Kevin Schlosser Authors, "The Statutory Minefield of Education Law §3813" for NYLJ

Publication Source: New York Law Journal

Contractor XYZ Corp. is engaged by the ABC School District to construct new classroom space to meet the needs of its expanding enrollment. Contractor XYZ Corp. completes the project within the time requirements and submits its final invoice for payment of the remaining $250,000 in charges on the job. Three short months pass without ABC School District’s paying the final bill. May XYZ Corp. proceed with an action for damages to collect the $250,000 due? Maybe, but only if the contractor has complied with New York Education Law §3813 and has protected its rights in advance!

This article discusses §3813’s requirements for filing notices of claim, the latest developments under this sleepy statutory monster and the ways to protect a contractor and other parties dealing with school districts from the potentially fatal impact of this statute.

Most lawyers are at least aware of, if not thoroughly familiar with, the requirement that some kind of notice of claim be filed soon after the event giving rise to a claim if an action is sought to be asserted against the state or some other municipality. For example, for personal injury actions against a governmental entity, the claimant must comply with the well-known requirements of the General Municipal Law and file a notice of claim within 90 days of the date the “claim accrued.” (1)

Education Law §3813(1) is to the party who deals with a public school district what the General Municipal Law is to the injured tort plaintiff. Section 3813(1) provides a similar notice of claim requirement, as follows:

No action or special proceeding, for any cause whatever, except as hereinafter provided, relating to district property or property of schools ... or claim against the district or any such school, or involving the rights or interests of any district or any such school shall be prosecuted or maintained against any school district ... unless it shall appear by and as an allegation in the complaint or necessary moving papers that a written verified claim upon which such action or special proceeding is founded was presented to the governing body of said district or school within three months after the accrual of such claim, and that the officer or body having the power to adjust or pay said claim has neglected or refused to make an adjustment or payment thereof for thirty days after such presentment ... (2)

Thus, §3813 applies to any action that is sought to be asserted against a school district and requires that a notice of claim be served “within three months after the accrual of such claim.”

When does a claim actually start to accrue? Based upon an amendment to §3813, for all contracts entered into after July 17, 1992, “accrual of such claim shall be deemed to have occurred as of the date payment for the amount claimed was denied.”(3)

This is fairly straightforward: When the contractor’s invoice is rejected, for example, the three-month period to file a notice of claim begins to run. When its invoice is rejected, the contractor is at least on notice that it must enforce its rights in some way. The contractor (or its learned legal counsel) should be aware, however, that a notice of claim must be served on the school district to preserve the contractor’s ability to proceed with an action or proceeding to enforce its rights.

For all contracts entered into before §3813 was amended (as of July 17, 1992), the statute can be perilous for unsuspecting parties dealing with school districts. Indeed, the way the courts have interpreted “accrual” of the claim applying to such contracts, the time could expire before anyone may suspect he or she even has a claim.

For example, based upon case law at the turn of the century analyzing when a party could sue the state for damage to its crops, the courts today repeatedly hold that for all contracts initially entered into before July 17, 1992, a claim accrues under §3813 “when the claimant’s damages are ascertainable.” (4) In the overwhelming majority of these cases, the courts do not care whether there has been any breach of contract or even any right giving rise to a viable action at the time they say the claim accrues.

Invoice Submitted

In the construction contractor example above, the claim would start to accrue when the final invoice is simply submitted to the school district (and not when payment is refused) because that is when the contractor supposedly knows the amount of its “damages.” (5)

The only problem is that until the contractor is told or becomes aware of a dispute about payment of its invoice, it does not even know it has a claim upon which it must sue when it submits its last invoice. Nevertheless, the clock starts to tick at the moment the invoice is submitted, regardless of whether any breach has occurred or the school district has refused payment in any way.

Remember that §3813 applies to any action against a school district, so any party attempting to enforce a contract that was initially entered into before July 17, 1992 is at risk here. For example, the statute has been applied to claims for compensation, vacation, sick leave and other employee benefits of school personnel in addition to typical construction contracts. (6) Any employees who started their contractual relationships with the school district before July 17, 1992 may conceivably forfeit their rights because the claim could be deemed to accrue even before the school district ever refused to make contractual payments.

