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Appellate Court Rules General Contractor May Assert A Trust Fund Diversion Claim as Subrogee

Written by Frank Gramarossa on . Posted in Legal Alerts.

In addition to mechanic’s lien foreclosure proceedings, the Lien Law affords contractors another safeguard for payment in connection with the improvement of real property – the trust fund.  Article 3-A of the Lien Law creates rights and obligations for contractors with respect to monies paid in connection with real property improvements.  Any monies received with respect to an improvement shall constitute trust funds to be held on behalf of those who provided labor and materials to the trustee in connection with the improvement.  These trust funds may only be used for trust purposes (which are defined by the Lien Law, but generally relate costs incurred for labor, materials, and general conditions required to complete the project), and if they are not, a beneficiary of the trust may bring an action to enforce the trust.  The Appellate Division, 1st Department issued a recent decision in the case  Flintlock Constr. Servs., LLC v HPH Servs., Inc., ___AD3d___, 2024 NY Slip Op 04282 [2024] to answer the question of whether a general contractor, who made involuntary payments to the vendors of a defaulted subcontractor (to obtain needed supplies being withheld due to nonpayment), may bring an action as subrogee of those vendors and enforce their rights as beneficiaries of the trust fund. 

Flintlock was the general contractor on a 20-story hotel project in midtown Manhattan (the “Project”), and Flintlock hired HPH as its subcontractor.  Flintlock alleged HPH breached the subcontract by abandoning the Project prior to completing its scope, as well as failing to pay certain vendors who performed work or supplied materials to HPH in connection with the Project.   Flintlock alleged it made involuntary payments to those vendors, then asserted a breach of contract action against HPH for failure to perform the work and failure to pay its vendors, as well as a Lien Law 3-A Trust Fund Diversion action against HPH and its principals. Flintlock alleged that it was a subrogee of the vendors, who are beneficiaries under Lien Law Article 3-A.  After a bench trial, the Supreme Court New York County awarded Flintlock a $450,000 judgment against HPH on its trust fund diversion claim, and the decision was appealed to the Appellate Division, 1st Department.

The Court ruled that Flintlock has standing to assert the trust fund diversion claim based on its status as subrogee of HPH’s vendors, citing several 2nd Department cases.  In other words, when Flintlock paid the claims made by HPH’s vendors, it acquired the rights of those vendors to seek satisfaction of the debt(s), including the vendor’s rights as beneficiaries of the trust fund created by Article 3-A.  As such, the Court ruled Flintlock had an actionable claim against HPH to recover the monies spent due to HPH’s failure to pay its vendors in violation of the Lien Law trust fund provisions.

The Court also found the principals of HPH personally liable for trust fund diversion based on evidence supporting the conclusion they knowingly participated in the diversion.  The Court found that one of the principals admitted he was the only person with authority to issue checks and wire transfers to suppliers.  There was also evidence of a $350,000 payment being made to a settlement escrow account managed by the principal’s spouse’s law firm, and then released back to one of the principal’s companies.  As such, the Appellate Division afforded deference to the findings of fact made by the trial court, whose determination was there was a knowledgeable diversion of trust funds perpetrated by the defendants.

Contractors must be aware of the rights created by Lien Law Article 3-A, which can be utilized as a powerful tool to recover monies earned performing work on construction projects in New York.  Contractors must also be aware of the obligations created by Lien Law Article 3-A and the possible consequences of the failure to adhere to them, which can include the personal liability of the principals of any companies who are found to have knowingly participated in any trust fund diversion, as well as punitive damages. Counsel from a seasoned construction law attorney is paramount in understanding the rights and obligations created by the Lien Law and the trust fund provisions enumerated therein.

If you would like more information regarding this topic please contact Frank Gramarossa at fgramarossa@wbgllp.com or call (914) 607-6465

Jack of All Trades Now Must be Master of All

Written by Andreas M. Koudellou on . Posted in Legal Alerts.

One of the great satisfactions as a construction attorney is assisting and witnessing a long-time client’s growth over the course of a years’ long relationship. In my career, I have had the pleasure of witnessing small subcontractors grow and take on larger projects. On occasion, those subcontractors “graduate” into general contractors, and begin taking on whole projects as their own lead.

Unfortunately, a recent decision from the Appellate Division Second Department may impact growing and established contractors alike; and may be particularly problematic for budding young general contractors. In Electrical Contracting Solutions Corp. v. Trump Village Section 4, Inc. (209 N.Y.S.3d 123 [2d Dept. 2024]), the Appellate Division overturned a favorable trial decision in favor of the contractor, where Electrical Contracting Solutions Corp. (“ECS”) was awarded a $450,000+ judgment against the Project Owner, Trump Village Section 4, Inc. (“Trump Village”).

