Court says mechanic's lien provides standing for subcontractor to pursue trust violation against owner

There is some dispute under New York law regarding whether a subcontractor has standing, as a beneficiary, to pursue a claim for trust diversions directly against an owner.  On March 5, 2013 the First Department made their opinion partially clear:  if the subcontractor has filed a mechanic's lien then, even in the absence of contractual privity, the subcontractor has standing to bring a claim under Article 3A of the Lien Law.  The decision was Rebar Lathing Corp. v. Century Maxim Constr. Corp.  The question remains whether a subcontractor may pursue a trust fund diversion claim against an owner if the subcontractor did not file a mechanic's lien.  Implicit in the First Department's ruling here is that the subcontractor may not.

It would seem to me that this decision is right on point and gels nicely with the stated intent of Article 3A of the Lien Law.  However, the implicit indication that lack of a mechanic's lien means no standing for a subcontractor to pursue a trust diversion claim is troubling.  If the purpose of Article 3A is to make sure that those entitled to payment on a construction project receive funds earmarked for that purpose, why would a subcontractor lack standing to pursue the trust funds from the owner directly?  Technically, the general contractor as trustee should pursue the claim on behalf of all beneficiaries but if the general contractor refuses is the subcontractor out of luck?  Stay tuned...

Vincent T. Pallaci is a partner with the New York law firm of Kushnick Pallaci, PLLC.  His practice concentrates on the areas of construction law, including prosecuting and defending trust fund diversion actions in New York.

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.

Subcontractor Awarded Summary Judgment - Not Bound to Documentation Requirements of the Prime Contract

In Beys Gen Const. Corp. v. Hill Intl Inc., the Appellate Division, Second Department, affirmed the decision of a trial court which awarded summary judgment to a subcontractor against a prime contractor for non-payment.  In this instance, the subcontractor contended that it had fully completed the work, completed the work properly, and had not been paid.  As part of its proof the subcontractor submitted a certificate of substantial completion, a final inspection report and an affidavit stating that the contract work had been performed and that payment in full had not yet been received.

The general contractor attempted to defeat the subcontractor's claim by submitting a New York City Engineering Office Audit report.  The general contractor also attempted to argue that the subcontractor did not submit sufficient documentation in support of its payment requisitions.  However, the documentation requirements that the general contractor relied upon were requirements in the prime contract between the general contractor and the owner - they were not requirements in the subcontract.   The general contractor was arguing that there was a clause in the subcontract that incorporated the terms and conditions of the prime contract by reference.  But the Appellate Division found that the subcontractor was not bound to the documentation requirements of the prime contract because those provisions did not relate to the "scope, quality, character and manner of the work to be performed."

General contractors can take a good lesson from this case - if you want terms from your prime contract to be included within your subcontract, put the provision in the subcontract.  Don't just rely on an incorporation reference.

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

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  

Court gives lesson to subcontractors: when your contract incorporates the terms of the prime contract READ IT

In CNP Mech. Inc. v. Allied Bldrs. Inc. the Appellate Division reduced a trial verdict that had been rendered in favor of a subcontractor and against a prime contractor.  While the trial judge awarded the subcontractor the full value of the change orders it submitted, the Appellate Division reduced the amounts of the award.  The reason behind the reduction was that the subcontract stated that it incorporated the terms of the prime contract between the owner and the prime contractor.  The prime contract contained a clause stating that the owner only had to pay for change orders in the amount approved by the owner.  Since the owner did not approve the full amount of the change orders related to the subcontractor's work, the general contractor was not required to pay the full value to the subcontractor.  Rather, the Appellate Division held, the general contractor only had to pay the subcontractor the value that was approved by the owner. 

Another interesting aspect of this case is that while the trial court awarded interest from the time the task was performed, the Appellate Division pointed out that the subcontract contained a valid "pay when paid" clause and, therefore, determined that the interest ran not from the time of performance but, pursuant to the contract, 15 days from the time that the general/prime contractor received payment from the owner. 

It is important to note the difference between a "pay if paid" contract, which is void in New York, and a "pay when paid contract", which is enforceable in New York.  Essentially the "pay if paid" provision shifts the risk of non-payment to the subcontractor.  If the general contractor is not paid, the general contractor is allowed to not pay the subcontractor.  A "pay when paid" provision on the other hand has been determined to be simply a timing mechanism for payment.  So, as in this case, it simply sets the time when payment becomes due.  Here, payment was due within 15 days of receipt of payment from the owner.

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

Contractor terminated for not paying subcontractors

In American Curtain Wall v. NTD Construction Corp. a contractor sued for breach of contract.  The defendant filed a motion to dismiss and argued that the contract was validly terminated because the contractor failed to pay its subcontractors and even after being given the opportunity to cure the breach by paying the subcontractor the contractor refused.  The appellate division agreed that the failure to pay the subcontractor was a breach justifying termination of the contract and therefore dismissed the claim for breach of contract. 

The lesson to be learned for subcontractors and lower tier subcontractors is that even if you are not paid you are required to pay everyone below you and do it on time.  If you do not, you are likely breaching your own contract.

