When a Deal is Not a Deal

A case pending in federal court in Manhattan explores whether a contractor can recoup a change order that it paid "under duress."

By Robert C. Angelillo

The successful replacement earlier this year of New York's Third Avenue Bridge between the Bronx and Manhattan appeared to be a model of construction professionals working together to complete a difficult job.

Nevertheless, it seems that there were troubled waters flowing under the bridge that have now pitted the general contractor, KiSKA of New York, and its primary subcontractor, G&G Steel of Russellville, Ala., against each other in federal court in Manhattan.

The case hangs on an agreement that settled a large set of change orders during the project. Though the two sides appeared to have made a deal, an early ruling from the court said, effectively, "maybe not."

As construction of the swing-span bridge over the Harlem River approached a crucial stage, G&G submitted three change order proposals to KiSKA for work that the steel contractor deemed to be extra. Although KiSKA agreed that some of the work was extra, its project leaders contended that most of the items constituted contract work. Therefore, it initially refused to pay G&G the requested amount, $1,757,285.

A short time later, the two companies entered into a written settlement agreement tilted toward the subcontractor's terms, and KiSKA paid G&G $1.5 million. The $123 million job for the New York City Department of Transportation proceeded to completion.

However, afterwards, KiSKA sued G&G for $1,134,722, the difference of the amount it had paid G&G under the settlement agreement minus the amount of the one change order that the two sides had agreed was extra work.

In its response to the lawsuit, G&G argued that it had a written and signed settlement agreement, and that KiSKA had entered into the agreement on the advice of its attorney, a seasoned construction lawyer. In other words, they had a deal.

The court's decision to let the case proceed, however, means a deal might not be a deal.

In the lawsuit, KiSKA admits that it signed the settlement agreement with G&G. However, KiSKA claims that after it initially denied the change orders, G&G threatened to stop work if it was not paid for its claimed extras. The plaintiff claims that had work stopped, it would have subjected KiSKA to a host of liquidated and other monetary damages, damaged the company's reputation, and effectively removed it from consideration for further public work in New York City. It also asserted that a work stoppage would cause danger and inconvenience to the public.

KiSKA's lawsuit also claims that the company could not have obtained a replacement subcontractor to complete G&G's work in a cost-effective manner that would have avoided these consequences.

Therefore, despite KiSKA's insistence that there was no legal basis for G&G's threat to stop work, and even though it insists it did not owe G&G the full $1.5 million it paid, the potentially damaging factors listed in the lawsuit gave the general contractor no alternative but to enter into the agreement and pay the sum. It claims that it only entered into the deal under "economic duress," and therefore asked the court to invalidate it.

And surprisingly, the court agreed with KiSKA inasmuch as it has let the case proceed.

Generally speaking, under New York law, success on an economic duress claim is difficult to achieve. It requires proof that a party made an unlawful threat and that the threat caused another party to involuntarily accept contract terms because it had no choice under the circumstances.

However, as noted by G&G in its defense, financial pressure and a strong bargaining position generally do not constitute duress. In agreeing to let the case proceed, the court essentially found that KiSKA's allegations, if proven, could amount to more than mere financial pressure, and could be considered economic duress sufficient to undo a signed, written settlement agreement.

This decision comes at a preliminary stage in the case and merely allows the claim to be made at a trial, if that occurs. It does not mean KiSKA has won. As noted by the court, if G&G proves it was entitled to the amount demanded before continuing work, it would defeat KiSKA's claim.

Still, it is an important decision with regard to the strategy employed in negotiating and settling change orders. It certainly appears to have broadened a traditionally narrow scope of what constitutes "duress." It also may inspire contractors to believe that they have a "second bite at the apple" and a new-found ability to contest disputed change orders after they have been "settled."

Only time will tell if the court dockets will begin to swell with economic duress claims. But it is clear that subcontractors should think long and hard before threatening to hold up a job over disputed change orders. After the KiSKA decision, subcontractors may find that they can win the battle and get paid for change orders during construction, but lose the war if they have to give money back because a court finds that the payment constituted unlawful duress.

Robert Angelillo is an attorney practicing construction law and litigation at Meyer, Suozzi, English & Klein, a law firm based in Mineola, N.Y.