The lesson for anyone who deals with a school district is to consult with counsel familiar with §3813 as soon as possible. The lesson for counsel with any client who deals with a school district in any way is to be vigilant in setting deadlines and keeping track of the three-month period to serve a claim.

Contracts that were initially entered into before July 17, 1992 but continue to be performed thereafter will still be judged by the accrual standard that applied prior to the amendment of §3813.

For clients in the construction field, a key date is the day that the last invoice is submitted, not when it is rejected. Other events must also be carefully analyzed for any possible claim in the offing so that the three-month period can be ascertained. Any indication that there could be a dispute on the job should be given immediate attention by counsel.

Approved Late Claim

Subdivisions 2-a and 2-b were added to §3813 to ameliorate its harsh impact by authorizing the court to extend the time to serve a notice of claim, even after an action encompassed within §3813 has been commenced. (7) In determining whether to permit a late filing, the statute directs a court to consider: whether the district or school or its attorney or it insurance carrier or other agent acquired actual knowledge of the essential facts constituting the claim within the time specified in subdivision one of this section or within a reasonable time thereafter. The court shall also consider all other relevant facts and circumstances, including: whether the claimant was an infant, or mentally or physically incapacitated, or died before the time limited for service of the notice of claim; whether the claimant failed to serve a timely notice of claim by reason of his justifiable reliance upon settlement representations made by an authorized representative of the district or school or its insurance carrier, whether the claimant in serving a notice of claim made an excusable error concerning the identity of the district or school against which the claim should be asserted; and whether the delay in serving the notice of claim substantially prejudiced the district or school in maintaining its defense on the merits.(8)

The court cannot, however, extend the time to file a late notice of claim past the statute of limitations period for such actions. Under §3813 subdivision 2-b, the limitations period is one year from the time the “cause of action arose.'

Note that the one-year limitation period for serving a late notice of claim may not have the same trigger date as the one for serving the notice of claim in the first place. That is, while the three-month period to serve a notice of claim starts upon “accrual of the claim,” the time limitation for serving a late notice starts on the date the “cause of action arose.” (9)

For contracts entered into after July 17, 1992, the claim and the cause of action are likely to start at the same time: when payment is refused, because that is probably when the “breach” of the contract occurred. Therefore the “late” — but approved — notice of claim must be served within one year from the date payment is denied.

For contracts entered into before July 17, 1992, however, as noted by many courts, while the cause of action does not arise until some type of breach by the school district, the claim “accrues” when “damages are ascertainable.” (10) Thus, it is quite conceivable that the one-year period for serving a late notice could extend for more than one year past the date the “claim accrued.”

Once again, counsel must be alert in monitoring this additional deadline, ascertain when the contract was initially entered and preserve the opportunity to take advantage of the “second life” afforded by these amendments.

Recent Developments

As noted above, for all contracts entered into before July 17, 1992, courts continue to adhere to the “ascertainment of damages” rule despite its tortured genesis. (11) While the Second Department has continued to follow the ascertainment of damages analysis, it has apparently recognized the rule’s harsh (and at times unfair) results and has recently found ways to ameliorate that impact.

In Pope v. Hempstead Bd. of Educ. (12), for example, the court held that a letter from plaintiff’s counsel “constituted substantial compliance with the notice of claim requirement, despite the fact that it was not verified, because it contained a sufficient degree of descriptive detail and was adequately served upon the defendant.” (13)

Just recently, the Second Department expanded Pope even further in Hygrade Insulators Inc v. Bd. of Educ. of the Middle Country Central School Dist. (14)

In Hygrade, the contractor submitted its last invoice and then engaged counsel located in New Jersey (apparently unfamiliar with §3813) when the school district raised some question as to the contractor’s entitlement to full payment, no notice of claim was filed at that time.

Subsequently, the defendant contended that the formal notice of claim was too late because it was served more than three months after the last invoice. At the trial level, the court dismissed defendant’s affirmative defense of late notice of claim, finding that defendant was estopped from asserting that defense based upon its misleading conduct in refusing payment.