The facts underlying ECS’s claims are simple. Trump Village needed substantial electrical work done on the housing development following extensive damage from Super Storm Sandy. ECS – an up-and-coming electrical contractor whose previous work was located outside of New York City – contracted with Brooklyn’s-own Trump Village and agreed to perform the electrical work. As ECS was just starting to take on work within New York City, it chose to use an older and more established company (“QNCC”) as its licensed Master Electrician subcontractor. Needless to say, this was not some ordinary contractor-subcontractor relationship, as ECS and QNCC shared common ownership, and the NYC Master Electrician’s License registered with QNCC was that of ECS’s own principal.

As projects tend to do, the Trump Village project began to incorporate extra and additional work, and ECS’s costs to perform grew exponentially. ECS claimed that Trump Village failed to pay all amounts due and owing for the work performed, sued Trump Village, and ultimately won at trial.

The interesting and concerning part of this story comes from the Second Department’s justification for overturning the trial court’s decision and judgment. The Appellate Division’s Second Department held that “since [ECS] was not licensed to perform electrical work in the City, it may not recover against [Trump Village] under breach of contract or [quasi-contract] theory.” The Court rejected ECS’s plea that the monetary recovery should not be denied on account of its utilizing a fully-licensed subcontractor, QNCC, to perform the work. Essentially, the Second Department is telling us that a trade-specific license, when required, must be held by the party contracting with the Project owner, irrespective of whether a license/qualified subcontractor performs the work.

This decision is devastating, as ECS did what all responsible contractors should aim to do; that is, hire and utilize personnel that possess the experience and credentials to perform the necessary work with the utmost professionalism, skills and care. That is why it was particularly surprising that the Court refused to consider the fact that ECS’s own principal, as Master Electrician for QNCC, oversaw the work on behalf of both the general contractor and subcontractor. Instead, the Court opted for as draconian a reading of the NYC Administrative Code as possible.

The operative question now is what we can make of this cautionary tale. Does this mean that a general contractor itself must possess all requisite licenses for each trade being performed on a given project, without relying on subcontractor’s licenses? It appears we may be going that way, though there is some older case law that allows a safe haven for larger projects. Instead, what we should take away from this decision is that all contractors must always be keenly aware of the licensing requirements of the jurisdiction they are working in, and make sure they are in full and unequivocal compliance.

As always, contractor’s best defense against being left holding the bag in the event of a payment dispute is what I like to call “pre-litigation”. Engaging with an experienced construction attorney at the outset of a project – or, better yet, before executing a contract – will allow your attorney to review the contract documents in the context of relevant licensing requirements, and better equip you to avoid potential non-payment traps. With an attorney’s guidance early on regarding your contract and applicable State and local laws, rules and regulations, you will be in better position to do what you do best. That is, perform your work without having to worry about whether you are/will be in compliance with pertinent licensing requirements.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487

Understanding Suspension-of-Work Clauses: Insights from a Recent Agency Decision

Written by WB&G on . Posted in Legal Alerts.

Construction contracts, much like other contracts, are designed to delineate the rights and obligations of the parties involved. These contracts often contain detailed provisions that dictate these rights and obligations, frequently incorporating terms from other documents or agreements, especially in public project contracts. These contracts are typically intricate, accounting for numerous potential scenarios that could arise during construction, including ordinary events and extraordinary situations.

A recent decision by the Armed Services Board of Contract Appeals in Granite Construction Company highlights the complexities and potential issues that can arise with such detailed contracts involving government projects (Granite Construction Company, ASBCA No. 62281, November 1, 2023).

Background

In the Granite case, the contractor entered into a contract with the United States Army Corps of Engineers to construct new outlet structures and cutoff walls at two dams in Houston as part of a federal flood control project. The contract included a suspension-of-work clause incorporated by reference and a provision detailing how time extensions and compensation for delay costs would be handled in the event of unusually severe weather.

In August 2017, after work had commenced, Hurricane Harvey caused substantial rain and flooding at the project site, leading to the release of water from the dams by the government. Consequently, the government issued a suspension of work, instructing the contractor to stop work on the project. This suspension lasted for approximately 49 days.

The contractor subsequently filed a request for equitable adjustment related to the costs incurred due to the suspension. Although the parties executed a modification for 30 days of the suspension, they did not resolve the issue of compensation for the remaining 19 days. The government contended that the 19 days were anticipated adverse weather days, as identified in the contract, leading to a dispute.

