Saturday, September 28, 2013

Quick Construction Contract Tips: Sometimes its OK to Suspend Work for Non-Payment (even if your contract says its not...)

One of the most common responses to non-payment under a construction contrat is almost human nature:  don't pay me and I'll stop working.  But can you?  Some contracts, if not many, say that a contractor may not suspend work even if he or she has not been paid.  Luckily for contractors in New York, the legislature has given them protection against these clauses.  Specifically, Section 757 of the General Business Law says some contract clauses are void, including:

   2. A provision, covenant, clause or understanding in, collateral to or affecting  a  construction contract stating that a party to the contract cannot suspend performance under the contract if another  party  to  the contract fails to make prompt payments under the contract.

Now this doesn't mean that you can simply walk off the job the first day a payment is "late."  There are two important things to remember when attempting to use Section 757:  First, we have to determine whether another party has failed to make "prompt payment."  Just what is "prompt payment" in a construction contract?  You can look two places: the contract itself and the rest of the Prompt Payment Act in G.B.L. Article 35E.  Second, Section 757 of the GBL only voids the provision prohibiting suspension in the event of non-payment, it does not say that the unpaid contractor may abandon the job.  So while work may be suspended, the contractor would have to return upon cure of the failure to make "prompt payment."  
As always, make sure you read, and understand your contract before signing it and before taking a drastic action like suspending work.  
Vincent T. Pallaci is the managing partner of the New York law firm of Kushnick | Pallaci PLLC where his practice concentrates on construction law.  With offices in the New York City metropolitan area and Buffalo, KP serves the construction industry across the State of New York.  

Sunday, June 16, 2013

Construction Contract Tip: Attorneys' fees are not recoverable, unless...

One of the biggest drawbacks to litigation, or even arbitration, is the cost associated with attorneys.  In New York, a corporation or an LLC must have an attorney in litigation.  Corporations and LLCs are not permitted to represent themselves in Court in the State of New York.  This leads to a difficult decision one a dispute develops on a construction project: is it cost effective to proceed to litigation or should I just cut my losses?  Take for example a $4,500 dispute.  Because it is under $5,000, you can proceed (in most counties) through small claims court.  Small claims court is not overly expensive.  You can typically pay all of the fees and even hire an attorney to handle the hearing for you fairly cheaply.  Even if you are sitting in court for 4 hours the day of the hearing you probably still will not pay more than $1,500 for everything (fees included).  But that is still 1/3 of your money.  A claim for more than $5,000 and you are proceeding to the Civil Court (in NYC), the District Court (on Long Island) or perhaps the County Court (upstate).  Much more than $5,000 and you could end up in Supreme Court.

Litigation in the Courts means Court appearances, depositions, pleadings, motions and discovery.  That means lots of time for attorneys and lots of money spent.  Complex construction litigation can easily cost more than $100,000.  Even basic uncomplicated litigation (if such a thing exists) can easily cost over $10,000.  It is with these smaller amounts that there is what I call a gray area.  If you are owed $20,000 do you really want to spent $18,000 to recover it?  Keep in mind there are no guarantees.  You could spend $18,000 and lose.  You could spend $18,000 and win but be left with an collectible judgment.  What if you spend $21,000 to recover the $20,000?  It easily gets to the point where it is not cost effective to proceed.

But if you win at the end of the day you get all your costs back right?  WRONG.  New York follows the "American Rule" whereby all parties to litigation absorb their own costs.  This means even if you win, even if you were 100% right and should have never had to litigate, you eat your own costs.  Doesn't seem fair right?  Well, luckily, there is an option.  While the default rule is you pay your own fees, you can change that rule by contract.  So, first things first, make sure you have a written contract!  The days of the handshake agreement in construction should be long gone.  A written contract is essential to protecting your rights.  Even the most well intentioned contractor can have things go wrong and you need protection.  Now that you have your written contract, you simply need to insert a provision that says the prevailing party is entitled to recover its attorneys fees from the other party.  That's it.  If you win, you can recover your (reasonable) attorneys' fees. With an attorneys' fee provision in your contract it is now much easier to decide to chase after that $20,000 debt.  It also makes the pain of long drawn out (and expensive) litigation a bit less.

There is another advantage to an attorneys' fee provision aside from merely recovering your fees.  Sometimes there is an unwritten rule that the best defense for a party with no real defense is to try and "outspend" the opponent.  Parties will think twice about dragging out questionable litigation and driving up your costs if they know that they will be paying those costs back at the end of the day (in addition to paying their own costs).  Of course there is a downside: if you are the one in the wrong you may be the one stuck paying fees.  But it is a risk that you have to decide and weigh.

Vincent T. Pallaci is a partner with the New York law firm of Kushnick | Pallaci, PLLC.  With offices in Buffalo and the NYC Metro area, KP provides legal services to the construction industry across the State of New York.

Sunday, May 19, 2013

New York Construction Collections

Collection is a part of every business, but in the construction industry it sometimes seems like collection is 90% of the business with 10% devoted to the actual construction.  If you plan for collection from the beginning, you will significantly increase your chances of recovering the money you are due.

