Category Archives: Commercial Construction

Are New York Property Owners Entitled to Common Law Indemnification for a Third Party’s Injury by a General Contractor if That General Contractor Did Not Control or Supervise the Worksite?

In McCarthy v. Turner Construction, Inc., 17 N.Y. 3d. 369 (2011), Boston Properties, Inc. and Time Square Tower Associates, LLC (collectively “Property Owners”) leased a retail storefront to Ann Taylor, Inc. (“Ann Taylor”). Subsequently, by agreement (the “Agreement”), Ann Taylor engaged a general contractor, John Gallin & Son, Inc. (“Gallin”) to perform construction on its storefront.  The Agreement stated that Gallin was solely responsible for and in control of the construction and was required to take reasonable safety precautions to protect the workers from injury. Id. at 372.

However, Gallin did not perform the construction itself; Gallin engaged Linear Technologies Inc. (“Linear”) as its subcontractor.  Shortly thereafter, Linear hired Samuels Datacom, LLC (Samuels) as its sub-subcontractor. An electrician employed by Samuels (“Plaintiff”) was injured when he fell from a ladder while working on the project site. Subsequently, he brought an action in the Supreme Court of New York (“Lower Court”) for his injuries against Gallin and the Property Owners. Id. The Property Owners asserted a cross claim against Gallin for common law indemnification. Id. at 373. Indemnification is a legal concept that enables a defendant the right to be reimbursed for some or all costs associated with the suit by another person or entity.

The Lower Court held that the Property Owners and Gallin were vicariously liable for Plaintiff’s injuries. Vicarious liability is a legal concept that holds a third party responsible for the acts of another solely because of his or her relation to the actual wrongdoer. For example, under certain circumstances an employer could be held vicariously liable for his or her employee’s unlawful conduct.

Property Owners and Gallin  reached a settlement under which they each paid the Plaintiff $800.000.00. The settlement itself was not in dispute. Instead, the question before the Court was whether the Property Owners could recoup some or all of that money from Gallin.

The Lower Court rejected the Property Owners’ cross claim for common law indemnification because Gallin was not actively at fault in bringing about the injury. Id. at 373. Thus, the Lower Court held that Gallin was not required to reimburse the Property Owners for some or all of the $800,000.00 they paid to Plaintiff.

The Property Owners appealed to the Supreme Court of New York, Appellate Division (“Appellate Court”). The Appellate Court affirmed the Lower Court’s holding.

The Property Owners appealed to the Court of Appeals of New York (the “Court of Appeals”). In their appeal, they argued that they were entitled to common law indemnification by Gallin, whether or not Gallin directly supervised and controlled Plaintiff’s work, based upon the Agreement. Id. at 374. That was the central issue before the Court of Appeals: whether a person or entity that does not supervise or control another can be liable to indemnify for the damages that party causes.

First, the Court of Appeals considered Labor Law §240(1) which imposes upon owners and general contractors and their agents a nondelegable duty to provide safety devices necessary to protect workers from the risks inherent in elevated work sites. Further, the Court of Appeals noted that  §240(1) holds owners and general contractors absolutely liable for any breach of the statute, even if the job was performed
by an independent contractor whom they did not supervise nor control.

Having said all of that, the Court of Appeals nevertheless held that a general contractor’s authority to supervise the work and implement safety procedures was not a sufficient basis for requiring common law indemnification. It explained that liability for indemnification may only be imposed against parties who exercised actual supervision. Thus, the Court asserted that a common law indemnification claim did not lie against a party who had contractual authority to direct and supervise the work at a job site but never exercised that authority because it subcontracted its contractual duties to another.  Id. at 378.

The Court of Appeals also noted that an owner or general contractor, who was not at fault for the misconduct, still has the right to seek full indemnification from the party who was actually responsible for the accident.  Id.  A party’s right to indemnification may not only arise from a contract but may have also be based upon equity (what is fair and proper between the parties). Common law indemnification is generally
available in favor of an innocent party who was held vicariously liable for the wrongdoing of another.  Id. at 375.

In its analysis, the Court explained that although the Agreement required Gallin to supervise and direct the work at the worksite, such a provision was insufficient to establish that Gallin actually supervised or directed
Plaintiff’s work. The Court noted that this was especially so considering the following facts:

  1.  Gallin had no supervisory authority over Samuels’ (Plaintiff’s employer’s work) work.
  2. Gallin would not have directed Plaintiff as to how to perform his work.       and 
  3. Gallin did not provide any tools or ladders for the subcontractors that worked at the
    site.

Id.

Therefore, the Court affirmed the dismissal of Plaintiff’s cross claim for common law indemnification, holding that Gallin did not actually supervise, nor direct, Plaintiff’s work. Id. Thus, Gallin did not have to compensate the Property Owner for any of the $800,000.00 they paid to Plaintiff in order to settle his personal injury claim.

The Enforceability of “Pay if Paid” Clauses by Contractors Against Subcontractors

A June 30, 2010 case decided by the Appellate Division of the Superior Court of New Jersey, O.A. Peterson Construction Co., Inc. v. Englewood Hospital And Medical Center, 2010 WL 2696758 (N.J.Super., App.Div. 2010) dealt with the issue of whether a contractor can withhold payment to its subcontractor under a “pay if paid” clause.
The Underlying Facts
Plaintiff O.A. Peterson Construction Co., Inc. (“OAP”) was the general contractor on a construction project for Englewood Hospital (“Hospital” or “owner”). On Par Contracting Co., Inc. (“On Par”) was one of the subcontractors on the project. The contract between OAP and On Par contained the following provision concerning OAP’s obligation to pay On Par:

“It is expressly understood and agreed that the receipt by the Contractor of payment for the Subcontractor’s work shall be a condition precedent to the Contractor’s obligation to pay the Subcontractor. That is, the Contractor shall have no liability or responsibility for any amounts due or claimed to be due the Subcontractor for any reason whatsoever except to the extent that the Contractor has actually received funds from the Owner specifically designated for disbursement to the Subcontractor.”

[Emphasis added.]
The Pay if Paid Clause  
OAP contended that this language constituted an unambiguous “pay if paid” clause, which shifted to On Par the risk of the owner’s nonpayment for the work. The Court agreed, stating, “[W]e find that the “pay if paid” clause unambiguously shifted the risk of non-payment to the subcontractor. That is, the clause clearly anticipated that as the contract progressed, the owner would make periodic payments to the general contractor, with portions being designated as payment for work performed by each specific subcontractor on the job. If the owner refused to pay for a particular subcontractor’s work, the general contractor was not obligated to pay that subcontractor until the dispute was resolved and the owner made payment.” Id. at 2
The Covenant of Good Faith and Fair Dealing
One interesting note is that the Court also decided that OAP was wrong to enter into a settlement with the owner that did not designate a portion of the settlement funds for disbursement to the subcontractor, and then rely on the “pay if paid” clause to defeat that subcontractor’s right to payment. It found that this argument would violate the covenant of good faith and fair dealing implicit in every contract.


Comments/Questions: ljm@gdnlaw.com

© 2009 Nissenbaum Law Group, LLC