Decision

The Board granted the contractor partial summary judgment, holding that adverse weather delays specified in contract section 1.4 could not be subtracted from a suspension period issued under the suspension-of-work clause. The Board clarified that section 1.4 only defines “unusually severe weather” for determining if a default is excused under the default clause, with no connection to the suspension-of-work clause.

The Board stated that the remaining issue was whether the 49-day suspension period was “reasonable” under the suspension-of-work clause. According to the clause, a contractor is entitled to an equitable adjustment only if the government suspends work for an unreasonable period, thereby delaying the project.

To prove entitlement, the contractor had to establish:

  1. There was an unreasonable delay extending the contract completion time.
  2. The unreasonable delay was caused by the government’s actions or inactions.
  3. The delay resulted in injury to the contractor.
  4. There was no concurrent delay attributable to the contractor.

However, the Board concluded that the contractor was not entitled to compensation for the full 49-day suspension. The contractor did not prove that the government suspended the contract for an unreasonable amount of time, noting that the contractor could perform other work during the suspension period. The contractor’s reports indicated that critical activities could not be performed during the 49-day period, and the delay was proximately caused by the flood, not the government.

Commentary

The Granite decision underscores two critical points:

  1. Thorough Contract Review: Contracts should be meticulously reviewed and understood before signing.
  2. Meticulous Clause Interpretation: When a contract clause is triggered, it must be carefully reviewed to properly interpret and apply the clause to avoid further issues.

Failure to adhere to these practices can lead to significant financial consequences, as demonstrated in the Granite case.

If you would like more information regarding this topic please contact Andrew E. Zeyer at azeyer@wbgllp.com or call (914) 607-6485

New FinCEN Reporting Obligations Under the Corporate Transparency Act (CTA)

Written by Thomas S. Tripodianos on . Posted in Legal Alerts.

At the beginning of 2024 Welby, Brady & Greenblatt, LLP published a Legal Alert concerning the FinCEN Reporting Obligations Under the Corporate Transparency Act (CTA). You can find that Legal Alert here. The Financial Crimes Enforcement Network has setup a website to facilitate the reporting of the necessary information here. you can file online or complete a form and submit online. You will need identification documents for each beneficial owner as well as some identifying information of the entity. If we can be of further assistance please let us know.

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

Governor Hochul signs Bill aimed at Retainage provisions in Private Construction Projects.

Written by Thomas S. Tripodianos on . Posted in Legal Alerts.

New York State Senate Bill S3539, revised on May 25, 2023, and sponsored by Senator Breslin, addresses the issue of payment and retainage in construction contracts. The bill’s key provisions include:

  1. Amendment of Payment Terms: It amends section 756-a of the general business law to condition the release of retainage from the contractor upon achieving the “substantial completion” terms described in the contract.
  2. Retainage Limitations: It amends section 756-c to cap retainage at a maximum of 5% of the contract sum and establishes a maximum period of thirty days post-final approval for the release of retainage.
  3. Objective: The bill aims to reduce delays in the release of retainage on private construction jobs that meet “substantial completion” requirements, addressing long waiting times and disputes that often burden contractors and subcontractors, including Minority and Women Owned businesses.
  4. Implementation Details: The bill mandates the specification of substantial completion in private construction contracts and reforms the payment process of retainage to reduce disputes and delays between owners and contractors.
  5. Prior Legislative History and Fiscal Implications: The bill follows similar legislative efforts in previous years, with no fiscal implications for state and local governments.
  6. Effective Date: The act becomes effective immediately and applies to contracts entered into after its effective date

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

New York State Legislature Proposes Sweeping Reforms to Empower Plaintiffs’ Bar in Civil Litigation

Written by Thomas S. Tripodianos on . Posted in Legal Alerts.

The New York State Legislature is planning to significantly increase the influence and authority of the plaintiffs’ bar, according to a recent article in the New York Law Journal. The proposed changes (A.7138 and S.795) aim to strengthen the position of plaintiffs’ lawyers in civil litigation and enhance their ability to pursue legal claims on behalf of their clients. The proposed laws would revise New York General Business Law section 349 That section currently prohibits the more limited universe of “[d]eceptive acts or practices” in a business context, and it allows private actions for only injunctive relief and paltry $50 statutory damages.

The legislative reforms would involve several key modifications to existing laws. One of the primary changes in the proposed legislation seeks to reduce various legal defenses that defendants often utilize in civil cases. This includes limitations on the use of contributory negligence as a defense and stricter standards for summary judgment motions, which could potentially make it harder for defendants to have cases dismissed early in the litigation process.

