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July 19, 1990


The opinion of the court was delivered by: McCURN, Chief Judge.



This action arises out of a contract entered into in 1984 by the Town of Saugerties and a contractor, D'Annunzio Constructors Corp. ("D'Annunzio" or "contractor"), for the construction of a sewer project in the town. Disputes over performance of the contract developed between the town, D'Annunzio, and Employers Insurance of Wausau ("Wausau"), the holder of a performance bond on which D'Annunzio was the principal and the town the obligee. The disputes culminated in two lawsuits that have been consolidated and are now before the court.

In counterclaims against the town, the defendants D'Annunzio and Wausau seek recovery of a sum of money they contend they are owed under a change order in the contract, and/or recovery in quantum meruit for services rendered to the town. The town now moves for summary judgment dismissing the counterclaims on the ground that the defendants failed to comply with Section 65(3) of the New York Town Law, which requires that a party bringing a contract action against a town must first file a notice of claim with the town within six months of the accrual of its cause of action, and must not commence the action until 40 days have elapsed from the filing of the notice of claim.

The defendants argue that a timely notice of claim was filed with the town, and that, in addition, Section 65(3) does not apply to those counterclaims which seek quasi-contractual remedies. The defendants cross-move for leave to amend their counterclaims to include an allegation that a timely notice of claim was filed, and for the court to deem that the 40-day waiting period for commencement of their action has passed.


On June 25, 1984, the plaintiff, Town of Saugerties, entered into a contract with defendant D'Annunzio for the construction of a sewer project. In connection with the contract, defendant Wausau, as the surety, issued performance and payment bonds on behalf of the contractor, as principal, and in favor of the town, as obligee. The parties agree that the contractor entered into performance of the contract, and that disputes eventually arose over, among other things, the contractor's contention that certain subsurface conditions unknown to the parties at the time of contracting made it impossible for the contractor to complete the contract as originally agreed.

On November 22, 1985, the contractor commenced an action in this court against the town, seeking damages for (1) moneys due but unpaid under the contract; (2) extra work performed at the request of the town; and (3) interference and other acts by the town including the careless and negligent preparation of plans and specifications for the contract. See Wallach affid., Exh. 1. On or about December 20, 1985, the town commenced an action against defendant Wausau, as surety on the performance bonds. Around this time, the contractor stopped work on the project.

Negotiations began between the town and D'Annunzio toward resolution of the disputes and the two pending lawsuits. As a result of the negotiations, the town and D'Annunzio entered into a change order, known as Change Order 3-12. The important alterations made by the change order were that the time to complete the contract was extended to December 1, 1987, and that the contract was changed from a unit price contract to a stipulated sum contract, with the contract amount set at $3,600,000.00. At the same time, attorneys for the town, D'Annunzio, and Wausau entered into a stipulation signed as "so ordered" by the court and dated September 5, 1987, which, among other things, provided for the dismissal of the two lawsuits upon completion of the work to be performed under the contract, including Change Order 3-12. The contractor then resumed work on the sewer project.

The contractor submitted estimates for payment to the town in October and November 1987. Estimate No. 20, submitted in November, showed that the value of the work completed was $3,600,000.00, the total contract amount. The town, however, withheld payment of approximately $427,000, because it contended the contractor did not comply with the plans and specifications of the original contract or with Change Order 3-12. Couch affid., para. 21. Nevertheless, the sewer system is functional, and has been used by the town since December 1987.

  Through 1988, the town and contractor continued to meet and
exchange correspondence regarding work the town felt was
required to complete the contract, and the disposition of the
$427,000 withheld by the town. For example, in a May 17,
1988, letter from Mr. Wallach, the attorney for the
defendants, to Mr. Couch, attorney for the town, Mr. Wallach
refers to a meeting at which a settlement proposal was

   . . The work under the contract has long been
  completed, the sewer system has been in operation
  for quite some time, and the Town is holding in
  excess of $428,000 in contract balances and
  retainages for reasons which remain unclear to
  me. At the meeting on March 31, 1988 among
  representatives of the Town, D'Annunzio and
  surety, we made what we believed, and still
  believe, to be a fair, reasonable and practical
  proposal, namely, that the Town agree to take a
  $60,000 total credit against the $428,000
  remaining to be paid under the contract for all
  its claims, including, but not limited to, claims
  for incomplete and defective work, punchlist
  items, prospective maintenance, and engineering
  costs. . . .

Couch affid., Exh. F.

In a letter dated September 8, 1988, from Mr. Wallach to Mr. Couch, Mr. Wallach states:

    The time has come for a decision by the Town
  with respect to our most recent, and ...

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