Construction Contracts

The New York City Building Code, Chapter 33, requires a developer to safeguard adjoining property during the conduct of all construction and demolition operations. Accordingly, a developer and an adjoining property owner may enter into a license agreement, whereby the adjoining property owner provides the developer with access to its property to install Code-required protections.  In return, oftentimes the developer, among other things, pays compensation to the adjoining property owner for such access.  If the parties cannot reach an agreement, the developer may seek to compel such access through the courts pursuant to Section 881 of the Real Property Actions and Proceedings Law.

While the Building Code does not explicitly provide a right to compensation, when these issues have been brought before them, New York courts have awarded compensation to adjoining property owners.  However, whether compensation is mandated and the amount of compensation is within the courts’ discretion.  Courts often consider the length of time for which access is necessary and the intrusiveness of the developer’s work on the use and enjoyment of the adjoining property by its owner and occupants.  Without clear guidance from the courts, a developer and an adjoining property owner need to give due consideration to the issue of compensation as illustrated below.

In her ruling released late last month, Manhattan Judge Arlene Bluth denied any license fee to the Condominium Board of the Fifth Avenue Tower, an adjoining property owner to the New York Public Library.  The Library will conduct a $200 million overhaul of its main Fifth Avenue branch.  In her decision, Judge Bluth specifically rejected the Condominium Board’s request for a $15,000 / month license fee.  It has been separately reported that the Condominium Board rejected the Library’s offer of a $3,500 / month license fee.  It appears that Judge Bluth may have denied any license fee to the Condominium Board based, at least in part, on the excessiveness of its demands.

In view of the lack of clear guidelines, developers and adjoining property owners should consult with their legal counsel and should be sure not to overplay their hands when negotiating license fees.

Last week, New Jersey’s Appellate Division re-affirmed the principle that a court must strictly apply the terms of a construction contract when determining a dispute between contracting parties.  Where the contract terms speak directly to the issue in dispute, a court may not employ equitable considerations to determine the dispute even if the court believes that strictly applying the contract terms would be unfair to one of the parties under the circumstances.

While this is not a novel legal principle, the Appellate Division, in its unpublished opinion, Wallace Bros, Inc. v. East Brunswick Board of Education, Docket No. A-1432-15T3 (N.J. App. Div.  Nov. 9, 2017), reiterated this tenet in reversing a trial court that granted summary judgment to a general contractor that claimed it was owed final payment on a school construction project because the school board had waited too long to object to the contractor’s work.  The Appellate Division found that there were numerous material factual disputes between the parties when examining their allegations and the language in the parties’ contract.  It, therefore, reversed the trial court’s judgment, and remanded the case back to the trial court for further proceedings.  Critically, it appeared from the facts proffered by the school board that the contractor had not yet complied with the contract’s provisions regarding the right to receive final payment, such as the contractor’s obligations to provide standard close-out documentation and its failure to complete punch-list work.

Wallace Bros. serves as a reminder of how important it is for a contractor to review and, where possible, negotiate the terms of a contract before signing it, and then strictly comply with all contract provisions during the course of the project through completion.  In the public contracting context, as in Wallace Bros., the contractor generally must accept the terms of the contract on which it bids.  It then must strictly follow the procedures set forth in that contract when seeking payment for its work, particularly those provisions which explicitly set forth prerequisites to payment.  For example, change order provisions will typically require written documentation signed by the owner setting forth the additions or changes to the specified contract work, along with the price to be paid for that work, before such work is even performed, and therefore before payment is required to be made by the owner for any such work.

Also, as illustrated in Wallace Bros., contractors must be sure to compile and maintain their close-out documentation throughout the project, so that when it is time to submit their close-out packages in connection with final payment, they are not delayed tracking down or locating items such as subcontractor lien waivers, as-built drawings, and manufacturer warranties.  Note that in the private contracting context, a contractor may attempt to negotiate all contract provisions to try to ease the burdens of onerous payment and close-out requirements, as well as other critical terms, such as dispute resolution provisions and requirements relating to the performance and inspection of the work itself.

In sum, contractors must stay on top of their administrative duties and responsibilities in connection with their contracts.  No contracting party wants a construction dispute to end up in litigation, but if it does, the contractor will want to ensure that it has done everything by the book (or by the contract) to avoid getting tripped up by a technical contract prerequisite with which it failed to comply.

The Appellate Division recently affirmed a trial court’s granting of summary judgment in favor of the County of Union (the “County”) on a contractor’s extra work claim for $631,895.27 arising from an ambiguity in the contract specifications.  The Court found the ambiguity to be a patent ambiguity, which A. Juliano & Sons, Inc. (“Juliano”), the successful bidder to whom the contract was awarded, should have recognized and raised with the County prior to the submission of its bid.  Having failed to identify and raise that ambiguity with the County, Juliano was barred from seeking  payment for extra work that was based on its interpretation of the ambiguity in the contract specifications.

