A Construction Manager as a Fiduciary in New York? Maybe
In the words of iconic singer-songwriter Bob Dylan, “the times they are a-changin’.” A new case in New York may alter the legal relationship between owners and construction managers in the State. Traditionally, courts have viewed an owner and a construction manager as business partners, and their contract as an arms-length transaction between equally sophisticated parties. Indeed, the New York courts have firmly held that an owner cannot maintain an independent claim against a construction manager for breach of fiduciary duty, which alleges a violation of the duty of the utmost trust imposed on persons such as trustees, corporate officers, attorneys and estate executors. Courts routinely hold that such a claim is merely duplicative of a breach of contract claim because the relationship between an owner and a construction manager is contractually defined. Nevertheless, the U.S. District Court for the Eastern District of New York recently questioned this principle in United States v. Tishman Construction Corporation and suggested that construction managers may be headed for fiduciary status and potential tort liability.
On many construction projects today, both public and private, the owner of the subject property retains a construction management firm whose primary responsibility is to ensure that the contractors complete the work timely and in accordance with the architect’s and engineer’s drawings, specifications, and all local building codes. In addition, construction managers are often responsible for hiring and/or firing certain tradesmen, laborers, and foremen.
Under New York law, a fiduciary relationship is always fact-specific. It is grounded in a higher level of trust than normally present in the marketplace between persons involved in arms-length business transactions. As such, where parties have entered into a contract, courts look to their agreement to determine the scope of the parties’ relationship according to the contractual provisions establishing the parties’ interdependency. If the parties do not expressly and unequivocally create their own relationship of higher trust, courts in New York traditionally refuse to elevate them to a higher realm of relationship or impose a stricter duty upon them.
Enter Tishman. On December 10, 2015, the U.S. Attorney’s Office for the Eastern District of New York filed criminal fraud charges in federal court against Tishman Construction Corporation, one of the largest construction companies in New York City. Over a ten-year period, Tishman provided construction management services on several significant projects throughout New York. Tishman was largely responsible for supervising the work done by the subcontractors or trade contractors, in addition to supplying workers from the Mason Tenders’ District Council of Greater New York.
The U.S. Attorney’s Office alleged that Tishman engaged in a fraudulent scheme by overbilling clients, including government contracting and funding agencies, for hours that were not worked by the labor foremen on each project. Specifically, Tishman drafted and submitted time sheets to its clients, hours of overtime per day whether worked or not, for certain senior labor foremen; and allowing other labor foremen to take paid sick time, major holidays, and one or two weeks of vacation per year in violation of their collective bargaining agreements. Tishman entered into a deferred prosecution agreement with the U.S. Attorney’s Office, agreeing to pay more than $20 million in restitution and penalties to its clients and the federal government.
The significance of the Tishman case is best recognized in conjunction with the current trend in New York to root out fraud in the construction industry. In fact, Tishman marks the third instance of construction management fraud in the last several years. In May 2015, another large construction company entered into a non-prosecution agreement and agreed to pay more than $7 million in restitution and penalties for engaging in an eight-year fraudulent overbilling scheme. Similarly, an experienced construction management firm that was charged in April 2012 with defrauding its clients entered into a deferred prosecution agreement, and paid $56 million in restitution and penalties for engaging in a ten-year overbilling scheme. In 2010, a Manhattan construction company was indicted in State court on charges connected to an alleged scheme to inflate construction costs for interior building projects across the Tri-State area by submitting false invoices from subcontractors to developers of various building projects, and collecting the extra money through kickbacks from those subcontractors. The construction management company and three of its officers pleaded guilty to grand larceny charges and agreed to pay over $2 million in restitution. These criminal cases are notable because, as previously stated, New York law clearly provides that such business transactions should give rise to no more duties than that required by the contract. Although these cases involve criminal fraud, the jump by owners to civil fraud—a tort—is not long.
Given this recent trend, construction management firms may be held to a standard above and beyond mere contractual obligations. Other jurisdictions grappling with this issue have traditionally swayed in favor of non-recognition with respect to fiduciary relationships between owners and construction managers. In Avon Bros., Inc. v. Tom Martin Construction Company, Inc., the New Jersey Appellate Division found that a fiduciary relationship did not exist irrespective of an express provision in the contract stating that “the contractor accepts the relationship of trust and confidence” with the owner. Similarly, in Construction Systems, Inc. v. Garlikov & Associates, Inc., the Ohio Court of Appeals found that absent affirmative decision-making power or authority binding on an owner, the very essence of a principal-agent relationship, a construction manager does not owe the owner a fiduciary obligation.
To be clear, Tishman’s responsibility as a construction manager was to contract certain labor foremen and to supervise the work performed by subcontractors onsite. Indeed, the terms of the construction management contract between Tishman and its clients specifically required that Tishman bill clients for work actually performed. In theory, Tishman’s overbilling scheme gives rise to a breach of contract claim, nothing more. Tishman was not vested with the authority to approve additional subcontract work or otherwise change the project’s design such that its actions would bind the owner to those decisions. Nevertheless, New York courts are carving out exceptions to this rule by indicting construction managers for criminal fraud.
As suggested above, the million-dollar question remains: when is a breach of fiduciary claim not duplicative of a breach of contract? The answer appears to be when a construction manager engages in fraudulent practices. While the attractiveness of a breach of fiduciary claim to a disgruntled owner is readily apparent given the availability of punitive damages, a remedy not available in a breach of contract case, courts have historically and consistently denied owners such relief. If New York’s trend continues, however, the transition from criminal fraud to civil liability, and consequently breach of fiduciary duty, is inevitable. For now, construction managers should be wary of Tishman and its implications on the construction industry in New York.
