Kalisch-Jarcho, Inc. v. City of New York

• Decision Date: 22 December 1988
• Docket Number: KALISCH-JARCH,INC
• Citation: 72 N.Y.2d 727,533 N.E.2d 258,536 N.Y.S.2d 419
• Parties: , 533 N.E.2d 258 , Respondent, v. CITY OF NEW YORK, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 419

536 N.Y.S.2d 419

72 N.Y.2d 727, 533 N.E.2d 258

KALISCH-JARCHO, INC., Respondent, v. CITY OF NEW YORK, Appellant.

Court of Appeals of New York.

Dec. 22, 1988.

Peter L. Zimroth, Corp. Counsel (Barry P. Schwartz, Fay Leoussis and John F. Grubin, New York City, of counsel), for appellant

David E. Montgomery and Frederick R. Rohn, New York City, for respondent.

OPINION OF THE COURT

KAYE, Judge.

This appeal centers on a New York City contract provision requiring a contractor during a construction project to perform disputed work directed by the City and postpone any claim for additional compensation until after completion of the work. While the contractor urges that this provision violates the public policy articulated in Borough Constr. Co. v. City of New York, 200 N.Y. 149, 93 N.E. 480, which protects against collusive claims for extra work, we conclude that the concern expressed in Borough is inapplicable here. The contractual procedure for resolving disputed work claims should have been honored in this case, and the contractor's midstream request for a declaration of contract rights during the project denied.

In March 1985, the City solicited bids for four prime contracts involved in constructing a new broom depot and salt storage building for the Department of Sanitation. Kalisch-Jarcho, with a bid of $999,547, received the plumbing contract. Separate contracts were awarded for the general construction work; the heating, ventilation and air conditioning; and the electrical work.

At a meeting the day Kalisch-Jarcho was awarded the plumbing contract--and even before contract-signing--a dispute surfaced regarding the concrete pads to be installed below the underground fuel tanks. While Kalisch-Jarcho was required to install the tanks and concrete casing around them, at that meeting it expressed the view that the excavation for and installation of the concrete pads below the tanks was the responsibility of the general construction contractor; the City representatives replied that the responsibility was Kalisch-Jarcho's. Shortly after work began, the project architect, relying on contract diagrams and other contract provisions, notified Kalisch-Jarcho that it was required to excavate for and install the concrete pads. After several fruitless exchanges, the matter was submitted for resolution to the Commissioner of the Department of Sanitation, pursuant to the procedure set forth in article 27 of the contract. ¹ The Commissioner determined that it was "clearly evident that the intent of the contract documents was to require the Plumbing Contractor to perform the subject items of work", and he directed Kalisch-Jarcho to proceed with the disputed work, adding that it could, by filing a written protest, preserve its right to claim additional compensation after contract completion.

The contractor, however, refused and instead commenced this action for a declaratory judgment that it was not contractually obligated to perform the disputed work. Citing Borough Constr. Co. v. City of New York (supra), it pleaded that declaratory relief was justified as the disputed work was clearly outside the contract and under Borough would therefore not be compensable even if performed under protest. In opposition to Kalisch-Jarcho's motion for summary judgment, and in support of its own motion to dismiss, the City relied on article 27 of the contract, contending that even if declaratory relief could be sought for disputed work clearly outside the agreement, here the work was at least arguably within the contract. Both the project architect and the Commissioner had reasonably determined that the subject work was plaintiff's contractual responsibility, and that conclusion, in the City's view, should be final and binding.

The trial court granted Kalisch-Jarcho's summary judgment motion, concluding that it was not contractually obligated to perform the work before seeking judicial relief. The court found that the Commissioner was clearly wrong in his determination that the issue was at least fairly debatable, and that under Borough the contractor could not have recovered the value of the work had it complied with the Commissioner's direction.

