Remember the Golden Rule: Read Your Contract

Nassau County case a classic example of the importance of reading and understanding all of the terms in a construction contract.

by Robert C. Angelillo

Robert C. Angelillo is an attorney with Meyer, Suozzi, English & Klein, P.C., in Garden City, New York, practicing construction law and litigation.

As most contractors know, construction contracts often consist of reams of paper containing paragraph after paragraph of what appears to be nothing more than boilerplate “legalese.” However, buried within the various “Terms and Conditions” and “General Conditions” of construction contracts are the specific rules that contractors must follow in order to preserve and enforce their legal rights. As highlighted by a recent case in Nassau County, CAB Associates v. The Dormitory Authority of the State of New York (DASNY),it is critical that contractors understand all of their rights and responsibilities under their contract before they sign it. As the CAB case shows, if a contractor does not follow these rules to the letter, it can cost millions of dollars.

The CAB case involves a claim by a completion contractor, CAB, on a DASNY project at SUNY Old Westbury. While performing the work called for under its contract, CAB submitted 71 separate claims to DASNY for work it believed to be extra work, outside the scope of its contract. CAB claimed that the combined value of this work was over $1 million. DASNY denied all 71 of CAB’s claims for extras and CAB sued DASNY in court for payment.

The basic legal dispute between CABand DASNY was over whether CAB’s contract was a “design-build” contract or a construction-only contract. However, the court did not decide that issue, and that dispute did not even factor into the court’s conclusion. In fact, CAB did not even have an opportunity to make its “design-build” argument at all, as the court dismissed the case before trial. Why? Because CAB did not follow the clear, contractual procedure for making claims for extra work contained in the “General Conditions” section of its contract with DASNY.

CAB’s contract with DASNY contained a two-step process for making extra work claims. First, if CAB believed that it had performed extra work, it had to submit a claim for additional payment for that work to DASNY and wait for DASNY’s response. Second, if DASNY refused to pay the claim, then CABhad to submit a “verified statement” to DASNY explaining why it felt that DASNY’s decision not to pay for the extra work was wrong.

The court found that CABdid not comply with the second requirement -- submission of the “verified statement” explaining why it believed that DASNY’s decision was wrong. The court concluded that, because CAB failed to follow the clear rules in its contract, it was barred from collecting on its claims.  In other words, even if CAB was correct in all of its legal arguments concerning “design-build,” and the work was extra work for which it was entitled to additional payment from DASNY, DASNY would still not have to pay for it because CAB did not follow the specific contractual rules for making claims.

The CAB case highlights the critical importance of reading contracts before signing them and knowing what they require during the course of performance of the work. As shown in the CAB case, a contractor’s right to get paid for extra work hinges on its carefully following the rules in the contract for making claims. It is important to note that these rules vary from contract to contract and are not merely limited to the “two step” process in the CAB case. For example, many contracts contain specific time limitations for making extra work claims, and if a contractor does not make a claim within the specified time-frame, its claim may be barred, even if it is clearly due extra money. In addition to rules concerning claims, other important legal rights can be waived by contract. For example, some contracts contain arbitration clauses that require certain contract disputes to be resolved at an arbitration proceeding instead of before a court of law. Before signing away the important legal right to sue in court, contractors should at least know that they are doing so and the legal implications that follow.           

The CAB case is a clear reminder that a contract is the most important document in determining the contractors’ (and the owner’s) legal rights, and the procedures required for enforcing them. Therefore, it is crucial that contractors review these documents carefully and understand their rights and responsibilities before signing on the dotted line. As shown in the CAB case, if they do not do so, the consequences can be costly.