Step One

Plan for collection in your contracts.  The default rule in New York is that parties to litigation bear their own attorneys' fees unless the contract (or a statute) provides otherwise.  In your garden variety payment dispute no statute exists in New York that would provide you with an attorneys' fee award.  Therefore, your contract should provide that you can recover your costs of collection, including reasonable attorneys' fees, in the event you have to pursue litigation or arbitration.

Your contract should also explicitly state when payment is due.  You should be permitted to suspend work in the event you are not paid within a reasonable number of days after payment is due (e.g. 10 days) and charge interest at a reasonable rate (e.g. 1% per month) on all unpaid amounts.

One other area to consider in your contract stage is whether you are going to require a personal guarantee.  Personal guarantees will significantly increase the odds that you are able to recover any unpaid amounts.  Personal guarantees are more common in material supplier contracts than labor subcontractors but remember: contracts are a negotiation anything is possible if you ask.

Step Two

Actively monitor accounts and put a procedure in place for addressing unpaid balances.  This ties into your contractual obligations and helps to make sure you do not miss deadlines.  Your contract probably provides that you must provide notice before any steps can be taken to pursue a claim or suspend work.  Before you can send a notice you have to know that payment is past due.  Surprisingly, many in the construction industry will not do anything within the first few days of payment being bast due.  This is a mistake.  Once payment is past due, a notice should go out immediately to the debtor.  If applicable, the notice can go to those above it in the contract chain as well (e.g. the owner or general contractor).  Pre-lien notices are not required in New York like they are in other states but that does not mean that a letter right after payment is due is useless.

At this stage you also need to determine whether your project is covered by New York's prompt payment act.  If it is, there are additional obligations and rights for both creditor and debtor.  For example, if the debtor is not paying your full invoice, he must provide you with written notice within 10 days explaining why. The prompt payment act also provides for expedited arbitration.

If your payment letter goes ignored, its time to kick up the heat and move on to step three.  Remember, when it comes to construction collections there is a delicate balance.  You don't want to put on the pressure too soon because it could interrupt the project and cause bigger problems and could also damage valuable business relationships.  At the same time, you don't want to wait too long because a number of rights (explained below) could be impaired.

Step Three

Once the payment letter fails to trigger payment, you have three options to increase the pressure.  You can pursue one or all three and pursue them at the same time or in any order.  First, you have mechanic's lien rights and should exercise them at the proper time (see Article "To Lien or Not to Lien: That is the Question".  A mechanic's lien must filed within 4 months on a single family home, 8 months on any other commercial project, 30 days of completion and acceptance on a public project and 90 days for retainage.  A mechanic's lien puts pressure on everyone above you in the contract chain and usually provides security for your payment.

Second, if there is a payment bond, you should submit a payment bond claim.  Every bond is different in terms of how notice must be served and upon whom it must be served.  However, every bond has a provision stating that notice must be provided within X days of the claim going unpaid.  To be safe, a payment bond claim notice should go out on every project once payments are past due 30 days.

Third, exercise your rights under Article 3A of the Lien Law.  Article 3A is probably the must underutilized set of tools for construction collection.  Most people will immediately defer to their lien rights or to rights under a payment bond.  But liens and bonds don't always shake money loose.  Article 3A can be the biggest stick in the tool box.  Consider this: Article 3A provides for personal liability of corporate principals, potential punitive damages and attorneys' fees awards.  And don't forget, Article 3A liability is not dischargeable in bankruptcy.  Exercising your Article 3A rights means acting fast.  The first move is to serve a demand under Lien Law Section 76.  From there, your must file your 3A lawsuit within 1 year of the time that you completed the project (or if you are a subcontractor from the time that the GC completed the project).

Step Four

When all else fails, its time to commence litigation.  In construction litigation all attorneys are not created equally.  Some attorneys specialize in personal liability, others in bankruptcy, some in criminal law and, of course, some in construction.  Don't expect that because you know an attorney that he or she is the best for your construction collection claim.  An attorney with experience and knowledge of New York construction law will be able to most effectively utilize the Lien Law, including mechanic's liens and Article 3A, as well as the Prompt Payment Act (and a few other tricks of the trade) to maximize the chances you recover on your unpaid debt. Remember, don't wait - liens must be foreclosed upon within 1 year of filing and 3A trust diversion claims must be brought within 1 year.

Vincent T. Pallaci is a partner with the New York law firm of Kushnick Pallaci, PLLC where his practice concentrates on construction law.  With offices in Long Island and Buffalo, New York, KP provides counsel to the construction industry in every county in New York.

Thursday, May 9, 2013

Monday, April 22, 2013

Insurance Provisions and Issues for the New York Construction Industry

Navigating your insurance rights, duties and obligations in the New York Construction Industry can be difficult. For those without in house counsel, contractual insurance obligations and indemnification obligations may be difficult to understand. When risk is not understood, it cannot be effectively priced leading to potential problems down the line where more risk was taken on than the contract price justifies. It can also be difficult (if not near impossible) to understand some of the insurance policies that are written to construction professionals in New York. This informational presentation will hopefully guide you through some of the more common and complex issues that confront the construction industry on a day-to-day basis:

Kushnick Pallaci, PLLC is a full service law firm serving the construction industry across the State of New York from its Buffalo and Long Island offices.