefore, there is some uncertainty as to which costs fall into this category and accordingly which projects are subject to the prevailing wage requirements.

It should also be noted that certain construction projects are exempt from this expansion of prevailing wages including but not limited to the following:  small residential or school construction, nonprofit projects, and affordable housing developments.

To comply with this new law, parties to a construction contract should first determine if the relevant construction project is subject to the new prevailing wage requirements based on the parameters outlined above.  If so, owners and developers should ensure they follow the guidelines for certified payroll records and retention of same.

New York’s new wage theft law – expected to have a major impact on the construction industry state-wide – goes into effect on January 4, 2022 and will apply to contracts executed, modified, extended, or renewed from that date forward. Most notably, the law will impose (a) greater liability risk on prime contractors, and (b) reporting requirements on subcontractors.

The underlying bill, S2766-C (which can be found here), adds a new section to NY Labor Law § 198 and was signed into law on Labor Day by Governor Hochul. It extends full and complete liability to the prime contractor or construction manager on a project for any deviation of proper payment of wages by any subcontractor. The prime contractor or construction manager remains responsible for unpaid wages for all subcontractors, no matter how far down the subcontractor chain the wage theft occurs.

Under the new law, a worker who claims wage theft – or another party acting on their behalf, such as a union or even the attorney general acting on its own accord – can seek payment from both the worker’s employer and the prime contractor on the project. The prime contractor and direct employer will be jointly and severally liable for damages, including back wages, benefits, and penalties.  This is all a dramatic change in the law.

The prime contractor’s liability cannot be waived except through a collective bargaining agreement. The prime contractor can also seek indemnification and reimbursement from the subcontractor that failed to pay full wages, though in many instances we expect the ability to obtain this recovery will be limited, at best.

The legislation also amends General Business Law § 756 to provide that, even without specific contractual provisions, subcontractors performing work on a project submit up the chain employee names and contact information, as well as wage and benefit details, so that the prime contractor can properly audit wages and benefits paid. The law also expressly makes the failure to provide this information justification for withholding of payments to any subcontractor at any tier.

With the right to obtain payroll, wage, and benefit details for subcontractor labor, prime contractors, even those that do not self-perform work, will have to become experts and learn to oversee  New York labor law requirements to determine where their subcontractors may have failed to meet their obligations.

The goal of the new law is to provide deeper pockets for workers seeking compensation for non-payment of wages and benefits, as well as to have the prime contractors police their subcontractors regarding payment of wages. It imposes an increased risk and administrative expense to prime contractors and heightened reporting costs to trade contractors. It also provides a benefit to trade unions in that a waiver of this liability can only occur pursuant to a collective bargaining agreement, and union contractors already engage in reporting requirements regarding wage and benefit details.

There are a myriad of questions relating the law’s coverage that will likely have to wait for courts to resolve, however. The law, for example, does not specifically provide for liability to project owners, intermediate subcontractors, advisory construction managers, or to hired developers. Will courts read liability for any or all of them? Would a court accept attempts to circumvent the law by having all contracts be held directly by the owner? If the owner contracts directly, does it assume liability as a general contractor if it is acting in that capacity?

In preparation for January’s changes, every prime and intermediate contractor should closely review and update its subcontracts to clarify its audit rights and to provide for indemnification rights against its lower-tier subs for any action brought under the new law.  All subcontractors should also familiarize themselves with their existing and future contracts to best understand how the new law will not only impact their potential liability for unpaid wage claims, but also their ability to obtain work on future projects while facing increased scrutiny from prime and intermediate contractors. Additionally, union prime contractors should consider seeking an addendum to their existing collective bargaining agreements to waive this new statutory provision.