Dispute Resolution Board Ruling Favors Contractor

By Henry L. Goldberg and Alex F. Ferrini

Over many years, New York City public works contracts have been modified to include increasingly onerous provisions governing the claim process. Often, these procedural provisions seem designed to penalize the unwary contractor. Such contract clauses, however, may not always work to the city's advantage.

In a recent decision, the city's Contract Dispute Resolution Board ruled in favor of a contractor by wielding the procedural sword against the city. The contractor was hired by the city's Department of Parks and Recreation to build an asphalt roller hockey rink. Six months after completion and acceptance of the work the department - citing the contractor's one-year warranty obligation - issued a directive claiming that the asphalt did not meet the project specifications and ordered the contractor to remove and replace the top asphalt layer because the surface had become unplayable.

The contractor responded in writing to the directive, stating that the department had not shown that the work violated the specifications or was defective in any manner and that the work ordered should be considered extra work and compensated as such. After further correspondence and meetings in which the contractor and the department continued to dispute the issue, the department's agency chief contracting officer declared the contractor in default for failing to comply with the directive.

On three separate occasions, the contractor requested a final determination from the Department of Parks and Recreation commissioner regarding the declaration of default and the contractor's claim that the agency's directive ordered work that was beyond the scope of the contract. The contractor never received any substantive response. Indeed, the department's counsel sent a letter to the contractor (one year after the initial request!) stating that no further action could be taken by the commissioner. The contractor proceeded to file its claim with the city Comptroller's office, which denied it, citing the contractor's failure to comply with the agency directive to replace the asphalt as a waiver of the claim. The contractor then appealed the comptroller's decision to the city's Contract Dispute Resolution Board.

In its argument before the board, the department reiterated the comptroller's position that the contractor's failure to comply with the directive was a waiver of any claim for compensation or for anything else that relate to the agency's declaration of default. The board rejected this argument and noted that the contractor had properly followed the required contract procedures by promptly seeking the commissioner's review of the directive.

Significantly, the board found that the department did not follow the procedures set forth in the contract for declaring a contractor in default. In particular, the contract documents stated that only the commissioner or his duly authorized representative may declare a contractor in default and that a default declaration can only be made if the contractor refuses to proceed with the work when ordered by the commissioner. Nothing in the contract documents or correspondence between the parties designated the agency chief contracting officer or any other department employee as the duly authorized representative of the commissioner. Thus, the directive and the default declaration were improper because the commissioner did not issue them. Further, the contract also required that all determinations include a reasonable explanation. In this case the commissioner failed to make any determination whatsoever, despite the contractor's repeated requests. In short, the board found that the agency had completely failed to adhere to its own contract procedures, both in issuing the directive and in declaring the contractor in default.

In support of its ruling the board recognized that the department's actions were inherently unfair to the contractor. By improperly declaring the contractor in default and then completely refusing to consider the claim (because according to the department the default could not be appealed to the commissioner), the department deprived the contractor of its contractual right to be heard.

While it is somewhat surprising that the board issued a decision so critical of the city's administration of a contract, it is gratifying that basic concepts of fairness in the application and interpretation of contract obligations won the day. Public owners cannot set notice traps for the unwary while expecting to be relieved from the strictures of the contract.

The lesson here is obvious: Contractors should continue to scrupulously follow the procedures outlined in the city's numerous contract dispute provisions, but at the same time, should not hesitate to enforce those same provisions against the city. As demonstrated by the board's decision, following the rules means the difference between winning and losing for contractors and the city alike.

Henry L. Goldberg is managing partner of the law firm of Goldberg & Connolly in Rockville Center, N.Y.