Our parents taught us to think before we speak. That lesson is especially important when words or conduct could cost you hundreds of thousands of dollars beyond what was previously agreed upon in a subcontract agreement.
In a recent case before Justice Andrea Masley, Corporate Electrical Technologies, Inc. v. Structure Tone, Inc. et al., Plaintiff Corporate Electrical Technologies, Inc. (“CET”), a subcontractor, was hired by Structure Tone, Inc. (“STI”), a general contractor, to perform electrical work on a multi-million dollar renovation project at a Macy’s flagship store in Herald Square, in anticipation of the holiday shopping season.
CET argued that soon after the renovation work commenced, the project was delayed to the point that Macy’s took over the day-to-day running of the renovation project. Once Macy’s took over, it directly negotiated with CET and requested that CET perform extra work beyond CET’s subcontractor agreement with STI. Based on the additional work performed, CET submitted numerous unpaid change orders and brought this action against STI and Macy’s, alleging that it was owed over a million dollars for the project.
With respect to CET’s cause of action for quantum meruit, Macy’s moved for summary judgment under the theory that Macy’s, as an owner, was not in contractual privity with CET, and therefore, could not be held liable to the subcontractor.
Typically, an owner is not liable to a subcontractor and the subcontractor’s quasi contract claims against a property owner are precluded where the owner contracts with a general contractor and does not expressly consent to pay for a subcontractor’s performance (DL Marble & Granite Inc. v. Madison Park Owner, LLC).
However, a property owner can be equitably bound to pay the reasonable value of the work it directed where, as in this case, Macy’s project manager emailed CET directly and seemed to implicate that Macy’s would pay costs that CET incurred as an incentive to completing the required work on time.
The Court noted that even where a contract provides that any extra work must be supported by a written authorization signed by the owner, an owner’s conduct can constitute a waiver of that requirement where the owner orally directs work and knowingly receives and accepts the benefits of that extra work. In that instance, the owner can be found liable to pay the reasonable value of the extra work, notwithstanding the provisions of the subcontract.
CET also moved for spoliation sanctions against Macy’s, arguing that Macy’s should have reasonably anticipated litigation based on its disagreements with CET. CET asserted that Macy’s neglected to place a hold on its automatic email destruction policy which resulted in the destruction of hundreds, and perhaps thousands, of critical internal emails related to CET’s work on the project during the time when the project was planned and constructed. CET argued that these destroyed emails would have supported its theory that STI’s poor management caused the numerous project delays and would have disproved STI’s and Macy’s allegations that CET was to blame for the delays.
The Court held that CET failed to show that Macy’s had an obligation to preserve relevant emails because Macy’s could not reasonably anticipate litigation. Mere delays of work, engagement of another subcontractor, and disagreements about the project could not have placed Macy’s on notice of a credible probability that it would become involved in litigation. Rather, there needed to be something more amounting to repeated threats to terminate the agreement, transmissions of breach letters, or a formal termination of the agreement.
Takeaway: (1) Property owners should be wary of solely relying on the explicit terms of a subcontract agreement when it comes to payment for a subcontractor’s work. Ultimately, an owner’s words or actions can be interpreted as express consent to pay for a subcontractor’s performance; and (2) In the commercial context, run of the mill disagreements during construction are not enough to place a party on notice of a credible probability of litigation. Even so, a company that routinely engages in business that has the potential of developing into litigation should review and be aware of its email retention/destruction policy in this new age of electronic discovery.