In Aspen Landscaping Contracting, Inc. v. A. Juliano & Sons Contractors, Inc., Docket No. A-5436-11T2 (Aug. 9, 2013) (the “Aspen Case”), plaintiff, a subcontractor of Juliano, the general contractor, sought recovery of certain amounts due from Juliano and the County relating to a project to establish a public park in Clark, New Jersey (the “Project”).  Juliano filed a cross-claim against the County asserting entitlement to payment for extra work.  Juliano’s claim related to amounts claimed due for the cost of borrow excavation material at the Project.  The trial court granted summary judgment to the County, concluding that because Juliano’s change order for the borrow material was based on Juliano’s resolution of a patent ambiguity in the bid documents not brought to the attention of the County as required by the specifications, the relief Juliano sought was barred by the “patent ambiguity doctrine.”  The Appellate Division affirmed that decision.

A patent ambiguity in a publicly bid contract is one that “either (1) would have been apparent to reasonable prospective bidders from the facts available, or (2) was in fact known to the contractor before submitting its bid.” D’Annunzio Bros., Inc. v. N.J. Transit Corp., 245 N.J. Super. 527, 534 (App. Div. 1991).  Where the ambiguity is patent, the bidder has a duty to inquire and the failure to do so bars a claim based on the contractor’s resolution of the ambiguity.

In the Aspen Case, the court considered the bid form, specifications, certifications, post-bid correspondence and deposition testimony to determine the extent of the ambiguity and concluded that there was a glaring ambiguity that a reasonable bidder would have recognized.  The specifications provided that the bidders were required to bring any apparent ambiguity, inconsistency, error, discrepancy or omission to the attention of the engineer at least seven (7) working days before the opening of bids.  Neither Juliano nor either of the other two bidders requested information or brought any problem with the bid documents to the attention of the engineer prior to submitting a bid.

The ambiguity in the bid documents arose because the documents sought a unit price for a specified quantity of only one type of borrow excavation material, namely “select” material, while, elsewhere, the specifications referenced two types of borrow excavation material – “select” material and “zone 3” material.  The specifications never noted a specific quantity of “zone 3” material and did not seek a unit price for the “zone 3” material.  The Court found the reference to two types of borrow material to be in direct conflict and inconsistent with other provisions of the bid documents.  The Court further noted that the failure to include an item on the bid form calling for a price for “zone 3” material to be blatant conflict, which was a glaring ambiguity.

The Court concluded that a reasonable contractor would have noted the glaring problem with the two types of borrow material and either declined to bid or requested a clarification from the County engineer as the bid specifications directed.  The Court found Juliano’s interpretation of the conflict in the bid documents, which led to the claims for extra work, not to be reasonable.  As a result, the Court affirmed the trial court’s conclusion that Juliano’s claim is barred by the patent ambiguity doctrine.

The Aspen Case emphasizes the importance of a contractor’s vigilance in reviewing the contract specifications prior to submitting a bid and bringing any ambiguities, discrepancies and/or inconsistencies to the attention of the public contracting entity prior to submitting a bid.  The failure to do so can have an adverse impact on any contractor claims relating to or arising from the claimed ambiguity, inconsistency and/or discrepancy.  Here, Juliano had sought payment of $631,895.27 for extra work, which is approximately 25% over and above its $2,518,030.75 contract amount. 

The Aspen Case is particularly harsh on the general contractor as the Court found a patent ambiguity despite the fact that none of the three bidders, including Juliano, identified the ambiguity prior to submitting their bids.  The failure of the other two bidders to also raise the so-called patent ambiguity did not impact the Appellate Division’s decision denying Juliano’s claim.

In a recent unpublished opinion, New Jersey’s Appellate Division provides another reminder to contractors bidding on municipal contracts to timely challenge any portion of the bid specifications that may be improper or problematic.  As this decision shows, if you fail to challenge a bid specification at least three days prior to the opening of the bids, and you then fail to comply with that specification, your bid may be rejected.  In that case, you will not be able to challenge the award of the contract to another bidder, even if you were the low bidder.

That is precisely what happened to the rejected low bidder for a three-year municipal landfill disposal contract in Sajo Transport, Inc. v. The Village of Ridgewood, Docket No. A-4121-11T3 (May 20, 2013).  The bid specifications called for the bidder’s site to be located within a 15 mile radius of the municipality, and the proposal form required both the address of the bidder’s site and a MapQuest mileage calculation of the distance from a specific address within the municipality to the bidder’s site.  Perhaps realizing that a MapQuest mileage calculation, which is based on driving distance, would place it beyond the 15 mile radius, Sajo Transport attached  an exhibit to its bid showing a distance of 13 miles between the town where it is located and the contracting municipality that it obtained from the website geobytes.com.  That website, however, calculates distances ‘as the crow flies’ – rather than by driving distance.  Sajo Transport also wrote in its bid: “Map Quest Distance Map is not Available for Destination.”

