Thomas Crimmins Contracting Co. v. City of New York

— 140 — OPINION OF THE COURT Carro, J. Plaintiff Thomas Crimmins Contracting Co., Inc., and Cayuga Construction Co., a joint venture (hereinafter plaintiff or contractor), entered into a contract with the City of New York, acting through its agent the New York City Transit Authority, to construct a section of the proposed Second Avenue subway. Among the provisions of this lengthy contract is article XXIV, which establishes a dispute resolution procedure and states as follows: "To prevent disputes and litigations, the Engineer shall in all cases determine the classification, amount, quality, acceptability and fitness of the several kinds of work and materials which are to be paid for under this contract, shall determine every question in relation to the Works and the construction thereof and shall determine every question which may be relevant to the fulfillment of this contract on the part of the Contractor. His determination and estimate shall be final and conclusive upon the Contractor, and in case any question touching this contract shall arise between the parties hereto such determination and estimate shall be a condition precedent to the right of the Contractor to receive any money under this contract.” The contract defines the engineer as the chief engineer of the Transit Authority. Included in the general clauses of the specifications to the contract is a clause dealing specifically with changed and unanticipated subsurface conditions at the construction site. This clause, section 201.34, provides that "(a) Should the Contractor encounter during the progress of the work, subsurface conditions at the site materially differing from any shown on the contract drawings or indicated in the specifications or such subsurface conditions as could not reasonably have been anticipated by the Contractor and were not anticipated by the City or the Authority, which conditions will materially affect the cost of the work to be done under the contract, the attention of the Engineer must be called immediately to such conditions before they are disturbed. The Engineer shall thereupon promptly investigate the conditions. If he finds that they do not so materially differ, or that they could not reasonably have been anticipated by the Contractor and were not anticipated by the City or the Authority, the contract may be modified with his written approval. However, the amount of an increase or decrease of cost resulting from such conditions shall be subject to prior written approval of the Comp — 141 — troller’s Chief Engineer. Any increase in costs resulting therefrom shall be subject to the Charter and Administrative Code provisions relating to additional work, (b) In addition to the foregoing, the prior written concurrence of the [Federal] Government and of the Commissioner of Transportation of the State and the State Comptroller shall be necessary.” Plaintiff did encounter what it believed to be changed and unanticipated subsurface conditions and brought these to the engineer’s attention, who, except for a small adjustment with respect to the high rock claim, denied plaintiff’s request for an upward adjustment in the contract price. Plaintiff also submitted to the engineer claims for protest work alleged to have been outside the scope of the contract and for payment of extra work which the engineer deemed necessary for completion of the contract. Most claims were denied. Plaintiff thereafter commenced the within action seeking damages for the additional expenses incurred as a result of the unanticipated subsurface conditions and for the extra and disputed work claims previously denied. Defendant served an answer in October of 1980, an amended answer in November of 1980, and then five years later, sought leave to serve a second amended answer to set forth as a further defense that the engineer’s determinations made pursuant to article XXIV, denying the very claims raised in the instant complaint, were final and conclusive and bar an action to have these claims litigated de novo. The motion was initially denied on the ground of prejudice to the plaintiff. Upon renewal, the motion court, having conceded its factual error in finding prejudice to plaintiff due to delay, nevertheless denied the motion, finding the defense insufficient, as a matter of law, on the basis of Naclerio Contr. Co. v City of New York (69 NY2d 794, affg on mem below 116 AD2d 463). It is from this determination that the city appeals. While the city’s inordinate delay in asserting this defense lacks any justifiable excuse, plaintiff does not contend on appeal that this delay resulted in substantial prejudice. Thus, whether or not leave to amend should be granted turns solely on the question of the merits of the proposed defense. While