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:
- Gallin had no supervisory authority over Samuels’ (Plaintiff’s employer’s work) work.
- Gallin would not have directed Plaintiff as to how to perform his work. and
- Gallin did not provide any tools or ladders for the subcontractors that worked at the
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.
What constitutes a “pay-if-paid” construction contract clause? The United States Court of Appeals for the Third Circuit recently addressed this question in Sloan v. Liberty Mutual Insurance Company, 653 F.3d 175 (3d Cir. 2011).
That case involved a waterfront condominium in Philadelphia. Isla of Capri Associates LP, the developer of the condominiums (“IOC”), contracted with Shoemaker Construction Co. (“Shoemaker”) to be the contractor for the project (“Contractor Contract”). Subsequently, Shoemaker hired subcontractor Sloan & Co. (“Sloan”) to perform construction involving drywall and carpentry (“Subcontract”). Liberty Mutual Insurance Co. (“Liberty”) issued a surety bond guaranteeing payment for the subcontractors work. After the work was completed, IOC refused to pay Shoemaker for monies owed under the contractor contract because IOC was unhappy with some of the subcontractors’ work. As a result, Shoemaker withheld the remaining balance due to Sloan.
Sloan filed a claim against Liberty for payment pursuant to the surety bond. Id. at 177. Liberty denied any payment obligation under the premise that Paragraph 6.f of the subcontract contained a provision that conditioned Sloan’s right to payment on IOC’s payment to Shoemaker (a pay-if-paid clause). See id. Therefore, Sloan was not entitled to payment since Shoemaker never received payment from IOC. Id. The United States District Court for the Eastern District of Pennsylvania entered partial summary judgment for Sloan, rejecting Liberty’s view of the contract. Id. at 178.
The dispute here centered on the interpretation of Paragraph 6.f of the subcontract, which dealt with final payment. The first subparagraph provided: ‘Final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment . . .’ Id. at 179. There were seven (7) conditions precedent, one of which was that ‘[IOC] shall have accepted the Work and made final payment thereunder to [Shoemaker].’ Id. Another provided that Shoemaker “shall have received final payment from [IOC] for [Sloan’s] work.’ Id.
Paragraph 20’s liquidating provision in the subcontract further clarified the extent of Shoemaker’s responsibility for payment to Sloan:
“In the event [Sloan] asserts a claim for payment of the Subcontract Sum or a portion therof . . . and in the event that [Shoemaker] in its sole, exclusive and arbitrary discretion submits said . . . Claim to [IOC] . . . for a decision or determination, then all decisions and determinations made by [IOC] or its representative shall be binding upon [Sloan] even though [Sloan] may not be a party thereto.”
Id. at 182.
When Liberty appealed the United States District Court for the Eastern District of Pennsylvania’s judgment, the Third Circuit was satisfied that the contract stipulated a pay-if-paid compensation policy for Sloan. See id. at 184. The Third Circuit concluded that “Paragraphs 20 and 6.f create a mechanism for passing through Sloan’s remaining claims for final payment and peg Sloan’s recovery to the amount that Shoemaker receives from IOC for Sloan’s work.” Id. Sloan, therefore, received a proportional/pro rata share of the recovery Shoemaker gained from its separate lawsuit against IOC rather than receiving the full balance it was owed under the contract. See id.
The lesson here for subcontractors is to be aware of the pay-if-paid issue when drafting the subcontractor agreement.
© 2012 Nissenbaum Law Group, LLC