Bank of America, N.A. v. ASD Gem Realty LLC, 205 A.D.3d 1, 164 N.Y.S.3d 566 (2022).
ASD Gem Realty LLC and ASD Diamond, Inc. (together, ASD or Owner) contracted Sweet Construction Corp. (Sweet) to renovate a commercial space in Manhattan’s Diamond District (the Project). ASD solicited proposals for the supply and installation of partitions in the space (the Work) and ultimately directed Sweet to hire Arenson Office Furnishings, Inc. (Arenson). Arenson subsequently entered into a subcontract with Sweet to complete the Work (the Subcontract).
The Subcontract contained two signature lines, one for “Sweet Construction Approval” and one for “Arenson Office Furnishings Approval.” It provided that the Work was “to be performed pursuant to the ATTACHED SCOPE LETTER … and ‘SCC General Requirements.'” The scope letter in turn provided that “Subcontractor understands that Contractor is acting as an agent for the Owner, and agrees to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract.” ASD was not a party to the Subcontract.
Arenson completed the Work without objection by ASD or Sweet between January and December 2014. In January 2015, Sweet notified its subcontractors, including Arenson, of “the payment process” for the Project, noting that “all subs are being paid directly from the bank, but will be distributed by [Sweet].” Subcontractors were to submit payment requisitions to Sweet, which would submit them to bank. Arenson duly submitted its payment requisitions, but it did not receive payment from either ASD or Sweet, apparently because ASD encountered financial difficulties.
Arenson filed claims against Sweet for breach of the Subcontract and of New York’s Prompt Payment Act. It separately moved for summary judgment on those claims. Sweet cross-moved for summary judgment, arguing that Arenson could only expect payment from ASD, not Sweet, citing the scope letter. The trial court granted Arenson’s motions and denied Sweet’s. Sweet appealed.
Sweet argued that it was not liable to pay Arenson because it was merely an agent acting on behalf of a disclosed principal, ASD. The appellate court concluded that Sweet was not ASD’s agent. It noted that Sweet had signed the Subcontract in its own capacity and not on ASD’s behalf. It also noted that the Subcontract provided that the Work was to be performed pursuant to general requirements that provided that Arenson would, among other things, indemnify Sweet, obtain insurance in Sweet’s favor, and recognize Sweet’s authority as to Project safety, requirements that on their face applied to Sweet in its own capacity. The court rejected Sweet’s attempt to “break out its payment obligation under the guise of agency while simultaneously retaining numerous other rights,” deeming this “merely a thinly disguised pay-when-paid provision” that the New York Court of Appeals “has held to be void as against public policy in West–Fair Elec. Contrs. v. Aetna Cas. & Sur. Co.” It also rejected Sweet’s attempt to distinguish West-Fair.
Sweet also argued that New York’s Prompt Payment Act (PPA), which generally requires timely payment of a subcontractor “from the party with which it contracts,” contains an exception for a contractor acting as an agent for a disclosed owner, citing a provision that “where a contractor enters into a construction contract with a subcontractor as agent for a disclosed owner, the payment obligation shall flow directly from the disclosed owner as principal to the subcontractor and through the agent.” The court concluded that the purported exception was inapplicable because Sweet was not ASD’s agent for the reasons previously stated. It also concluded that Sweet’s interpretation “turns the statute on its head,” explaining that “the purpose of the PPA is to protect those lowest in the construction chain from those highest in the construction chain by mandating prompt payments.” The cited provision affords subcontractors more rights (by making owners liable), not fewer (by making agents immune from liability).
The appellate court affirmed the trial court.