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.

New York Contractors Don't Miss Out on Getting Paid!

The biggest mistake contractors make is missing key deadlines for securing their payment rights.  Lien deadlines, payment bond deadlines and short lawsuit statutes of limitations are critical to securing your ability to recover payment.  This guide can help prevent you from missing the key payment deadlines.  

Material Supplier Clobbers Surety Under Payment Bond in Third Department

In Erie Materials, Inc. v. Universal Group of N.Y., Inc. a material supplier brought a claim under a payment bond issued pursuant to State Finance Law Section 137.  After discovery, the material supplier filed a motion for summary judgment against the surety that issued the payment bond.  The trial court found that the surety established a prima facie case that the materials were delivered and were not paid for.  In opposition, the surety argued that there were issued of fact at as to whether the materials for which the plaintiff sought payment were "actually delivered to and used on the project site."  However, the Appellate Division ruled that "we have never required a supplier to demonstrate that it actually delivered the materials to the project site in order to recover on a bond pursuant to State Finance Law Section 137."  Therefore, the fact that materials were later diverted away from the site by the contractor was not a defense to the material supplier's claim against the payment bond.

The icing on the cake for the material supplier was that the trial court awarded it attorneys' fees and the Appellate Division refused to disturb the award.  The decision noted that the surety "aggressively defended against plaintiff's entire claim, although only a relatively minor portion thereof was actually in dispute."  This case could be a stark warning to New York sureties to beware how they approach defending a payment bond case.  While many defendants in New York will try the defense of "outspending the plaintiff", the surety takes that course at its own risk because it may be hooked for attorneys fees.

Vincent T. Pallaci is a partner at the law firm of Kushnick | Pallaci, PLLC. With offices in Long Island and Buffalo, New York, Kushnick | Pallaci, PLLC offers legal services to the construction industry across the State of New York.

The Miller Act and the Little Miller Act: What New York Contractors Need to Know

Have you ever worked on a public construction project for the federal government?  How about a public construction project for the State of New York or even a local municipality? If so, then you may know that you cannot file a traditional mechanic's lien (that attaches to the property). In New York, you can file a mechanic's lien against the public fund, known as a lien on a public improvement.  But on a federal project, you cannot file any type of mechanic's lien.  Instead, public construction projects, both federal and state, almost always give contractors, suppliers, materialmen, etc. the protection of a payment bond.  These bonds are posted thanks to the Miller Act (federal projects) and its little brother in New York, often colloquially referred to as the "little Miller Act", found in State Finance Law Section 137.  Here is what anyone working on a construction project within the State of New York needs to know about protecting itself from non-payment and protecting its payment bond claim.

The Miller Act

The Miller Act, enacted in 1935, protects subcontractors and material suppliers on any public construction project of $100,000 or more in the United States.  The Miller Act requires the posting of a bond, known as a payment bond, that provides the subcontractor or material supplier with protection against non-payment.  In essence, the payment  bond will guarantee that if the subcontractor or material supplier performed its work properly, and was not paid by the general contractor for any reason, the surety that issued the bond will step in and make the payment.  You probably noticed that I did not mention general contractors (a/k/a prime contractors) in those that can file a claim against the payment bond.  That's because they can't.  The Miller Act does not protect the general/prime contractor from non-payment.  

The time within which to bring a Miller Act claim is short.  Claims must be brought to suit within 1 year of the last time that you provided labor or materials to the project.  Sub-sub contractors and material suppliers to subcontractors must jump through the additional hoop of serving a proper written notice, satisfying the requirements of the Miller Act, on the general/prime contractor within 90 days of the time that you last provided labor or materials to the project.  The Miller Act is strict and non-compliance with the notice requirements will likely lead to rejection of the claim and no protection under the bond.  It is therefore strongly recommended that you hire an attorney to serve the notice for you.  

New York's Little Miller Act (State Finance Law Section 137)

Subcontractors and suppliers in New York also are protected when they perform work on a public project (whether it is the State, County, City or Town).  This protection is provided through State Finance Law Section 137.  State Finance Law Section 137 (a/k/a the Little Miller Act) applies to public construction projects of more than $100,000 but only if those projects are not subject to New York's Wick's Law.  State Finance Law Section 137 provides that an eligible party may bring a claim against the bond once 90 days have elapsed since the last furnishing of labor or materials and a non-payment situation exists.  Sub-subcontractors and suppliers and materialmen to subcontractors may bring a claim against the payment bond as well but only if, within 120 days of the time that they last furnished labor or materials to the project, they have put the contractor on notice of their claim.   

The notice to the contractor must set forth with substantial accuracy: 1) the amount claimed; 2) the name of the party to whom the material was furnished or labor was performed; and 3) must be served personally or registered (not certified) mail.  You should note that if the contractor actually receives the notice it is effective even if the service method was not proper under the statute but it is not recommended that you try this method.  Stick to the statute when at all possible to avoid problems with service.  

