New York State Court of Claims

New York State Court of Claims

SMALIS v. New York, #2000-015-002, Claim No. 98030, Motion Nos. M-60985, CM-61026


A failure to give notice pursuant to State Finance Law § 179-f(3) to a contractor of the grounds for the State's denial of final payment will not commence the running of interest if that payment is not due pursuant to the terms of the contract.

Case Information

Claimant short name:
Footnote (claimant name) :

Footnote (defendant name) :

Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
Motion number(s):
Cross-motion number(s):
Francis T. Collins
Claimant's attorney:
DeGraff, Foy, Holt-Harris & Kunz, LLPBy: Kirk M. Lewis, Esquire
Defendant's attorney:
Honorable Eliot Spitzer
Attorney General of the State of New YorkBy: Eidin Beirne, Esquire, Assistant Attorney General
Third-party defendant's attorney:

Signature date:
February 24, 2000
Saratoga Springs

Official citation:

Appellate results:

See also (multicaptioned case)


The motion of the claimant for an order pursuant to CPLR 3212 awarding it summary judgment is granted and the cross-motion of the defendant[1] for an order pursuant to CPLR 3212 awarding it summary judgment is granted to the extent that all portions of the claim seeking an award of interest for time periods preceding September 9, 1997 are dismissed.

As characterized by claimant in its notice of motion this "is a claim for interest due to claimant pursuant to State Finance Law § 179-f". The instant dispute between the parties arises from work performed pursuant to a contract approved by the Comptroller on August 22, 1984 whereby claimant was to sandblast and paint portions of the substructure of the Skyway Bridge located in the City of Buffalo which carries State Route 5 over the Buffalo River and spans two marinas, the Buffalo Naval Park, a section of the Thruway, parking lots and several public streets and sidewalks. Article 7 of the contract provided for monthly payments as the work progressed based upon estimates "of the quantity of work done and of material which has actually been put in place". Article 8 of the contract provided that there shall be no estimate made for the purpose of payment while the contractor is out of compliance with a direction concerning the work given by the Commissioner of Transportation or his representatives. Article 9 of the contract directed the Commissioner to notify the contractor by letter of final acceptance of the work based upon the recommendation of the Regional Director. Article 10 provided for final payment to the contractor after the final acceptance of the work and Article 11 granted the Commissioner authority to suspend or terminate the contract if the work is not being performed in accordance with the contract terms.

New York State Department of Transportation (DOT) "Standard Specifications" were made part of the contract between the parties by Article 2 of the agreement. The Standard Specifications required, inter alia, the contractor to procure and maintain property damage insurance naming the State as an additional insured. Section 104-01 of the Standard Specifications provides:
104-01 WORK REQUIRED. Under the contract the Contractor shall be required to do all work enumerated under the different items of the contract and in addition to this shall be required to protect all adjoining property, all Utilities and existing highway facilities within the Right-of-Way and to repair or replace any such properties, Utilities and facilities damaged or destroyed by him or his employees through the construction operations, both within and adjacent to the Right-of-Way.
Section 107-09 provides that "[a]ll damage, direct or indirect, of whatever nature resulting from the performance of the work . . . shall be borne and sustained by the Contractor." The section further provides:
The Contractor shall indemnify and save harmless the State from suits, actions, damages and costs of every name and description resulting from the work under his contract during its prosecution and until the acceptance thereof, and the State may retain such monies from the amount due the Contractor as may be necessary to satisfy any claim for damages recovered against the State.
Thus, the contract specifically authorized the State to withhold monies that would otherwise be due to the contractor as security for any damages that might be recovered against the State by parties injured as a result of work done pursuant to the contract.

Claimant secured property liability insurance from Zurich Insurance Company which policy included the State as a named insured. In early May of 1985 the engineer in charge of the project for DOT began to receive complaints of property damage caused by claimant's paint spraying and sandblasting operations. While Zurich initially adjusted and paid the property damage claims, a dispute thereafter developed between claimant and Zurich as to whether the policy covered certain of the property damage claims. The dispute came to the attention of DOT and on October 16, 1985 the Department's Regional Construction Engineer sent a letter to claimant which stated:
The Department of Transportation is becoming increasingly concerned about the large number of damage claims resulting from your painting operations on the Buffalo Skyway. Information available to us suggests that the number of claims will exceed 2500 and the cost to repair could equal $700,000; more than 50% of the contract amount.

