By: WBG, LLP Published: July 2015

Protecting Your Rights Against the Passage of Time

One of the easiest ways to forfeit your rights under a construction contract is to fail to understand, and take action within, the many time limitations that may exist in the agreement. A perfectly valid and justified claim can become valueless for the want of something as simple as a letter providing notice of your claim within a specific time period. These time limitations are often found not only in your typical construction contracts, but also in statutes enacted by the state legislature. While adhering to the terms of your contract is of utmost importance, your rights can be lost just as easily when you fail to abide by the provisions of the various statutes that affect your contract. The fact that such laws are in a state of constant change makes this task all the more difficult.

Take, for example, the recent case of Kafka Construction Inc. v. New York City School Construction Authority (125 AD3d 933 [2d Dept 2015]), decided by the Appellate Division in February. Kafka contracted with the New York City School Construction Authority (SCA) to perform approximately $12 million worth of work at a high school in Queens. The contract allowed the SCA to opt to have Kafka not perform some of the work under the contract (and be credited accordingly). The SCA exercised this right and Kafka completed the reduced scope of work. Prior to final payment, the SCA requested that Kafka provide a change order reflecting the credit due to the SCA based on the reduced scope of work. On February 4, 2011, Kafka provided a change order proposal to the SCA reflecting a credit of $192,608.18. The SCA did not respond to the Kafka proposal until September 14, 2011, when it claimed that its own calculation showed that the proper credit amount was $814,535.00.

Two weeks later, Kafka served a Notice of Claim on the SCA for $621,926.82, the difference between the Kafka and SCA change order values. The parties’ attempts to negotiate a settlement were unsuccessful, leading Kafka to commence a lawsuit. The SCA made a motion to dismiss, claiming that Kafka had failed to serve a timely Notice of Claim pursuant to Public Authorities Law § 1744(2)—which requires, among other things, that a Notice of Claim be filed with the SCA within 90 days of the accrual of the claim. Kafka argued that its Notice of Claim was timely as its claim accrued on September 14, 2011, the date it received the SCA’s conflicting change order. The SCA argued that Kafka’s claim accrued on February 4, 2011, when it submitted its change order to the SCA. The lower court agreed with the SCA and dismissed the complaint, citing New York cases which held that a claim accrues under Public Authorities Law § 1744(2) at the time that work is substantially completed or a detailed invoice for the work performed is submitted. Based on that definition of accrual, Kafka’s claim accrued when it submitted its proposed change order on February 4, 2011. The appellate court affirmed the dismissal of Kafka’s suit on the same grounds set forth by the lower court.

The result of the appellate court’s holding was that Kafka’s claim had both accrued and expired before the SCA ever made any determination as to what credit it was owed in the first place. In fact, the lower court noted that under New York law, a contractor’s claim may become time-barred before there is any reason to expect litigation.

Lest seemingly odd results (like what happened to Kafka) continue to happen, on December 17, 2014, the New York legislature amended Public Authorities Law § 1744(2) to provide that a claim accrues when payment for the claimed amount is denied (i.e.: when the contractor first has a reason to know that there is a dispute as to the amount owed). However, since that provision was only deemed effective as to contracts executed after its effective date, Kafka was still out of luck.

Practice Tip: The Kafka case is illustrative of the extreme importance of staying on top of project events and exercising forward thinking in relation to those events. A failure to identify what may grow into a claim at the earliest possible moment could be fatal to recovery, as it was for Kafka. Still, early identification of potential claims is only step one. Strict compliance with statutory and contractual limitations regarding those claims is just as critical. Also, even though the possibility of an outcome like that in the Kafka case has been mitigated by the new law, it is still wise to err on the side of caution and send a notice of claim to protect your rights anyway. In the end, it is important to consult your construction attorney on these matters so you can keep your mind on the task at hand—the construction itself.

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