prior law basically favored limited judicial review of proposed pleadings merely to establish facial sufficiency or to detect palpable defects, the favored practice has now become that when a substantial question is raised as to the meritoriousness of proposed pleadings, courts should resolve the question of — 142 — merit to obviate further time-consuming litigation. (Brennan v City of New York, 99 AD2d 445, 446; Andersen v University of Rochester, 91 AD2d 851, appeal dismissed 59 NY2d 968; Sharapata v Town of Islip, 82 AD2d 350, 362, affd 565 NY2d 332; East Asiatic Co. v Corash, 34 AD2d 432, 434.) We begin our discussion of the merits with the observation that it has been a long-established practice, one which originated with government works’ contracts, to provide in construction contracts that the completion, sufficiency, classification, and amount of the contractor’s work be determined by a third person, usually the owner’s architect or engineer, who typically issues the final certificate, certifying completion and adequacy of the work performed, and who the contract often authorizes to resolve work disputes. (See generally, 22 NY Jur 2d, Contracts, §§ 297-303.) As early as 1859, the Court of Appeals, in reviewing a clause giving the defendant railroad’s engineer broad authority to "decide every question * * * between the parties, relative to the execution [of the contract],” upheld the legitimacy of such "common” dispute resolution clauses and described their purpose as "to prevent disputes in regard to the amount and character of the work performed; and to secure the accuracy of all measurements and calculations, by having competent persons to make them.” (McMahon v New York & Erie R. R. Co., 20 NY 463, 465.) Given the limited effect of these clauses, they have not been deemed assailable because the engineer was employed by the governmental body for whom the construction is being performed, nor because the engineer’s determinations are made final only as to the contractor. (See, e.g., O’Brien v Mayor of City of N. Y., 139 NY 543, 576-577.) Although some cases construing the scope and effect of such dispute resolution clauses have drawn parallels to arbitration clauses and have loosely termed the architect or engineer an arbitrator, determinations made pursuant to these clauses have not been subjected to the limited judicial review accorded to arbitrators’ decisions pursuant to CPLR article 75, but instead have been reviewed pursuant to judicially created rules, as set forth in Joseph Davis, Inc. v Merritt-Chapman & Scott Corp. (27 AD2d 114). "The extent of the right of a third party, such as the Authority’s engineers, to bind the parties by their determination is well settled. If a contract provides that the decision or determination of an engineer shall be final and binding, such finality attaches, in the absence of — 143 — fraud, bad faith or palpable mistake equivalent to bad faith, only to those determinations involving quantity or quality of material, classification or amount of work performed, or a calculation as to a final estimate; where the expertise of the engineer is important and essential (Sweet v. Morrison, 116 N. Y. 19; Yonkers Contr. Co. v. New York State Thruway Auth., 26 A D 2d 766; Dowd v. State of New York, 239 App. Div. 141, 142). In short, the resolution of factual disputes is the prerogative of the engineers. Absent any question of construction of the contract, the engineers’ determination could not be challenged. They do not, however, have the power to construe the contract (see, generally, Ann. 137 A. L. R. 530; 10 N. Y. Jur., Contracts, §§ 155-156). The cases cited above are distinguishable from those situations where the meaning of the terms is to be construed and where the court’s responsibility for construction cannot be assumed by the engineers so as to oust the court of jurisdiction (Daniels Co. v. City of New York, 196 App. Div. 856; Merrill-Ruckgaber Co. v. City of New York, 160 App. Div. 513; Uvalde Contr. Co. v. City of New York, 160 App. Div. 284; Burke v. Mayor, 7 App. Div. 128). The legal meaning of the contract is always the responsibility of the court and not of the engineers” (supra, at 117-118 [emphasis added]). Even Savin Bros. v State of New York (62 AD2d 511, affd on opn below 47 NY2d 934), upon which the dissent partially relies to support its argument that the instant dispute resolution clause conclusively determined plaintiffs claims and bars the within action, also reiterated the now well-established rule that while "the parties are free to leave certain determinations to the judgment of the engineer and, where this has been done, the determination of the engineer is final as a matter of law, absent a showing of fraud or bad faith * * * the contractor is not bound by the