In general, courts will enforce the clear terms of a contract entered into by two business entities dealing at arms length, even though it favors one side to the disadvantage of the other side. However, there are limits to enforcement where a contract provision is so unfair to one of the parties as to warrant a court’s intervention to declare that harsh contract clause void and unenforceable.
In the recent case of American Architectrual, Inc. v Marino, an appellate court held a contract provision to be void and unenforceable.
AMCC Corp., the contractor, and American Architectural, one of its subcontractors, entered into a construction subcontract which provided that the contractor was “the sole arbiter of all claims, disputes, and questions of any nature” arising out of the subcontract. The contract also provided that in the event of a claim or dispute arising out of the subcontract, the subcontractor was required to give the contractor notice of the claim within seven days’ of its arising or else the claim will be waived.
Sure enough, subcontractor American Architectural made a claim against the contractor and filed both a mechanic’s lien and claim with the payment bond surety, followed shortly thereafter by a lawsuit seeking to both foreclose the mechanic’s lien and to collect from the surety. In response, the contractor, AMCC Corp. moved to dismiss the action based on the subcontractor’s failure to comply with the claims procedure set forth in the contract.
The court denied the contractor’s motion to dismiss (which was affirmed on appeal) and held that the dispute resolution procedure set forth in the contract was void as against public policy. The court noted that the provision of the subcontract which granted the contractor the right to act as the sole arbiter would violate the principles underlying the Lien Law trust by creating a conflict between the contractor’s own financial interests and its statutory duties as trustee of the funds to be paid to its subcontractors, laborers and suppliers under Article 3A of the Lien Law. The court also noted that the sole arbiter provision also had the effect of both limiting the subcontractor’s right to file a mechanic’s lien—in violation of the statute which makes such limitations void.
In addition, the court ruled that the contract provision which required the subcontractor to give notice of a claim to the contractor within seven after the claim arose was more stringent than the notice required under Section 137 of the State Finance Law. The court therefore held that the contractual seven day notice requirement is void as against public policy.
While courts grant wide latitude to business entities that voluntarily enter into contracts, this case demonstrates that there are indeed provisions which a court will not enforce a contract clause, even if freely agreed to. When such provisions are declared void, they are judicially removed from the contract and nothing will be left in their place. Accordingly, a contractor would be well advised that even if it enjoys greater bargaining power and wants more favorable terms to be included in the contract, it should be reasonably fair to both parties.
About the author: Mr. Miuccio is a partner of the law firm of Welby, Brady & Greenblatt, LLP and General Counsel to the Construction Industry Council of Westchester & Hudson Valley, Inc. Gregory J. Spaun, an associate with the firm, assisted with the preparation of this article.