New Jersey’s Local Public Contracts Law (“LPCL”) requires that any challenge to a bid specification must be made “no less than three business days prior to the opening of the bids” and that challenges made thereafter are deemed void.  Rather than challenge the specification requiring that the site be located within a 15 mile radius and the MapQuest methodology by driving distance, as the court interpreted the contract specifications to require, Sajo Transport submitted its bid based on an alternative measurement.  The municipality rejected its bid on that basis, and Sajo Transport filed suit seeking a declaration that it was the lowest responsible bidder and should be awarded the subject contract.  The trial court found the 15 mile radius requirement to be arbitrary and ordered the municipality to rebid the contract 

On appeal, however, the Appellate Division determined that the municipality properly rejected Sajo Transport’s bid and awarded the contract to the next lowest, qualified bidder.  Among other things, the Appellate Division stated that Sajo Transport’s legal theories were barred by its failure to challenge the distance specifications at least three business days before bids were to be opened as required by the LCPL.  The court noted that “[t]o allow otherwise would hand Sajo a trump card that could be played against a successful bidder if its bluff with geobytes.com failed.”  The court also determined that the 15 mile over-the-road distance requirement was, in fact, directly related to the “purpose, function or activity for which the contract is awarded” as required by the LCPL, and that Sajo Transport’s non-compliance with that requirement was a material, non-waivable irregularity justifying the bid’s rejection. 

This decision shows the importance of complying with the statutory requirements of the LCPL generally and of challenging any improper or questionable specification in a timely manner, sufficiently in advance of the opening of bids.

The New Jersey Appellate Division, in Contract Applicators, Inc. v. Borough of Park Ridge, Docket No. A-6080-10T3 (October 2, 2012), recently affirmed a trial court decision that denied a contractor’s attempt to obtain payment for extra work on a public project because the contractor did not comply with the express terms of the contract by obtaining prior written approval authorizing the performance and payment of the extra work.  The contractor claimed it was entitled to payment because he was given verbal approval by the municipality’s engineer to perform the extra work.  The Appellate Division rejected that argument and affirmed the trial court’s decision to deny payment to the contractor for the extra work. 

Contract Applicators, Inc. (“Applicators”) was the lowest responsible bidder for the mechanical and structural rehabilitation and waterproofing of the Mill Road Powerhouse Museum project (the “Project”) in Park Ridge, New Jersey (“Park Ridge”).  The contract awarded provided: “Any proposed changes or deviations from the contract documents during the construction phase of this project must be submitted to [Park Ridge] in writing.  Written approval from [Park Ridge] must be obtained prior to the execution of the proposed change.  The contractor proceeding without receipt of this approval does so at his own risk.”  Park Ridge engaged an engineer (“Engineer”) to supply information regarding engineering related to the Project and separately designated the municipal Director of Operations (the “Director of Operations”) as the contact person for issues relating to the contract.

After the Project work was completed, Applicators submitted an itemized request to the Engineer for payment for additional work at the Project.  Applicators claimed that the Engineer waived the requirement in the contract that extra work must be approved in writing when the Engineer told him to wait until the work was done before submitting claims for extra work.  Despite the lack of prior written approval, Park Ridge approved some, but not all, of the extra work claims submitted.  Applicators then filed a legal action against Park Ridge seeking payment for all of the extra work.

At trial, Applicators claimed that the Engineer had authority to and did waive the requirement that there must be prior written approval for any extra work.  The trial judge disagreed, finding that Applicators did not comply with the contract, failed to obtain prior written approval for the extra work and found Applicators was not entitled to relief.

On appeal, the Appellate Division also rejected Applicators’ argument based on certain statutory procedures relating to the adoption of municipal budgets, taxes and approving budgeted funds for specific purposes.  The Court also noted although the Engineer could provide expert opinions and recommendations regarding change order requests, “nothing supports the proposition he held authority to waive [Park Ridge’s] prior approval of any changes, especially those resulting in increased costs.”  Those areas presumably came under the control of the Director of Operations, not the Engineer.

In refusing to find a waiver of the requirement that any extra work must be the subject of prior written approval, the Court explained that the applicable statutes reflect a policy to assure the protection of public funds.  In addition, the Court found nothing to support Applicators’ claim that the Engineer held authority to waive the prior written approval of any changes/extra work requirement.  The question remains whether anyone, even the Director of Operations in the Contract Applicators, Inc. v. Borough of Park Ridge case, may verbally waive the prior written approval requirement in a contract or whether the applicable statutes still will prohibit such a waiver even if given by the appropriate person appointed by the municipality or public entity to deal with contract issues.

The lesson here is that contractors on public projects should be diligent in obtaining prior written approval for extra work from the public body rather than relying on verbal assurances of payment for extra work performed from municipal or other public entity representatives.