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Tolling of Notice of Claim Deadlines: New York’s Appellate Division Holds That Equivocal Denial of Claim by Architect Does Not Trigger Deadlines for Filing Notice of Claim Where Parties Thereafter Participate in Voluntary Mediation

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Construction Group Newsletter

January 3, 2011

The matter of Zurich Am. Ins. Co. v. Ramapo Cent. School Distr., 63 A.D. 3d 729, 879 N.Y.S.2d 585 (App. Div. 2d Dep’t 2009) involved a dispute between certain parties on a school construction project, including Zurich America, the surety, Parsippany Construction Company, the contractor, and Ramapo Central School District in New York, the owner. The contractor submitted various requests to the owner for payment for extra work on December 5, 2005, but did not specify any time frame for resolution. Instead, the contractor requested that, if the owner was not going to make any adjustment to the contract price, the claims be submitted to mediation. The project architect declined the requests for payment on February 7, 2006, and the owner and contractor thereafter agreed to mediation as provided in their agreement. The mediation process dragged on for a year, but ultimately proved fruitless. The contractor filed a notice of claim on April 9, 2007 and, after the surety was assigned the contractor’s rights under the contract, the surety filed suit on November 20, 2007, nearly two years after the contractor first submitted its the claims to the owner. The owner sought summary judgment on the basis that (1) the notice of a claim was not served within three months of the architect’s rejection of the payment request as required by Education Law § 3813(1) and (2) the lawsuit was not instituted within a year after denial of the architect’s rejection as required by Education Law § 3813(2). The trial court denied the motion and the owner appealed.

Although it would appear that the contractor filed the claims within the required three months initially, the Appellate Division noted that a cause of action for non-payment does no accrue until the request for payment is denied. The issue then was whether the architect’s February 7, 2006 letter was a denial sufficient to trigger the three month period in which the contractor had to file a notice of claim. Notably, the architect disapproved the requests for payment, but the owner did not reject the requests and agreed to participate in mediation. The court found that it would have been disingenuous for the owner to agree to mediate and for all practical purposes lull the contractor into sleeping on its rights, particularly where the contractor’s initial requests for payment was never unequivocally denied by the owner or the architect. Thus, the court held that the notice of claim and subsequent lawsuit were timely filed.

The issues raised in the Zurich case are not uncommon when there are time frames for making claims and a requirement of mediation before arbitration or litigation. Another complicating factor, although not mentioned in the case, can be the presence of a nonjoinder clause that is found in many construction contracts. Under New York’s Education Law, if a request for payment is not rejected out of hand, then the three month time frame in which to file a notice of claim is not triggered. While rejection of the request for payment can be express or constructive, an owner’s participation in a voluntary mediation regarding the dispute demonstrates that the claim for payment was not rejected. In other words, by agreeing to mediate a dispute over payment in lieu of unequivocally rejecting the payment, the owner essentially extends the time period for the contractor to file a notice of claim. The upshot is if the owner actually believes that there is no merit to mediation and wants to trigger the three month period for filing a notice of claim requirement, then it should state so expressly and unequivocally. If, however the parties engage in mediation in good faith instead, a court will likely conclude that the timing provisions of the Education Law have been tolled.