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

General contractor can pay subcontractor's sub-subcontractors and vendors without violation Lien Law Article 3A

In Metro Foundation Contractors, Inc. v. Marco Martelli Associates, Inc., the Appellate Division affirmed the trial court's denial of summary judgment to a subcontractor that claimed the general contractor had violated New York's Prompt Payment Act (G.B.L. Article 35E) and New York's trust fund provisions (Lien Law Article 3A).  Apparently the general contractor determined that the subcontractor inexcusably defaulted under the subcontract and didn't pay the subcontractor.  However, the general contractor did pay the subcontractor's sub-subcontractors and vendors.  The subcontractor claimed these were improper payments and diversions of trust funds.  The Appellate Division confirmed that the sub-subcontractors and vendors were proper lien law trust fund beneficiaries and, as such, ruled that the general contractor did not divert funds by paying them directly (assuming the correct amounts were paid). 

The Court also notes that the Prompt Payment Act does not give a subcontractor that is not paid the drastic remedy of summary judgment without more proof.  While the decision is light on details, it sounds like the subcontractor argued that the mere non-payment violated the Prompt Payment Act.  What the Court says is that the subcontractor still has to prove its claim (i.e. it performed properly and was not paid).  This result is in line with the language of the Prompt Payment Act which specifically provides that a general contractor can withhold payment if there is a dispute over performance.  Of course if it later turns out that the general contractor fabricated the performance issue the subcontractor could still have a potential Prompt Payment Act claim.  Stay tuned...

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

Using Lien Law Section 8 To Help You Get Paid

There are a number of tools in the construction attorney's toolbox to help a subcontractor get paid.  One very useful and effective, yet rarely used, tools is the Lien Law Section 8 Demand.   Lien Law Section 8 allows subcontractors to serve a demand on the project owner demanding 1) the terms of the contract between the owner and the general contractor; and 2) the amount due, or to become due, on the contract between the owner and the general contractor. 

This tool is useful for a few reasons.  First, it gets the claim in front of the owner.  A properly worded demand will put the owner on notice that the general contractor has not paid the subcontractor and most owners will insist that the subcontractor's claim be satisfied before any further/additional monies will be paid out to the general contractor.  Second, it gives you information.  Information is a crucial tool when attempting to collect unpaid contract balances.  Most subcontractors have heard the excuse that the owner has not paid the general contractor and, thus, the general contractor claims he cannot pay the subcontractor (this is not a defense to the subcontractor's claim under New York law but that is another topic).  The Lien Law Section 8 demand will let you know if the general contractor is telling the truth.  If the contractor has actually been paid, you now have set up a a Lien Law Article 3A trust fund diversion claim.  If he has not been paid, you know there is a fund to which you can attach a mechanic's lien.  The third, and perhaps most powerful, thing that the Lien Law Section 8 demand does is potentially put the owner on the hook for the unpaid contract balance.  Pursuant to Lien Law Section 8, when an owner fails to respond to a Lien Law Section 8 demand the owner becomes liable for the unpaid contract sums. 

The Section 8 demand is only one tool to help contractors get paid.  Finding counsel familiar with the Lien Law and construction law in New York is vital to maintaining a successful construction business in New York.  If your attorney doesn't know the options available to contractors then he or she is of little use to you. 

Vincent T. Pallaci is a New York construction attorney.  For more information please visit us on the web at http://www.nyconstructionlaw.com/ or e-mail me at vtp@nyconstructionlaw.com.

Subcontractor liable for damages flowing from its abandonment of project

In Farrell Bldg. Co., Inc. v. Shinnecock Electric, Inc. a general contractor sued its former subcontractor for breach of contract.  The subcontractor, an electrician, apparently intentionally abandoned the subject project (so says the Second Department) and unilaterally terminated the contract.  The court found that the subcontractor was liable for the damages that the general contractor incurred including the additional expenses of hiring completion contractors to finish the work that the original subcontractor failed to complete. 

This case should serve as an important reminder to subcontractors out there that damages can flow from your contract even if you have properly completed all of the work that you have been paid for up to the time that you improperly terminated the contract.  These damages, as was the case here, can include the completion costs that the general contractor incurs.  For example, if you have a subcontract for the electrical work for $500,000.00 and you terminate the contract (improperly) with $200,000 of work left and it costs the general contractor $300,000 to complete that work, you could be liable for the additional $100,000 in costs that the general contractor incurred.  A breach can occur for a variety of reasons from lack of capital to purchase materials to lack of manpower to a disagreement over the scope of work.  But regardless of the reason, if the termination is improper you could be exposing your business to tremendous damages.  Sometimes it is better to complete the contract at a small loss or under unpleasant conditions in order to avoid the consequences that may flow from your breach.

If you are planning on terminating a contract before the project is complete it is strongly advisable to speak to your attorney before hand to see make sure you fully understand the ramifications of your actions.  It is also a good idea to speak to your attorney before you enter into a contract to see try and draft the contract in such a way as to avoid any problems that may come up down the line in the event a termination is necessary.

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