Governor Patterson recently signed legislation which limits subcontractors and suppliers exposure of a general contractor passing along the risk of non-payment by an owner on a construction project. The new law, contained in the New York State General Obligations Law, voids as against public policy any contract clause which attempts to condition a subcontractor’s or supplier’s right to file and pursue a claim against a labor and material payment bond until after the exhaustion of mechanic’s lien remedies.
Prior to the 1995 New York State Court of Appeals case, West-Fair Electric Contractors, Inc., et al v. Aetna Casualty & Surety Company of America, et al (argued successfully by Welby, Brady & Greenblatt, LLP), construction contracts routinely contained clauses which conditioned a subcontractor’s or supplier’s right to payment on the general contractor’s receipt of payment from an owner. In West-Fair, the New York State Court of Appeals ruled that any clause which attempted to pass along the risk of non-payment by an owner to a subcontractor or supplier was void.
Subsequent to West-Fair, clauses have appeared in construction contracts attempting to circumvent the Court’s decision by requiring subcontractors and suppliers to exhaust their mechanic’s lien rights before they are able to pursue collection against a labor and material payment bond, which traditionally offered an independent remedy. As many in the construction industry know, mechanic’s lien enforcement proceedings are both lengthy and costly. In many cases, by the time the mechanic’s lien proceedings concluded, there was no money available for payment to the subcontractor and supplier and the statute of limitations to pursue claims against the labor and material payment bond expired, thereby eliminating the subcontractor’s or suppliers ability to collect payment.
Although this new law makes it easier to pursue claims against labor and material payment bonds, you must be sure that you comply with all statutory and bond provisions with respect to timely and adequately providing notice and commencing a lawsuit to preserve your rights for payment under the bond. In essence the new law underscores the independent and alternative remedy the payment bond offers to subcontractors and suppliers. For peace of mind, it is also wise to contact a construction attorney should you need any assistance.
If you have any questions about the information set forth in this Legal Alert, please call Anthony P. Carlucci, Jr. at 914-428-2100. Please understand that this alert provides general information only. It is not intended to provide legal advice. We encourage you to contact an attorney should you desire to discuss specific situations for which you may need legal advice. Under the ethical rules that govern the practice of law, this communication may be considered as attorney advertising.