The lawsuit against a bond procured pursuant to State Finance Law Section 137 must be filed within 1 year of the date that the project was completed and accepted by the public owner.  Additionally, State Finance Law Section 137(c) provides that the claim may include interest and that the Court may, in its discretion, award attorney's fees to the prevailing party as well, and the fees will be covered by the bond, if it is determined that the original claim or the defense to the claim was without substantial basis in law or fact.  

Like the Miller Act, the notice requirements of the Little Miller Act in New York are strict.  It is wise to hire an attorney to prepare and serve the notice on your behalf to make sure that you do not lose your rights to protection under the bond due to a technical misstep.  

Vincent T. Pallaci is a partner in the New York law firm of Kushnick Pallaci, PLLC.  His practice focuses primarily on the areas of construction law, including surety claims.  He can be contacted at (631) 752-7100 or vtp@kushnicklaw.com.  You can also visit our firm site at www.nyconstructionlaw.com  

Interpreting Surety Bonds

In East 49th St. Dev. LLC v. Prestige Air and Design, the Kings County Supreme Court (Demarest, J.) noted that under New York law, a surety bond is to be interpreted as any other contract and the court should, therefore, look to principles of standard contract interpretation in determining the rights and obligations of the parties under the bond.  The Court also noted that "before a surety's obligations under a bond can mature, the obligee must comply with any conditions precedent" and that "express conditions [of the bond] must be literally performed."

In regards to an AIA A312 performance bond, the Court notes that the conditions set forth in paragraph 3 thereof are conditions precedent that require strict compliance and that failure to comply with those conditions is fatal to an obligee's claim under the performance bond.  While the plaintiffs in this case argued that they "substantially complied" with the terms of the performance bond, the Court noted that literal compliance was required and having failed to precisely comply with the terms of the performance bond, the plaintiffs claims were barred.

The Court here also noted that the owner on the project did not have standing to make a claim under the payment bond since the payment bond was intended to cover claims made by those who had contracted with the principal and who had furnished labor or material to the project. Here, the owner attempted to argue that since it made payments directly to subcontractors, it could subrogate those claims and recover under the payment bond.  The court noted that subrogation does not lie where the payments were voluntary as they were here.  The owner had no legal duty to make payments directly to the subcontractors. However, because the subcontractors filed mechanic's liens, that the owner bonded, the Court found that the owner created questions of fact as to whether it was entitled to equitable subrogation against the payment bond due to the bonding of the mechanic's liens.

Vincent T. Pallaci is a partner in the New York construction law firm of Kushnick Pallaci, PLLC.  He can be reached at vtp@kushnicklaw.com or (631) 751-7100.

State Finance Law Section 137 Amended: Bond Claims Due Within One Year of Completion and Acceptance

Up until recently, anyone that submitted a claim under a payment bond on a public project in New York could expect that the statute of limitations to bring a claim was one year from the time that payment became due.  However, effective August 3, 2011, the legislature has amended State Finance Law Section 137 and an action against a payment bond must now be commenced within one year from the time that the public entity accepted the completion of the project.

However, you should still be careful in reviewing the timeliness of your payment bond claim.  Many payment bonds have very specific timing provisions listed in them.  The amendment to State Finance Law Section 137 cannot override an enforceable pre-existing contract provision.  That means that if your payment bond said that the action to enforce a claim had to be brought within one year of the time that payment became due, then that provision still controls. 

For new claims, there will be those that will argue that State Finance Law Section 137 provides a minimum and any contractual provision that creates a one year period that would expire before one year from the time the project is accepted is illegal and unenforceable.  But my suggestion is to not become the test case.  Follow the provisions of your payment bond and you are in good shape to avoid procedural problems and you will be able to focus on establishing that you performed your work properly and on time and should be paid. 

Vincent T. Pallaci is a construction attorney in New York.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com   His firm's website is http://www.nyconstructionlaw.com/  

What changes you need to know about in the new AIA A 312 Payment Bond

In 2010 the American Institute of Architects (AIA) issued a new revised A312 Payment Bond.  The new AIA A312 has some significant and noteworthy changes that those in the construction industry should be aware of. 

• The surety that issued the bond now has sixty (60) days to respond to your claim. 
• In good news for contractors and suppliers, the scope of those who can file a claim has been expanded.  Previous versions of the A312 limited the scope of claimants to those no lower than a second tier subcontractor.  However, under the new 2010 version, anyone that can file a mechanic's lien can file a bond claim.  (Editor's note:  In New York we are going to need further clarification on this.  As many of you know, those who can file mechanic's liens are different on public as opposed to private projects.  Since most A312 bonds are for public projects, is the scope of claimants limited to those who can file a public improvement lien?  Does it depend on whether the project is public or private?  Stay tuned...) 
• There is a new section (7.3) that expressly states the surety's failure to respond within sixty (60) days does not constitute a waiver of any potential defenses.  However, the new AIA A312 also states that if the surety fails to respond and if the claimant has to bring an action to recover under the bond, and is successful, then the surety will be responsible for attorneys' fees incurred by the claimant. 
• The new Section 16.1 provides certain minimum requirements that must be in the notice of claim to constitute a valid claim under the bond.  Previous versions of the AIA A312 did not contain such minimum requirements and a claimant in a rush could potentially submit a simple letter identifying the project and setting forth the amount of its claim to try and squeeze in before the deadline to submit a claim. 
• Pursuant to Section 12 of the 2010 version of the A312, the claimant must now bring a suit to enforce its claim against the bond within the earlier of: 1) 1 year from the time the bond claim is submitted; or 2) 1 year from the time the claimant last provided labor or materials. 

