December 2002
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
A construction project usually has several layers or tiers of contractors. The owner may contract with a general contractor to perform the work. The contractor typically hires several subcontractors for specialty trades such as plumbing, electricity, or HVAC. The subcontractors in turn may then subcontract part of their work to sub-subcontractors. For example, the plumber may hire a sub-subcontractor for a boiler installation; an HVAC subcontractor may hire a sub-subcontractor to install ductwork or automatic controls. Going one tier lower, the sub-subcontractor may hire a lower tier sub-subcontractor or order materials from suppliers.
The hierarchy in a construction project is important for several reasons. Communications generally run up and down through the various tiers. While it is not unheard of for a sub- subcontractor to take field directions from the general contractor's project manager or job superintendent, generally the sub-subcontractor will report only to the subcontractor, who will communicate with the general contractor, who, in turn will communicate with the owner or owner's representative.
The hierarchy is also important with respect to claims for payment for work performed or materials furnished. The general rule is that a party performing work or furnishing materials may only seek payment from the party with whom the contract was made. Where a contract exists, whether written or oral, the parties to the contract are said to be in "privity of contract." A subcontractor may seek payment from a general contractor, but not from the owner because of lack of privity. A sub-subcontractor may seek payment from the subcontractor with whom it is in privity of contract, but not from the general contractor. This point was illustrated in the recent case of Sky-Lift Corporation v. Flour City Architectural Metals, Inc.
Background
Flour City Architectural Metals, Inc., was the subcontractor for the manufacture and installation of the entire stone curtain wall of a project. Flour City entered into a subcontract with Frame Engineering Company, Inc., for the installation of cornice stones. Sky-Lift Corp. sent a written proposal to Frame dated March 3, 1992 for the work, which Frame accepted by letter dated May 4, 1992. Sky-Lift performed the work pursuant to its proposal to Frame and accepted payments. Sky-Lift made an alternative proposal in December 1992 that Frame rejected. Frame promptly responded that the March 1992 proposal was the agreement.
When Sky-Lift was not paid for some of its work, it sued both Flour City, the subcontractor, and Frame, the sub-subcontractor. Flour City moved for summary judgment seeking dismissal of the claim against it on the ground that there was no privity of contract or agreement between Sky-Lift and Flour City. The lower court granted the motion and Sky-Lift appealed.
Arguments
Sky-Lift argued that it was in privity of contract with Flour City because Flour City had agreed to make payments directly to Sky-Lift. Sky-Lift also argued that Flour City benefited and was unjustly enriched by the unpaid work performed by Sky-Lift, in that the work went toward the completion of Flour City's obligations under its subcontract. Sky-Lift also argued that it never entered into a contract or had privity with Frame and therefore was not bound to seek payment from Frame. Rather, Sky-Lift sought payment based upon the value of its work to Flour City, the subcontractor, and Frame, the sub-subcontractor, both of whom benefited from the work.
Flour City argued that the only obligation it undertook as to Sky-Lift was to make payments to it in accordance with Frame's authorizations, and to pass change orders up to the general contractor in accordance with industry custom. It also argued that Sky-Lift was in privity of contract with Frame and not with Flour City, and, therefore, could recover only from Frame.
Decision
The appellate court affirmed the lower court's dismissal of the claim against Flour City. According to the court, there was no basis for departing from the general rule that a lower tier sub-subcontractor (Sky-Lift) who is not paid by the sub-subcontractor (Frame) cannot look for payment to the subcontractor (Flour City), absent privity of contract or an agreement by the subcontractor to pay its sub-subcontractor's obligations.
The court found neither privity between Sky-Lift and Flour City, nor an agreement by Flour City to pay its sub-subcontractor's obligations. Rather, Flour City agreed to pay Sky-Lift directly only upon the authorization of Frame, and as a draw against the subcontract between Flour City and Frame. The court also found that the obligation to pass change orders up to the general contractor was in accordance with industry custom and did not create privity between Flour City and Sky-Lift.
The court also noted that in the absence of privity between Flour City and Sky-Lift, it did not avail Sky-Lift that Flour City may have benefited from Sky-Lift's work.
Finally, the court found that there was privity between Sky-Lift and Frame. Frame accepted Sky-Lift's written proposal, forming a contract. Sky-Lift performed work and accepted payments pursuant to that agreement. The latter proposal by Sky-Lift, which was rejected by Frame, did not affect the existence of the prior agreement.
Conclusion
This case adheres to the general rule that a party performing work or furnishing materials may only seek payment from the party with whom it contracted to perform such work or furnish such materials. A subcontractor may not seek payment from a higher tier contractor with whom it is not in privity of contract unless there was an agreement by the higher tier to assume liability for its subcontractor's obligations.
Lower tier subcontractors should take careful note of potential lien rights or bond rights, which exist independently of contractual rights. These rights may offer the only basis for payment in the event that the party with whom the lower tier is in privity turns out to be insolvent.
About the author: Mr. Miuccio is a partner in the New York City-based law firm Altieri, Kushner, & Miuccio P.C. and legal counsel to the Construction Industry Council of Westchester & Hudson Valley Inc.