engineer’s erroneous construction of law in interpreting the contract (Smith Contr. Co. v City of New York, [240 NY 491], supra; Daniels Co. v City of New York, [196 App Div 856], supra; Burke v Mayor, etc. of City of N. Y., 7 App Div 128)” (supra, at 516). This exclusion which preserves for the judicial forum issues involving questions of law can hardly be said to undermine the specific purposes underlying these clauses and, indeed, is responsive to a problematic factor in having an engineer or architect make legal determinations. As one commentator has observed: "The whole purpose behind courts allowing contracts to make architect’s decisions final at all is to allow — 144 — experts to protect the owner who lacks expertise in the field. Architects having no particular legal expertise, the courts should be willing to review their legal conclusions made on points not concerned with the quality or nature of the work required * * * Compare this with the case of an arbitrator, whose expertise, if not strictly legal, is certainly in the area of settlement of disputes. It should go without saying that when the reason for the rule ceases, the rule also ceases, and experts are therefore not entitled to conclusive deference outside the areas of their expertise” (Corbin, Contracts § 652, at 790-791 [Kaufman 1984 Supp]). The City of New York cannot ignore the effect of these cases by arguing that they are nevertheless inapplicable to the instant broadly worded clause, for this very same clause has itself been interpreted in this manner since at least 1893. The contract at issue in O’Brien v Mayor of City of N. Y. (139 NY 543, supra) included the very same article XXIV clause (supra, at 575). While the city never asserted that the plaintiff contractor was barred by the clause from bringing its action to recover on its previously denied excavation claim, the court did note that the dispute therein involved a question of contract construction, which the court then went on to review on the merits (supra, at 568). Subsequently, in Daniels Co. v City of New York (196 App Div 856, supra) this court specifically ruled that despite the article XXIV language that the engineer is to "determine every question which may arise relative to the fulfillment of this contract on the part of the Contractor”, the engineer’s determinations were only final and conclusive on such issues as "quality of material * * * and * * * quantity and classification of material,” but not as to points of law and contract construction (supra, at 862, 864). Likewise, in Smith Contr. Co. v City of New York (209 App Div 271, mod 240 NY 491, supra) this Court again confirmed that article XXIV does not bar an action de novo on matters involving contract construction (supra, at 277, 279). While this court, however, reversed the jury’s verdict as to one item involving the classification of certain work, concluding that that issue was within the engineer’s domain (supra, at 279), the Court of Appeals reinstated the verdict on that point, relying on two equally viable theories: that the engineer’s classification of the work was so arbitrary as to be the equivalent of bad faith, or that the engineer misconstrued the contract terms. (Smith Contr. Co. v City of New York, supra, 240 NY, at 499, 500.) Under either — 145 — theory, the court ruled, article XXIV did not bar de novo litigation of the contractor’s claim (supra, at 500). Since these decisions interpreting article XXIV predate Ardsley Constr. Co. v Port Auth. (54 NY2d 876) and Maross Constr. v Central N. Y. Regional Transp. Auth. (66 NY2d 341) upon which the city and the dissent so heavily rely, it is important to determine whether these more recent decisions explicitly or implicitly overrule this long judicial history of construction of these clauses. The court’s opinion in Ardsley indicates that the parties there had agreed to be bound by the standard of review of Tufano Contr. Corp. v Port of N. Y. Auth. (18 AD2d 1001, affd 13 NY2d 848): that the decision of the engineer was conclusive, unless infected by fraud, bad faith or palpable error. (Ardsley Constr. Co. v Port Auth., supra, 54 NY2d, at 877.) Thus, although the Court of Appeals noted that the Ardsley dispute resolution clause was different from the Tufano clause and more akin to an arbitration clause in that it did not exclude the engineer from determining questions of law, it did not disturb the parties’ agreement to be bound by the Tufano standard of review. Tufano, in turn, did not involve a dispute pertaining to contract construction, and thus the standard of review applied therein, that the engineer’s determinations were final unless infected by fraud, bad faith or palpable error, is consistent with the case law limiting finality to the engineer’s factual determinations. Maross (supra), however, squarely presented the court with what it concluded was "a broad arbitration clause”, which empowered the architect, who was privately retained by the Transportation Authority and not one of its employees, "to decide all questions of any nature whatsoever arising out of, under or in connection with, or in any way related to or on account of, this Contract (including claims in the nature of breach of Contract or fraud or misrepresentation * * *)” and made those decisions "conclusive, final and binding on the parties” and not subject to impairment or waiver by negotiations or settlement offers (supra, 66 NY2d, at 344). Having concluded that this was a broad arbitration clause, and noting that no public policy challenge was made to its scope, the court held that the clause did empower the architect to interpret the contract and limited judicial review of his decisions to that review available under the decisional law relative to arbitration. Maross (supra), however, does not stand for the proposition — 146 — that all construction contract dispute resolution clauses should be treated as broad, binding arbitration clauses and certainly did not explicitly or even implicitly overrule the long history of judicial construction of the very clause involved herein. Furthermore, the differences between the subject dispute resolution clause and the Maross clause, the differences between a municipal agency and a public corporation engaging in construction projects and certain public policy concerns compel us to conclude that the Maross standard of review should not be applied across the board to any dispute resolution clause and certainly not to the one at issue here.* The Maross arbitration clause specifically provided that the decisions of the privately retained architect were mutually binding "on the parties”, as is typical in arbitration. This indicated that the contract contemplated the submission of disputes by both parties. Article XXIV, on the other hand, exists so that the contractor will submit its disputes to the engineer and specifically binds only the contractor. The reality is that neither the city nor the Transit Authority need formally submit their disputes to the engineer for resolution, since the engineer is their agent and employee, represents their interests and, furthermore, is the one who protects the city’s interests as he directs, inspects and supervises the work and assigns any required additional work under the contract. The subservient position of the chief engineer vis-á-vis city officials was noted in O’Brien v Mayor of City of N. Y. (139 NY 543, supra) where the court observed that because the chief engineer was obligated to follow the directions and interpretations of the city’s Commissioner of Public Works and had no power to discharge his duties under article XXIV by invoking and applying equitable considerations, the engineer therefore "occupied no such position as an ordinary arbitrator upon a disputed question submitted by the parties for decision” (supra, at 585). Maross and also Ardsley (supra), on the other hand, involved public corporations. The juridical independence of public corporations from the political limitations imposed on — 147 — the State and its political subdivisions has been long noted. (See, Grace & Co. v State Univ. Constr. Fund, 44 NY2d 84, 88; Matter of New York Post Corp. v Moses, 10 NY2d 199, 203-204; Matter of Plumbing, Heating, Piping & Air Conditioning Contrs. Assn. v New York State Thruway Auth., 5 NY2d 420, 423.) Although the Transit Authority is also a public corporation, it openly acted as the agent of the City of New York with reference to this contract and is therefore bound by the same limitations as restrict the city. (See, Grace & Co. v State Univ. Constr. Fund, supra, 44 NY2d, at 88.) Another such limitation is that, as opposed to the arbitrator in Maross (supra, at 344), whose decisions could not be "impaired or waived by any negotiations or settlement offers in connection with the question decided,” the chief engineer, pursuant to the City Charter, has no authority to settle or adjust a claim, since that power is expressly reserved to the City Comptroller. (NY City Charter § 93 [g]; see, Bush v OBrien, 164 NY 205, 212.) To suggest, then, that the engineer herein has any judicial autonomy to settle questions of law and contract construction is not only to defy the realities of his position of subservience within the city’s political structure, but contravenes as well the City Charter provisions pursuant to which this contract must comply. Given these inherent limitations, then, in law and reality, of the engineer exercising any true impartial juridical autonomy, it is beyond question that it would violate public policy to interpret article XXIV as