These are only the highlights of the key changes.  You should take the time to read and familiarize yourself with the entire new 2010 version of the AIA A312 (or hire a good attorney to do so for you!). 

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

Court rejects late submission of payment bond claim

Pursuant to State Finance Law Section 137:  "a person having a direct contractual relationship with a subcontractor of the contractor furnishing the payment bond but no contractual relationship express or implied with such contractor shall not have a right of action upon the bond unless he [or she] shall [give] written notice to such contractor within one hundred twenty days from the date on which the last of the labor was performed or the last of the material was furnished, for which his [or her] claim is made." In Brer-Four Trans. Corp. v. Zurich America Ins. Co. the general contractor hired a subcontractor to remove excavated materials from a site.  The subcontractor (S1) then hired another contractor to assist it with the removal (S2).  S2 claimed that it was not paid in full and brought a claim against Zurich (the surety that issued the payment bond to the GC pursuant to State Finance Law Section 137).  Zurich moved to dismiss claiming that S2 failed to comply with State Finance Law Section 137 by notifying the GC of the claim within 120 days from the date on which the last of the labor was performed. 

While the trial court originally denied the motion, the Appellate Division revered and found that since S2 did not submit the bond claim to the general contractor within 120 days the claim was barred under State Finance Law Section 137.  The lesson to be learned is to submit your bond claim on time, in writing and not to wait until the last day to do so.  Also, you should keep in mind that some bonds contain provisions requiring notice within less than the 120 days provided by State Finance Law Section 137.  The AIA Payment Bond (AIA A 312) for example, has a provision requiring notice to be submitted within sixty days.  When in doubt, read the bond in full and contact a construction attorney to find out what deadlines apply to your particular claim. 


Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

Bonds, bonds and more bonds!

The term "bond" is thrown around often in the construction industry.  In fact bonds have become a crucial part of doing business.  But there are a few different types of bonds that serve different purposes. 

Payment Bonds

A payment bond is a bond that is usually obtained by the general contractor as a requirement of the owner.  The payment bond secures that all subcontractors and suppliers are paid by the general contractor.  The payment bond protects the owner because it can prevent subcontractors and suppliers from filing mechanic's liens when they are not paid.  The payment bond protects subcontractors and suppliers because it is an added security for payment.  Making a bond claim is almost always much easier, cheaper and quicker than enforcing a mechanic's lien if you are not paid. 

Performance Bonds

A performance bond is a bond that is also usually obtained by the general contractor as a requirement of the owner.  The performance bond is a security for the owner against the general contractor's non-performance.  If the work performed by the contractor is defective or deficient it is usually something that will be covered under the performance bond.  Likewise if the general contractor simply does not or cannot complete the project the performance bond protects the owner against the failure to perform.  The surety that issued the performance bond will usually hire someone else to come in and correct the defective work or complete the project. 

Mechanic's Lien Discharge Bonds

When a mechanic's lien is place on a piece of property one way to remove the lien is to obtain a mechanic's lien discharge bond.  A mechanic's lien discharge bond is obtained from a surety and by statute will be 110% of the amount of the mechanic's lien.   Essentially the mechanic's lien is removed from the real property and attached to the mechanic's lien discharge bond. 

Maintenance Bonds

Maintenance bonds are bonds that more or less guarantee the construction work for a period of time.  For example, the bond may provide that if an item fails the contractor will come back and repair it free of cost.  If the contractor does not do so, and should have done so, the surety that issued the maintenance bond will hire someone to correct the issue. 

Bid Bonds

A bid bond is usually seen on public projects.  Every contractor submitting a bid on the contract is required to include a bid bond.  A bid bond protects the owner against financial loss if the bidder (the contractor) withdraws the bid or does not enter into a contract for the project if the bid is won. 

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

Legislature Bans Contract Provision Requiring Subcontractor to Exhaust All Remedies Before Filing Bond Claim

The New York State Legislature recently amended Section 5-322.1 of the General Obligations Law to declare that any contract provision which requires a subcontractor to exhaust all other remedies prior to filing a claim on a payment bond is void and unenforceable.

Vincent T. Pallaci is a New York construction lawyer.  He can be reached at vtp@nyconstructionlaw.com