By a divided vote, the Appellate Division affirmed, holding that under Borough Kalisch-Jarcho was not required to perform the disputed work before seeking judicial resolution of the question whether the work was clearly beyond the limits of the contract (135 A.D.2d 262, 525 N.Y.S.2d 190). While acknowledging that article 27 served an important public interest, the court nonetheless concluded that it failed to accord the City protection, as does Borough, against conspiracies between a contractor and a municipal employee to obtain payment for additional work not contemplated by contract. The court then agreed with the trial court that the disputed work was not Kalisch-Jarcho's contractual responsibility, and that the contractor was not obligated to perform it. In dissent, the late Justice Leonard H. Sandler concluded that article 27 was not violative of Borough or the public policy that motivated it, and that the disputed work was not clearly beyond the contract but rather the subject of honest dispute (135 A.D.2d, supra, at 269, 525 N.Y.S.2d 190). We are in essential agreement with the dissent, and now reverse.

A declaratory judgment action may be an appropriate vehicle for settling justiciable disputes as to contract rights and obligations (see, Matter of Public Serv. Commn. v. Norton, 304 N.Y. 522, 529, 109 N.E.2d 705; see also, Restatement of Contracts § 345, comment d, at 107-108; 5 Corbin, Contracts § 991, at 4-5; 4 Williston, Contracts § 601, at 316-317 But parties to an agreement may not seek a declaration of their contract rights when their agreement specifies a different, reasonable means for resolving such disputes (see, e.g., Rifkin v. Rifkin, 118 N.Y.S.2d 322 affd. 281 App.Div. 1035, 121 N.Y.S.2d 277; 16 Williston, Contracts § 1919A, at 155-156). A declaratory judgment in such circumstances may be unnecessary (see, Walsh v. Andorn, 33 N.Y.2d 503, 507, 355 N.Y.S.2d 329, 311 N.E.2d 476; James v. Alderton Dock Yards, 256 N.Y. 298, 305, 176 N.E. 401), and could also enable parties to circumvent their contractual undertakings (see, Siegel, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR C3001:14, at 364-365).

Article 27 of the contract delineates the agreed procedure to be followed for resolving disputes arising during the project as to whether certain work is or is not within the contract. When, as the last step in the process, the Commissioner determines that the disputed work is contract work and so notifies the contractor, the contractor has specifically undertaken an obligation to perform that work and postpone any claim for additional compensation until after contract completion. In view of the agreed procedure for resolving disputed work claims, and in view of the nature of the disputed work here, we conclude that the Appellate Division abused its discretion by affirming the declaratory judgment.

Kalisch-Jarcho does not contest the applicability of the contract provision to which it agreed, or argue that this was anything but an arm's-length bargain between sophisticated parties (see, Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384, 461 N.Y.S.2d 746, 448 N.E.2d 413). Nor does it dispute the City's assertion that article 27 was designed to protect the public interest in avoiding costly, disruptive delays during public works projects. The nub of the contractor's contention is that the contract provision cannot control because it violates the public policy articulated in Borough Constr. Co. v. City of New York (supra). We disagree. The public policy concerns defined in Borough are not implicated here, and the contract should be honored.

In Borough, a contractor sought recovery for extra work and materials in the construction of a large sewer for the City of New York. The City engineer in charge ordered the contractor to lay a portion of the sewer in a more expensive cement than agreed, and also to furnish an elevator to lower automobiles into the sewer, clean up the sewer and illuminate it with candles for what this court characterized as a "so-called inspection trip of the city officials". (200 N.Y. 149, 152, 93 N.E. 480, supra.) (Judge Learned Hand later described the work as making access "more genial for those attending the festivities incident to the opening" of the sewer The contractor protested that the order was outside the contract, but did as it was ordered and then sued.

The court first recognized that a contractor ordered by a municipal representative to furnish services or materials as covered by the contract, which the contractor believes are outside the contract, may under protest do as directed and later recover damages for breach of contract, even though it turns out that the contractor was actually right and the official had no right to call on it for such labor and materials (Borough Constr. Co. v. City of New York, supra, 200 N.Y. at 153, 93 N.E. 480). Thus, as an abstract principle, the value of extra work--work that is ultimately found to be outside a contract--may unquestionably be recoverable...