Under Section 107-09 of the Contract Specifications and page 49 of the Contract Proposal, the contractor is responsible for any damage caused by their operations to vehicles, persons, or property. Your agreement further states under Section 104-01 of the Specifications that the work required under the contract includes the repair or replacement of any property damaged by your operations. While the actual work of painting the bridge is substantially complete, the repair of damaged property is not. You are, therefore, directed to repair or cause to be repaired all damages caused by your operations to the satisfaction of the Regional Director.

To date, your insurance company has made significant progress in adjusting and paying damage claims. However, less than half of the apparent claims have been settled leaving a potential remainder of several hundred thousand dollars yet to be satisfied, and the local insurance agent further advises that they are approaching the limit of their responsibility.

In view of the large dollar value of claims outstanding and the uncertainty of prompt payment by your insurance carrier, you are advised that, in accordance with Article 8 of the agreement, no further estimate will be made for the purpose of payment until we have received written assurance from your insurance carriers that all damage claims related to this contract will be adjusted in accordance with our contract specifications.
On October 25, 1985, Zurich sent a letter to claimant, with a copy to DOT, disclaiming coverage for any property damage claim arising after May 31, 1985. By letter dated November 4, 1985, the Regional Construction Engineer rejected claimant's request for the release of contract monies upon the ground that the insurance issue had not been resolved. On December 6, 1985, DOT Executive Deputy Commissioner John K. Mladinov wrote to claimant terminating the contract upon the grounds that claimant had not repaired the property damage caused by its work and had not secured the appropriate insurance coverage. Claimant requested final payment from DOT by a letter dated December 10, 1985. DOT responded by letter dated December 20, 1985 advising that the request for final payment "has been referred to our legal counsel for response".

The insurance dispute resulted in the commencement of three declaratory judgment actions in Supreme Court involving DOT, claimant, Zurich and the insurer providing the umbrella coverage for the project. In November of 1995, the Third Department affirmed the lower court's granting of summary judgment in favor of claimant and DOT upon the coverage issue (Zurich Ins. Co. v White, 221 AD2d 700). Thereafter, Zurich began processing the property damage claims. As a result, DOT determined in February of 1997 to process Contract Payment Estimate # 9 and the sum of $197,112.17 was paid to the claimant. On June 25, 1997, DOT accepted the contract work and on July 16, 1997 DOT released retainage to claimant in the sum of $43,291.00. On August 13, 1997, claimant submitted a signed final agreement to DOT and on September 24, 1997 final payment on the contract in the sum of $93,621.50 was issued by the Comptroller to the claimant. This claim was filed on March 24, 1998 and trial is scheduled to commence on March 1, 2000.

Claimant contends that pursuant to State Finance Law § 179-f (3) DOT had fifteen days following the submission of the request for payment on December 10, 1985 in which to provide claimant written notice of any defects or suspected improprieties and, upon its failure to do so, interest commenced to run on December 20, 1985. Defendant's position is set forth at page 7 of its memorandum of law as follows:
In order to prove entitlement to interest for late payment claimant has to establish the foundation that it was entitled to that payment in the first place. The facts demonstrate no such entitlement in this case until acceptance of the contract by the Commissioner on June 25, 1997. Under § 179-f(2) of the State Finance Law which incorporates, by virtue of subdivision 6 of § 179-e, the provisions of § 38(7)(g) of the Highway Law, the State had seventy-five calendar days, excluding holidays, from the date of acceptance, June 25, 1997, to make final payment without incurring interest. Accordingly, allowing for two legal holidays; Independence and Labor Days, interest began to run on September 10, 1997. At the very most, therefore, claimant is entitled to 14 days' interest on the final payment of $93,621.50 (Weber affidavit, paragraph 19) - or $287.28, based on an annual interest rate of 8% as referenced in claimant's Verified Bill of Particulars, para. 2.
Article 11-A was added to the State Finance Law by chapter 153 of the Laws of 1984 in order "to encourage State agencies to pay bills in a timely manner by imposing interest payments for unjustified late payments" (Governor's Program Bill Memorandum, Bill Jacket, Laws of 1984, c 153). State Finance Law section 179-f (1) provides that, "Each state agency which is required to make a payment from state funds pursuant to a contract and which does not make such contract payment by the required payment date shall make an interest payment to the contractor in accordance with this article on the amount of the contract payment which is due". Thus, the obligation of a State agency to make an interest payment pursuant to the provisions of section 179-f is contingent upon there being a payment due pursuant to the contract.

