Commercial Division Blog

Posted: September 13, 2016 / Categories Commercial, Contracts

NYC Not Obligated to Pay for Work Done Under Improperly-Granted Contract

On August 26, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Michael R. Gianatasio, PE, P.C. v. City of New York, 2016 NY Slip Op. 26270, holding that New York City was not obligated to pay for work done under an improperly-granted contract.

In Michael R. Gianatasio, PE, P.C., the plaintiff brought claims relating to a contract under which it had done work for the City of New York. Even though the plaintiff had performed work under the contract, the court granted the City's motion to dismiss the plaintiff's claim to be paid for the work it had done, explaining:

There is no doubt that the City acted unlawfully and treated MRG unfairly. The City failed to pay MRG more than $1.5 million for work done and money outlaid. ACS begged MRG to expedite a public policy driven project and now refuses to pay all that it owes MRG. Nonetheless, despite the inequities here, there is clear, binding precedent that precludes this court from enforcing the Contracts against the NYC Defendants. As the First Department recently held in a case where, as here, the subject contract did not comply with procurement requirements, the contract is unenforceable and estoppel against the municipality is unwarranted. It does not matter that the municipality or its agents violated the law. The very purpose of prohibiting the enforcement of illegal contracts with municipalities is to protect the public from corrupt or ill-considered actions of municipal officials. That is why, as noted earlier, those dealing with municipal agents must ascertain the extent of the agents' authority, or else proceed at their own risk. As the NYC Defendants correctly note, MRG proffers no case where the government was estopped from preventing the enforcement of an agreement that violates statutorily required competitive bidding. Cases such as Casa Wales and Henry Modell & Co. demonstrate that the sort of estoppel argument proffered here will not overcome the Contracts' illegality.

There is, of course, intuitive appeal in declaring the instant situation manifestly unjust. However, if estoppel would apply here, it would likely apply in all situations where the City refused to make payment on an unbid contract that was partially performed and where the work was properly and timely done. Such a conclusion cannot be squared with the cited case law. To be sure, estoppel based on manifest injustice has been found outside of the contractual context, such as in Bender, 38 NY2d at 665-66, where the city misled plaintiff about where its notice of claim was to be filed under a new statutory scheme; in Rudey v Landmarks Pres. Comm'n of City of New York, 182 AD2d 61 (1st Dept 1992), aff'd 82 NY2d 832 (1993), where the Landmarks Preservation Commission was estopped from preventing an apartment owner from replacing windows after obtaining permits from the Department of Buildings; and in Landmark Colony, 113 AD2d at 744, where Nassau County was estopped from fining a company that illegally began construction where the company was more a victim of bureaucratic confusion and deficiencies than the perpetrator of an inexcusable violation. This is not a comparable situation. This is a classic case where the Contracts were entered into illegally due to failure to comply with bidding and procurement regulations. Finding estoppel here due to the City's culpability would result in the estoppel exception swallowing the rule because virtually all similar illegal contracts involve wrongdoing on the part of a city agency.

Nor can the fact that ACS paid MRG approximately 66% of the amounts owed under the Contracts constitute a ratification. MRG correctly contends that partial payment can constitute ratification by a municipality of an otherwise legal contract entered into without authorization. However, an illegal contract cannot be ratified.

(Internal quotations and citations omitted).