September 2024 – Duane Morris Construction Law

A recent New York appellate court opinion, Dreamco Development Corp. v. Cranesville Block Company, Inc., provides valuable insight into the application of the Uniform Commercial Code (UCC) and the concept of “adequate assurance of performance.”

The case centered on a one-page “independent contractor and consultant” agreement. Under the contract, the plaintiff was responsible for selling a minimum quantity of concrete on behalf of the defendant in exchange for monthly payments. However, midway through the contract term, the defendant stopped making these payments and ultimately terminated the agreement. The defendant claimed that the plaintiff had sold less than 10% of the required minimum and failed to provide adequate assurance that the remaining amount would be sold before the contract’s expiration.

The key legal issue was whether the defendant was justified in demanding “adequate assurance of due performance” under UCC § 2-609(1). Under the UCC, a party to a contract can demand adequate assurance from the other party if they have reasonable grounds for insecurity regarding performance. If such assurance is not provided, the party may treat the contract as repudiated. However, the UCC applies only to contracts primarily for the sale of goods.

The court found that the plaintiff’s role was to sell concrete, a service, rather than to buy or sell goods. Because the contract was service-oriented and not predominantly for the sale of goods, the UCC did not apply. As a result, the defendant’s demand for adequate assurance was unjustified, and their failure to make the agreed-upon monthly payments constituted a breach of contract.

This ruling underscores the importance of identifying the nature of a contract’s obligations and determining whether the UCC governs the agreement. It also highlights the need for parties to define their roles and responsibilities to prevent future disputes.

Jose A. Aquino (@JoseAquinoEsq on X) is a special counsel in the New York office of Duane Morris LLP, where he is a member of the Construction Group and of the Cuba Business Group. Mr. Aquino focuses his practice on construction law, lien law and government procurement law. This blog is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this blog are those of the author and do not necessarily reflect the views of the author’s law firm or its individual attorneys.

In a recent ruling, a New York appellate court sided with a contractor in a dispute over a 33-story building project.[1] The contractor initially hired a subcontractor to supply equipment for the project, but the subcontract was later assigned to another entity. Shortly thereafter, the contractor alleged breaches of the subcontract, terminated the agreement, and took possession of the equipment. The contractor then filed a lawsuit seeking compensation for delays and additional costs resulting from the defendants’ defective work. In response, the defendants counterclaimed for breach of contract and sought foreclosure of mechanic’s liens. They also filed a third-party claim against the property owner and its surety, seeking to foreclose on the liens.

The court dismissed the defendants’ counterclaims and third-party claims, highlighting the defendants’ reliance on unsigned and unnotarized requisitions and change orders, which failed to meet the contractual requirements. The court citing precedent underscored that payment requisitions must be both signed and notarized, and that change orders must be formally documented and mutually approved in strict compliance with the terms of the contract.[2]

Additionally, the court found that the contractor had provided sufficient evidence to support its claims for delay damages. The contractor presented documentation detailing additional work performed by other vendors, as well as payments made to replacement subcontractors, due to the delays attributed to the defendants. The court found that such evidence raised genuine issues of material fact regarding the impact of the defendants’ actions on the project’s timeline and costs, prompting the court to deny the defendants’ motion for summary judgment on this issue.

The court also rejected the defendants’ claims for unpaid equipment rental, as they were unable to demonstrate that the proposed monthly rental rates had been agreed upon. The subcontract specified only a 12-month rental period, and the defendants could not provide evidence of any additional rental terms beyond that period.

This decision highlights the importance of adhering to contractual documentation and approval processes in construction projects. It serves as a reminder to contractors and subcontractors alike to ensure that all requisitions and change orders are properly signed, notarized, and approved to avoid disputes and potential legal challenges. Furthermore, the ruling underscores the necessity of maintaining thorough records and evidence to substantiate claims for damages and delays. The court’s decision reinforces the judiciary’s commitment to enforcing strict compliance with agreed upon contract terms.

[1] Hudson Meridian Construction Group LLC v. Bayport Construction Corp., 228 A.D.3d 531, 215 N.Y.S.3d 78 (1st Dept. 2024)

[2] F. Garofalo Elec. Co. v. New York Univ., 270 A.D.2d 76, 80, 705 N.Y.S.2d 327 (1st Dept. 2000), lv dismissed 95 N.Y.2d 825, 712 N.Y.S.2d 450, 734 N.E.2d 762 (2000); Martin Iron & Constr. Corp. v. Howell Co., 242 A.D.2d 608, 609, 664 N.Y.S.2d 746 (2d Dept. 1997).

Month: September 2024

APPELLATE COURT REJECTS UCC ADEQUATE ASSURANCE CLAIM IN CONTRACT DISPUTE

Court Emphasizes Strict Compliance in Construction Contracts