making the engineer the final arbitrator over questions of contract construction, for to do so would be to make the city the final and conclusive arbitrator over its own disputes. (Naclerio Contr. Co. v City of New York, 116 AD2d 463, 464, affd on mem below 69 NY2d 794, supra.) The situation here presents not a matter of having a person serve as arbitrator who has some known relation to a party, but, rather, the inherent inequity of having as an arbitrator one who is one of the parties. (Compare, Matter of Cross & Brown Co. [Nelson], 4 AD2d 501, with Matter of Siegel [Lewis], 40 NY2d 687.) Thus, not only does the Maross decision (supra) not require that we depart from the established decisional law regarding these dispute resolution clauses, but public policy forbids that we do so. The fact that the court in Grow Tunneling Corp. v City of New York (70 NY2d 665, supra), despite the city’s request that it do so, failed to address this very same public policy argument, cannot, as the dissent argues, be interpreted to mean — 148 — that the Court of Appeals has rejected the argument. Principles of law are established by what is decided by a court, not by what the court fails to reach. Moreover, the Court of Appeals adopted the reasoning of our memorandum decision in Naclerio (supra) which specifically relied on this public policy argument. (Naclerio Contr. Co. v City of New York, supra, 116 AD2d, at 464, affd on mem below 69 NY2d 794.) Having concluded that article XXIV does not bar a contractor from commencing an action to challenge the engineer’s determinations on questions of law and issues of contract construction, we must now address the nature of plaintiffs claims. We address first the claims made pursuant to section 201.34 of the specifications, the changed conditions provision. Changed conditions clauses first appeared in Federal construction contracts just prior to World War II to ameliorate the problems which beset contractors in bidding on projects involving subsurface conditions. Prior to the adoption of these clauses, contractors either conducted their own borings of subsurface conditions, a time-consuming and expensive practice which raised the price of bids, or they simply added a high contingency factor to their bids to protect against unusual conditions discovered during the performance of the contract. (See, Foster Constr. C. A. v United States, 435 F2d 873, 887.) Since introduction of these clauses, the government often makes its own core borings of subsurface conditions and makes logs of the borings, which are then included in the contract. The contractor relies on the logs, contract plans, drawings and specifications in preparing its bid and is then further protected by the changed conditions clause, which provides that should the conditions encountered materially differ from those shown in the plans, drawings, specifications or logs and affect the cost of performance of the contract, an equitable adjustment of the price will be made. (Supra; see also, Kaiser Indus. Corp. v United States, 340 F2d 322, 329.) The public benefits from these clauses in that the contractors "will have no windfalls and no disasters. The Government benefits from more accurate bidding, without inflation for risks which may not eventuate. It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.” (Foster Constr. C. A. v United States, supra, 435 F2d, at 887.) It has been uniformly agreed that a determination as to whether changed conditions exist is a matter of contract — 149 — interpretation—whether the conditions encountered were reasonably indicated in the contract provisions, drawings or specifications—and, thus, a question of law for courts to resolve. (Foster Constr. C. A. v United States, supra, 435 F2d, at 880-881, 886-887; Kaiser Indus. Corp. v United States, supra, 340 F2d, at 333-334; Johnson Constr. Co. v Missouri Pac. R. R. Co., 426 F Supp 639, 648; Groves & Sons & Co. v State, 50 NC App 1, 273 SE2d 465, 494, 496; Metropolitan Sewerage Commn. v R. W. Constr., 72 Wis 2d 365, 241 NW2d 371, 377; Catapano Co. v City of New York, 116 Misc 2d 163, 166.) Since such disputes involve questions of contract construction, they fall outside the scope of article XXIV, whether the changed circumstances clause is deemed subject to mandatory or equitable adjustments. In fact, because of the strong public policy favoring such clauses, other courts have also rejected arguments that they have been stripped of their authority to review these claims because the claims were previously denied pursuant to contractual review procedures. (See, e.g., Fattore Co. v Metropolitan Sewerage Commn., 454 F2d 537, 543; Foster Constr. C. A. v United States, supra, 435 F2d, at 880, 886, 888; James Julian Inc. v President of Town of Elkton, 341 F2d 205, 209; Kaiser