NY Legislation Offers Payment Protection on Public-Private Construction Projects, by Andrew Richards, Esq., 6-7-2024

Legislation that would provide contractors, subcontractors and suppliers with payment protection on certain “hybrid” construction projects built in New York State has passed the Senate.

S. 3551, which is now in the Assembly, impacts “hybrid” projects – i.e., public improvement projects built using private funds.  

The legislation, which would amend Section 5 of the lien law, would require that a payment bond, letter of credit or other equivalent form of payment security be posted by the private developer on projects costing more than $250,000.  The intent of the law is to provide all parties supplying labor and/or materials to the project some measure of protection against non-payment for work performed and/or material delivered in lieu of filing a public improvement lien or private improvement lien, which are not permissible on a hybrid project.  

Background

In 2003, legislation amending Section 5 of the Lien Law was introduced to provide payment security to contractors and subcontractors on such hybrid projects, according to the legislative summary. The addition to the statute states:  “Where no public fund has been established for the financing of a public improvement . . . 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.”  While the intent was to provide an alternate source of security and payment protection for subcontractors, materialmen and laborers, in 2018 the New York State Court of Appeals affirmed an Appellate Division, First Department decision, which effectively made the 2004 amendment to the Lien Law meaningless. The court ruled that a “formal guaranty” issued by the private developer that it would pay for all costs in connection with the work satisfied the statutory requirement to post an “undertaking.”  Obviously, such a “promise” does not provide an alternate source of compensation separate from the developer’s agreement to pay for the project costs.  

This legislation if passed would remedy that and provide ease of mind to contractors and subcontractors working on hybrid construction projects.

Kaufman Dolowich will be monitoring any new developments regarding the pending legislation.

If your business needs assistance complying with federal, state or local statutes or defending claims or disputes, our team of skilled construction law attorneys are well equipped to handle a wide range of issues in both private and public construction projects.