P.E. Smith Associates, Inc. v Bandoian; Bandoian v Smith
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Attorneys and Parties
Brief Summary
Residential construction and architectural services dispute over extra work charges, contract enforceability, credits for owner-paid project costs, and related fraud, trust fund, and veil-piercing claims.
After a nonjury trial, the Supreme Court held that the homeowners breached the renovation contract by failing to pay $156,228.41 in extra costs, that the contractor did not have to refund a $146,000 credit, and that the homeowners failed on their claims under General Business Law § 771 [sets forth a number of requirements for home improvement contracts], Lien Law §§ 70, 71, and 71-a [New York construction trust fund provisions governing the use and diversion of project funds], fraud, and alter ego liability.
The Appellate Division reversed the award of $106,000 to P.E. Smith Associates, Inc. and reinstated the homeowners' breach of contract counterclaim based on the contractor's failure to refund the $146,000 credit, entering judgment for the homeowners in the principal sum of $40,000.
Although the contractor could charge for verbal change-order work because the parties waived the writing requirement by their conduct, the undisputed $146,000 credit for costs the homeowners had advanced exceeded the extra costs claimed. Therefore, the contractor failed to prove it was still owed money, and the credit had to be offset against the extras. The appellate court otherwise agreed that the contract remained enforceable despite technical noncompliance with General Business Law § 771 and that the fraud, Lien Law, and alter ego claims were not proven.
Background
Kevin and Melissa Bandoian first hired architect Peter E. Smith in 2000 for plans to renovate their Cold Spring Harbor home. They later learned Smith also owned P.E. Smith Associates, Inc., which entered into a 2002 construction contract to perform the renovation. During the project, the Bandoians verbally requested numerous changes and additions. They also directly paid certain material and service costs that otherwise would have been borne under the construction arrangement, and Smith credited them $146,000 for those advances. Before the project was completed, Smith Associates billed the Bandoians $156,228.41 for extra costs arising from the requested changes. The Bandoians refused to pay, asserting they had already overpaid. Smith Associates sued for breach of contract, and the Bandoians counterclaimed for breach of contract and under Lien Law article 3-A. They also brought a separate action against Smith, Smith Associates, and P.E. Smith Architecture, P.C. for, among other things, fraud and alter ego liability.
Lower Court Decision
The Supreme Court, Suffolk County, found after a bench trial that Smith Associates had a valid home improvement license and that the renovation contract was enforceable. It ruled that the parties had effectively waived the contract clause requiring written change orders, so the Bandoians were obligated to pay for verbally requested changes. The court therefore awarded Smith Associates $106,000, dismissed the Bandoians' counterclaims alleging breach of contract and violations of Lien Law §§ 70, 71, and 71-a, and dismissed their fraud and alter ego causes of action in the separate action.
Appellate Division Reversal
The Appellate Division modified the judgment. It agreed that the contractor was licensed, that the home improvement contract was not unenforceable merely because it did not strictly comply with General Business Law § 771, and that the written change-order requirement had been waived by the parties' course of conduct. But it held that the Supreme Court should have found Smith Associates in breach for failing to refund the undisputed $146,000 credit. Because that credit exceeded the extra costs claimed, Smith Associates did not prove any net amount due. The court therefore deleted the $106,000 award to Smith Associates, reinstated the Bandoians' breach of contract counterclaim regarding the credit, and entered judgment for them against Smith Associates in the principal amount of $40,000. It otherwise affirmed dismissal of the Lien Law, fraud, and alter ego claims.
Legal Significance
The decision confirms that a residential home improvement contract may remain enforceable even if it does not strictly comply with General Business Law § 771 [sets forth a number of requirements for home improvement contracts], so long as the evidence shows a meeting of the minds and the omissions did not induce the homeowners to enter the contract. It also reinforces that a contractual clause requiring written change orders can be waived through the parties' conduct, making an owner liable for orally requested extras. At the same time, a contractor seeking payment for extras must account for any undisputed credits or owner advances; where the credit exceeds the extras, the contractor cannot recover a net award. The case also illustrates the proof required to sustain claims under Lien Law §§ 70, 71, and 71-a [New York construction trust fund provisions governing the use and diversion of project funds], fraud, and alter ego liability: actual injury, inducement, and misuse of domination to commit a wrong must be shown.
Contractors can recover for orally approved extra work when both sides have waived a written change-order clause by their conduct, but they cannot ignore credits owed to homeowners. Here, the homeowners still won a $40,000 judgment because their undisputed $146,000 credit more than offset the claimed extras.