Subdivision (2) of section 179-f establishes a required payment date of "thirty calendar days, excluding legal holidays, or in the case of final payments on highway construction contracts seventy-five calendar days, excluding legal holidays, after receipt of an invoice for the amount of the contract payment due; except when:
(f) the goods or property have not been delivered or the services have not been rendered by the contractor in compliance with the terms or conditions of the contract
or . . .
(h) in the case of final payments on highway construction contracts the commissioner of transportation determines that the contractor has failed to properly submit the necessary documents and other submissions prescribed by the contract specifications and requirements . . ." .
The final paragraph of section 179-f (2) provides that the required payment date, which triggers a contractor's entitlement to interest, is extended by such period of time as is required to "satisfy or rectify any of the types of conditions described in paragraphs (a) through (f) or (h) of this subdivision".

Under the terms of the contract between the parties, the claimant agreed to include the repair or replacement of adjoining property damaged or destroyed by it as part of the work to be performed. As a result of the claimant's failure to perform in this respect, and following Zurich's disclaimer of liability, the Department exercised its contractual right to suspend further payments pending compliance with the October 16, 1985 directive to repair or replace the damaged property or provide assurance that the claims would be adjusted. When such action was not forthcoming the Department invoked Article 11 and canceled the contract.

Pursuant to the final paragraph of State Finance Law § 179-f the required payment date was extended until such time as claimant performed in compliance with the terms and conditions of the contract. Compliance was not accomplished until February of 1997, upon the claimant's insurer's good faith adjustment of outstanding property damage claims. As the Department paid estimate #9 in the amount of $197,112.17 at that time no interest is due thereon.

The motion papers establish that the Department of Transportation accepted the contract work on June 25, 1997 and released retainage monies in the amount of $43,291 on July 16, 1997. As Highway Law § 38 (7), referenced in article 7 of the contract regarding the payment of estimates, requires the payment of retained monies upon the acceptance of work and as such monies were paid within seventy-five days of acceptance no interest is due thereon.

Finally, Highway Law § 38 (7) (g) provides as follows:
For the purpose of making a final payment on a highway construction contract, the date to be used for determining the receipt of an invoice in subdivision two of section one hundred seventy-nine-f of the state finance law shall be the date on which the contract work has been accepted as completed by the commissioner of transportation.
The final payment due under the contract was made on September 24, 1997. The seventy-five day period began to run upon acceptance of the work on June 25, 1997 and concluded on September 8, 1997. The Court finds that the claimant is entitled to interest for the period from September 9, 1997 to September 24, 1997 at the 8% overpayment rate in effect for the third and fourth quarters of 1997. Consequently, claimant is awarded the sum of $328.32.

Let judgment be entered accordingly.

February 24, 2000
Saratoga Springs, New York

Judge of the Court of Claims

The Court considered the following papers:

  1. Notice of motion dated December 3, 1999;
  2. Affidavit of Kirk M. Lewis sworn to December 3, 1999, with exhibits;
  3. Affidavit of Ernie Smalis sworn to November 29, 1999;
  4. Notice of cross-motion dated December 23, 1999;
  5. Affidavit of Gilbert A. Weber sworn to December 21, 1999, with exhibits;
  6. Affidavit of George A. Buckhout sworn to December 7, 1999, with exhibits.

[1]The caption of this claim was amended by an order of this Court filed on June 10, 1998 to make New York State the only named defendant.