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What Constitutes an "Undertaking" Under Lien Law Section 5

By: Jared A. Hand
Published: November 2016

A recent decision surrounding the highly publicized and litigated project known as B2, a 34-story modular building containing 350 residential units, provides an opportunity to interpret the language of Lien Law § 5, which states that a private developer on public land must post a bond or other undertaking guaranteeing prompt payment to a contractor.

In furtherance of the project, Skanska USA Bldg. Inc. (“Skanska”) and Atlantic Yards B2 Owner, LLC (“B2 Owner”) entered into a “Construction Management and Fabrication Services Agreement” (the “CM Agreement”). After terminating the CM Agreement via a 146-page letter, Skanska commenced suit against, among others, B2 Owner and its parent company, Forest City Ratner Companies, LLC (“Forest City”). In relevant part, Skanska alleges that B2 Owner and/or Forest City (the private developer) breached the CM Agreement by failing to post a bond (pursuant to Lien Law § 5) to guarantee B2 Owner’s performance under the CM Agreement. In response, B2 Owner and Forest City moved to dismiss.

The lower court granted the motion to dismiss. On appeal, the Appellate Division, First Department, affirmed the ruling. In affirming, the Appellate Division undertook an analysis of the guarantee provided by a Forest City affiliate, and the following language contained in Lien Law § 5:

Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement.

The Appellate Division rejected Skanska’s argument that the guarantee provided by an affiliate of Forest City did not comply with the law because it is not equivalent to a bond “or other form of undertaking”. The guarantee stated that B2 Owner would “cause Substantial Completion of the Improvements and perform the Development Work,” including “to fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work, including, but not limited to, the costs of construction, equipping and furnishing the Guaranteed Work”.

The Appellate Division stated that the guarantee provided follows the letter of the statute in that it guarantees prompt payment to contractors. The fact that alternative or seemingly better “undertakings” may have been available, such as a letter of credit (as the dissent notes), is irrelevant. The public owner, Empire State Development Corporation, was satisfied with the guarantee, as was the Appellate Division. It should be noted that the Appellate Division did not address Skanska’s ability to enforce the guarantee as a third-party beneficiary, thereby leaving open the question of proper pursuit of the undertaking. 

 

While this case provides an interesting analysis and decision with regard to compliance with Lien Law § 5, the waters remain murky as to what type of “undertaking” will actually satisfy the statute. Given that two of the Appellate Division Judges provided a dissenting opinion, Skanska has the right to appeal to the highest court in the State, the New York Court of Appeals. Thus, please stay tuned for further developments with regard to the interpretation of Lien Law § 5.

If you would like more information regarding this topic please contact Jared A. Hand at jhand@wbgllp.com, or call (914) 607-6475.

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Please understand that this column provides general information only, and should not be construed as legal advice to anyone under any circumstances. The author reserves the right to modify any questions submitted so as to broaden their appeal. While we encourage you to contact us, you should not disclose to us any information that you consider confidential unless and until we have formally established an attorney-client relationship, and agreed to represent you in your particular matter. Citations to legal authority have been omitted.