{"id":904102,"date":"2025-03-18T16:00:21","date_gmt":"2025-03-18T22:00:21","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=904102"},"modified":"2025-03-18T16:00:24","modified_gmt":"2025-03-18T22:00:24","slug":"nonrecourse-provision-bars-most-claims-except-fraud","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/nonrecourse-provision-bars-most-claims-except-fraud\/","title":{"rendered":"Under New York Law a Recourse Provision Bars Most Claims Except for Fraud"},"content":{"rendered":"\n

Bill Wilson | Construction Law Zone<\/a><\/p>\n\n\n\n

In\u00a0Iberdrola Energy Projects v. Oaktree Capital Management L.P.<\/em>, 231 A.D.3d 33, 216 N.Y.S.3d 124,<\/a>\u00a0the Appellate Division for the First Department ruled that a nonrecourse provision in a contract barred a plaintiff\u2019s causes of action for tortious interference with contract, unjust enrichment, and statutory violations of a trade practices statute, but not for fraud.<\/p>\n\n\n\n

This case arose from a contract related to the construction of a power plant in Salem, Massachusetts. A choice-of-law provision dictated that the contract was governed by and construed in accordance with New York law. Defendants created a special-purpose entity (SPE) to serve as the company charged with constructing the new plant. Defendants owned, controlled, and managed the SPE and were the SPE\u2019s majority and controlling equity holders. The majority of the SPE\u2019s board of directors and officers were also defendants\u2019 employees. The SPE retained plaintiff to be the project\u2019s engineering, procurement, and construction contractor.<\/p>\n\n\n\n

The contract permitted the SPE to terminate the contract for convenience or for a material breach by the contractor. In the event of termination for cause, the owner would incur substantial payment obligations; a termination for convenience would not. The contract required the contractor to post a standby letter of credit in the amount of approximately $140 million as security for the contractor\u2019s performance. The owner was permitted to draw on the letter of credit only \u201cupon any Contractor\u2019s breach or failure to perform, when and as required, any of its material obligations under the Contract.\u201d The contract contained a nonrecourse provision that provided that,<\/p>\n\n\n\n

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[Owner\u2019s] obligations hereunder <\/a>are intended to be the obligations of Owner and of the corporation which is the sole general partner of Owner only and no recourse for any obligation of Owner hereunder, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director or Affiliate, as such, past, present or future of such corporate general partner or any other subsidiary or Affiliate of any such direct or indirect parent corporation or any incorporator, shareholder, officer or director, as such, past, present or future, of any such parent or other subsidiary or Affiliate.<\/p>\n<\/blockquote>\n\n\n\n

The project was plagued with delays and cost overruns. When the project was 98% complete, the SPE terminated for cause. The SPE drew the $140 million afforded by the letter of credit, retained a replacement contractor, and completed the remaining work. The original contractor filed for arbitration against the SPE, claiming that the SPE breached the contract, engaged in tortious conduct, violated the Massachusetts Unfair Trade Practice Act, and sought $700 million in damages. The SPE appeared in the arbitration proceeding and asserted counterclaims.<\/p>\n\n\n\n

The arbitration panel determined, among other things, that the SPE lacked cause to terminate the contract and that it terminated the contract as a pretense to draw on the letter of credit and issued a final award in the contractor\u2019s favor for $236,404,377. That award was confirmed in New York, and the SPE filed for bankruptcy. The original contractor filed a civil action in New York, bringing the same claims against the defendants, but all counts except for fraud were dismissed based on the nonrecourse provision.<\/p>\n\n\n\n

The New York lower court enforced the plain meaning of the nonrecourse provision, which sophisticated commercial parties negotiated. The nonrecourse provision is a contractual limitation on liability, which, like other exculpatory clauses, is generally enforceable provided it does not violate a statute or run afoul of public policy. The court determined the provision to be \u201cas broad as it is clear: no liability could be imposed upon various individuals and entities for \u201cany claim based on the contract or otherwise in respect thereof.\u201d Plaintiff\u2019s causes of action for tortious interference with contract, unjust enrichment, and violations of Massachusetts\u2019s deceptive trade practices statute were all hinged or predicated on conduct taken under or in contravention of the contract. Since these causes of action were all related to or connected with the contract, they were all barred by the nonrecourse provision. The court showed no sympathy for the plaintiff contractor and its likely inability to recover any part of the judgment it was holding. The plaintiff knew it was entering a very large contract with an SPE and should have known of the breadth of the nonrecourse provision. The takeaway appears to be: Beware of nonrecourse provisions with SPEs.<\/p>\n\n\n\n

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When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net<\/a>.<\/strong><\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Bill Wilson | Construction Law Zone In\u00a0Iberdrola Energy Projects v. Oaktree Capital Management L.P., 231 A.D.3d 33, 216 N.Y.S.3d 124,\u00a0the Appellate Division for the First Department ruled that a nonrecourse provision in a contract barred a plaintiff\u2019s causes of action for tortious interference with contract, unjust enrichment, and statutory violations of a trade practices statute,… Continue reading Under New York Law a Recourse Provision Bars Most Claims Except for Fraud<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[9],"tags":[9895,224,12147],"class_list":["post-904102","post","type-post","status-publish","format-standard","hentry","category-construction-contracts","tag-advise-consult","tag-construction-contract","tag-nonrecourse-provision","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nUnder New York Law a Recourse Provision Bars Most Claims Except for Fraud - 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