By: Thomas S. Tripodianos Published: September 2012

Possible Amendments to Statutes Regarding Negligence Indemnification Clauses and the Pro Rata Approach for Distributing Trust Funds

There are two important bills that will soon be proposed to the New York State Senate and Assembly. These bills, if passed, will directly affect contractors across the state.

Currently, New York General Obligations Law Section 5-322.1 provides that contractual clauses purporting to indemnify higher tier contractors on a project (and owners) for their own negligence are void and unenforceable. Owners and contractors have circumvented the purpose of this law by simply requiring that the lower tier contractors of whom indemnity cannot be sought, name owners and contractors as additional insureds. The proposed bill would invalidate any contract provision requiring such insurance for the scope of what is otherwise prohibited by section 5-322.1.

The second bill potentially affects the operations of New York Lien Law's trust fund statutes. Generally, the trust fund statues provide that all monies received by a party on a construction project are to be used to pay those furnishing labor, materials and equipment to the project. When funds are diverted to another project, claims ensue. If there isn't enough money to pay all of the claimants, New York Lien Law currently distributes the available funds on a pro rata basis, based upon the amount of the claim; i.e., the amount left unpaid. The bill seeks to alter this formula by distributing the funds on a pro rata basis, based upon the total value of each claim; i.e. the amounts unpaid and the amounts already received. The current formula allows the earlier completing contractors (or the more vigilant ones) to fare better overall on the project by getting a larger piece of the proverbial pie. The amendment puts all claimants in the same position, as if no one had been paid anything.

Welby, Brady & Greenblatt, LLP will monitor the progress of these two bills and will advise as to their progress.

If you have any questions about the information set forth in this Legal Alert, call us at 914-428-2100.

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