On appeal, the Second Department rejected the lower court’s estoppel ruling, but nevertheless affirmed the dismissal of the defense. The court declined the contractor’s invitation to rewrite the “ascertainment of damages” rule, finding that its damages “were clearly ascertainable” when it submitted its final invoice — regardless of whether there was any breach of the contract at that point. The formal notice of claim served more than three months later was, therefore, deemed untimely.

Nevertheless, the Second Department found that the final invoice itself “constituted a timely notice of claim as it substantially complied with the requirements of a notice of claim and was adequately served upon the defendant.” The court noted that the 'invoice provided 'the necessary information as to the nature of the claim, the time when it arose, the amount sought and how such amount was calculated.' ' (15)

These recent case developments show that the courts recognize full well the undesirable effects of the “ascertainment of damages” rule and have therefore devised ways to obtain fair results while still adhering to the rule.

Although the contract in Hygrade was entered into before July 1992, the analysis as to how a school district can be notified of a claim could apply equally to cases involving later contracts where a contractor or its counsel was not aware of the short three-month period to serve notice of its claim or unknowingly lets the time lapse — even where the accrual starts from the date payment was refused. Counsel would do well to take full advantage of these new developments.

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The 'ascertainment of damages' rule can be traced roughly back to a 1921 Third Department decision in an appeal from the Court of Claims,Dufel v. State, 198 AD 97, 189 NYS 759, (3d Dep’t 1921), later cited and followed by the Court of Appeals. Among other arguments on appeal In Dufel, the state argued that the claimant did not file its notice of claim within the six-month period provided by the Code of Civil Procedure (the CPLR’s predecessor). The claimant alleged that its crops were damaged when the state closed a dam in the Mohawk Valley. The Third Department analyzed several older Court of Appeals cases on the accrual of the statute of limitations and held that the accrual of a “claim” is different:

The expression “claim accrued” is not identical with the expression “cause of action accrued.” The claim accrues when it matures, and the words “claim accrued” have the same meaning as “damages accrued.”

...The injury to crops is an injury to the season’s crops, and it is a fair construction of this statute that his claim for injury to crops and for the use of crop lands accrues during the crop season and is accrued at the end of the season. It is then, and only then, that his damages and his claim have matured — have accrued. Not until then can he know the conditions of the season, the rains or drought, to what extent his lands would be overflowed and made sour and wet by water seeping through the flat lands and passing through the drains which he had placed in his lands under higher ground to lower ground.

Thus, the rule appears to have been developed from case law relaxing the time deadline for filing a claim against the state under the CPLR’s predecessor so that a claimant’s time to file was not deemed to start until its damages were ascertainable — even if the wrongful act giving rise to the claim occurred earlier. Nevertheless, most courts today apply the rule (to contracts entered into before §3813 was amended) without regard to its purpose or inception, which, as noted above, can have some very unfair results.

Some courts have recognized the irrational or undesirable impact of applying the “ascertainment of damages” rule to §3813. Ia attempting to give lip service to the rule, but applying it with common sense, some decisions have concluded that the claim accrues when the contractor is notified by the school district (or should have known) that its invoice has been refused or rejected. Chem Constr. v. Bd. of Educ.of the City of New York, 105 Misc2d 980, 430 NYS2d 771 (Sup.Ct. Kings Co.1980); Leith Constr. Co. Inc. v. Bd of Educ.of the City of New York, 75 AD2d 615, 427 NYS2d 60 (2d Dep’t 1980). In Chem Constr. v. Bd. of Educ. of the City of New York, for example, the court astutely observed that the time to serve a claim “must await a subsequent rejection or disavowal (of the invoice) ... Otherwise, every request for payment or change order, or extra work performed by a contractor would require the claimant to serve a separate notice of claim simultaneously therewith or upon completion of the specific work in question without regard to whether the item is in dispute or not, a result which would seemingly not be Intended by §3813.” Chem Constr., 105 Misc2d at 983, 430 NYS2d at 773.

The First Department, however, has expressly rejected this analysis (but not without a compelling dissent). Prote Contracting Co. Inc v. Bd. of Educ. of the City of New York, 179 AD2d 621, 567 NYS2d 687 (1st Dep’t 1991).

As noted above, the 1992 amendment to Section 3813 eliminated the unfair “ascertainment of damages” rule altogether and set the accrual of the claim at the time when payment was, indeed, actually refused.