By: Gregory J. Spaun Published: April 2014

Beware of the "Paperwork Breach"; it Can Prove Costly

 It is widely acknowledged that record keeping on a modern construction project can often seem as tedious and as difficult as the principal construction itself. Unfortunately, as a result, there are contractors who let paperwork requirements slip, preferring to focus on the construction itself. The mindset is often that building a good product is the best way to avoid litigation. However, the recent decision of the Appellate Division in High Tech Enterprises & Electrical Services of NY, Inc. v Expert Electrical, Inc. (113 AD3d 546 [1st Dept 2014]) highlights that a failure to adhere to “paperwork” requirements—even when there are no resulting or related problems—can support a claim for breach of contract and absolve the non-breaching party from the responsibility to pay for work actually performed.

The dispute in High Tech Enterprises arises out of a 2006 project for the New York City Department of Parks and Recreation. The Parks Department hired Expert Electrical as its prime contractor for the reconstruction of an electrical substation in Queens. Expert Electrical subcontracted certain work to High Tech, which High Tech performed in mid- to late-2007. High Tech submitted three payment applications to Expert Electrical, only two of which were paid.

During the project, city inspectors had visited the project site. This prompted Expert Electrical to perform an internal audit of its records. During this audit, Expert Electrical determined that High Tech failed to provide proper certified payroll records1 (the reports provided were not complete and had discrepancies in both the number of hours worked and the wage rate classifications), and that it failed to pay its workers prevailing wage and proper supplemental benefits. As a result, High Tech withheld the third payment—although the work addressed in the third payment application had been accepted by the owner and Expert Electrical had been paid for this work.

As a result of Expert Electrical’s failure to pay, High Tech ceased its work, asserted a mechanic’s lien and payment bond claim and, ultimately, commenced a lawsuit. Expert Electrical asserted counterclaims seeking to recover the excess completion costs it incurred after High Tech unilaterally suspended its work. In 2012, both parties moved and cross-moved for summary judgment. In support of its cross-motion and in opposition to Expert Electrical’s motion, High Tech contended that it had, in fact, properly paid its workers, and that this proper payment was best evidenced by the undisputed fact that that in the nearly five years since High Tech ceased its work at the project not a single one of its employees had complained about any alleged failure to pay wages, nor had any administrative agency issued a determination regarding any alleged violation of the prevailing wage statute (Labor Law §220).

In its decision, the trial court found in favor of High Tech. In doing so, the court held that “nothing in the contract may be interpreted as permitting Expert Electrical to withhold earned payment from High Tech, as the result of High Tech’s failure to pay prevailing wages, in any circumstances”. The Appellate Division reversed, finding that the High Tech’s refusal to provide an affidavit stating that all labor and materials had been paid for in full was a material breach of the contract, and that such refusal justified Expert Electrical’s failure to pay. The Appellate Division reasoned that the contract made the provision of the documentation a condition precedent to payment, and that since High Tech never provided the required documentation, Expert Electrical’s obligation to pay never came into being.

High Tech Enterprises provides a warning to contractors that providing solid paperwork is often just as crucial as performing solid work. If the provision of certain paperwork is specifically set forth in a contract (here, certified payroll reports and affidavits of payment), it can be characterized as a condition precedent to payment. As was demonstrated in High Tech Enterprises, upon High Tech’s failure to meet the condition precedent in the contract, Expert Electrical’s obligation to make payment never arose, despite that: 1) the work was actually performed and accepted and paid for by the owner; and 2) the problem which the paperwork requirement was designed to guard against (here, failing to properly pay employees) never arose.

1Although not clear from either the trial court’s or the appellate court’s decision, it appears that the discrepancies with the certified payroll documents were only discovered after High Tech had been paid. Inasmuch as the requirement to submit accurate certified payroll documents is statutory, it ostensibly had an independent obligation to bring this to the Parks Department’s attention and refund the money it had been paid in reliance on those erroneous documents. It appears that both the trial and appellate court missed the inconsistency in permitting Expert Electrical to receive payment based upon the same incomplete documents that Expert Electrical used to deny High Tech its payment.

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