Indus. Corp. v United States, supra, 340 F2d, at 329-330.) Accordingly, article XXIV is no bar to plaintiffs litigation of its changed conditions claims. Neither is there any merit to defendant’s argument that article XXIV precludes plaintiff from litigating its claims to recover for extra work and protest work. Extra work is defined as that work necessarily required in the performance of the contract, but which arises from circumstances which could not be anticipated. (Savin Bros. v State of New York, supra, 62 AD2d, at 516.) As the primary guide in determining whether or not certain work is extra work and whether the contractor is entitled to be paid for extra work is the contract itself, clearly this presents questions of contract construction (supra, at 515). The issue of extra work is further complicated in this case by the fact that section 6-110 of the Administrative Code of the City of New York limits a city agency when ordering additional work to not exceed an expense over 10% of the contract price. Given this limitation, the city and chief engineer will inevitably be pressured to interpret broadly the contract work requirements, while narrowly construing their — 150 — definition of extra work, and to classify the work which contractors claim is extra work as contract work for which the contractor may not receive additional compensation. This further supports the public policy concern raised above of the inequities in the city’s position that the engineer’s conclusions on extra work are binding even if they involve erroneous constructions of the contract. The same analysis applies with regard to the protest work claims. Protest work generally refers to that work which the contractor is ordered to perform, but which he argues lies completely outside that which was even intended by the contract. This is not a claim for extra compensation, as is the case with extra work, but rather is a claim for damages for breach of contract, and, as such, it involves questions of law, contract construction, and application of the judicially established limitations for seeking recovery on these claims. (See generally, Borough Constr. Co. v City of New York, 200 NY 149.) Interestingly, the Borough Constr. contract also contained the article XXIV dispute resolution clause, which was no bar to the court’s review of the merits of the contractor’s protest work claims. Should the plaintiff fail to sustain its claims that the engineer erroneously construed the contract and should the city satisfy the court that particular determinations only involved factual matters typically within the engineer’s expertise, the plaintiff, then, will be bound by those determinations, absent proof they were infected by fraud, bad faith or palpable error. However, by no means may the city’s position prevail that plaintiff is barred by article XXIV from commencing this action and arguing that the engineer erroneously construed the contract. To give to the engineer, who is obligated to answer to the city, the power to conclusively bind the contractor on legal determinations and, in effect, expose the contractor to the risks of performing, without compensation, work outside the intent of the contract or improper extra work would, as we recently said in a related context, be tantamount to "conferjmg] upon the municipality the unilateral power to modify the agreement and to impose on the contractor risks which he did not assume as part of his bargain.” (Kalisch-Jarcho, Inc. v City of New York, 135 AD2d 262, 265.) If we were to condone the city’s proposed manner of resolving construction disputes, then the contractors, who would otherwise have no effective means of redress, would simply revert back to the old practice of adding high contingency — 151 — factors to their bids to cover the unacceptable risks of doing business with the city. (See, Foster Constr. C. A. v United States, supra, 435 F2d, at 887.) Public policy cannot tolerate such a result. Therefore, the motion to amend the pleadings to add as a defense that article XXIV bars litigation of plaintiffs claims is denied. Accordingly, the order of the Supreme Court, New York County (Arthur Blyn, J.), entered August 4, 1986, which denied defendant’s motion for leave to amend its answer to add an affirmative defense, should be affirmed, without costs. Footnotes [*] Contrary to the dissent’s suggestion that these issues are not properly before us, they were clearly addressed below, prompting defendants-appellants to argue on appeal against these points, and plaintiff-respondent’s brief incorporates the arguments raised below and before this court in the recent cases: Grow Tunneling Corp. v City of New York (123 AD2d 899, affd 70 NY2d 665) and Naclerio Contr. Co. v City of New York (116 AD2d 463, affd on mem below 69 NY2d 794).