Furthermore, the reforms aim to enhance the rights and protections for whistleblowers who expose corporate misconduct. This could encourage individuals with knowledge of illegal activities to come forward and seek legal remedies, while also providing them with safeguards against retaliation.

Overall, the proposed changes in New York State intend to give plaintiffs’ lawyers greater tools and opportunities to pursue legal actions on behalf of their clients, potentially leading to increased accountability for corporations and professionals involved in various areas of litigation.

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

Don’t Wait To Protect Your Rights: File Your Lien Now!

Written by Thomas S. Tripodianos on . Posted in Legal Alerts.

As a hardworking professional, you deserve to be paid for your services and materials. But did you know that waiting too long to enforce your lien rights could put your payment at risk? It’s crucial to stay informed about lien deadlines and take action promptly. Don’t wait until the last minute to file your lien, as the consequences of missing the deadline far outweigh any temporary advantages.

Contractors often delay filing a lien until close to the deadline for various reasons. They may think that they can only demand payment after a certain period or believe that payment will eventually come without the need for a lien. Some even wait to file, thinking it will help negotiations or defer legal fees. While these reasons might seem reasonable, they can put your payment in jeopardy.

Mechanic’s liens create a cloud on the property’s title, which means that if someone buys the property you worked on, they will have to address the contractor’s lien before finalizing the sale. This situation makes it difficult for property owners to sell their homes or secure refinancing. The longer you wait to file a lien, the longer the property remains encumbered, delaying any potential transactions.

But that’s not all. Let’s talk about the concept of the “Lien Fund.” According to the New York Lien Law, subcontractors can only recover on their lien claims if they can establish the existence of a Lien Fund. This means that funds must be owed from the owner to the contractor, amounting to at least the same value as the lien. If the subcontractor fails to prove the validity of the Lien Fund, their lien may be dismissed.

The purpose of the Lien Fund concept is to prevent unfair double liability for property owners. If an owner has already paid the contractor in full, they should not be responsible for paying subcontractors simply because the contractor failed to make payments. Essentially, a subcontractor’s lien is based on the contractor’s claim against the owner. The same concept applies to sub-subcontractors, who must establish a contractor-subcontractor Lien Fund.

The longer you wait to file a lien, the more depleted the Lien Fund becomes. If the owner has paid the contractor before you file your lien, your remedy would be to seek payment from the contractor directly. The owner’s liability to subcontractors is strictly limited to the amount of the Lien Fund, which is the outstanding amount owed to the general contractor.

Don’t put your rightful payment at risk by waiting to file your lien. Act now to protect your rights and ensure you receive the compensation you deserve. Waiting only increases the chances of depleting the Lien Fund, making it harder for you to recover what you’re owed.

Contact our experienced team today to discuss your lien rights and take the necessary steps to secure your payment. Don’t wait any longer-time is of the essence!

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440

Woes in Different Area Codes – Enforceability of Pay-If-Paid Provisions

Written by Andreas M. Koudellou on . Posted in Legal Alerts.

Welby, Brady & Greenblatt LLP represents contractors working throughout the Northeast United States; from the New York, New Jersey and Connecticut tristate area, to Pennsylvania, Massachusetts and beyond. Nonetheless, our clients’ “bread and butter” expectedly revolves around projects in the states of New York and New Jersey. If you were to create a composite WBG client, they would likely be a successful contractor with multiple projects in both states, operating as either General Contractor or Subcontractor depending on the size of the project.

In light of the prevalence of our clients’ involvement in New York/New Jersey, we keep a close eye on any legal developments that affect the construction industry in one or both states. A recent decision by New Jersey’s Appellate Division concerning a subcontractor’s right to payment has created a chasm in how contracts will be enforced in New Jersey when juxtaposed to statutory and caselaw authority in New York, and dual-state contractors must beware when signing on to New Jersey Projects.

On a daily basis, our firm drafts and/or negotiates contracts on behalf of prospective subcontractors. Quite often, the upstream general contractor attempts to include a “Pay-if-Paid” provision in the subcontract, which essentially transfers the risk of a project owner’s non-payment from the general contractor to the subcontractor by making the owner’s payment a condition precedent to the subcontractor’s entitlement to compensation for services rendered. This is quite easy to deal with when negotiating a subcontract in New York; under New York’s General Obligation Law §5-322.1, Pay-if-Paid provisions are unenforceable as contrary to public policy due to their infringement on lien rights, even if agreed to by both parties. As such, in New York these contract clauses revert to simple timing mechanisms for payment as opposed to their intended purpose of restricting the general contractor’s ultimate obligation to pay the subcontractor.

In contrast, the New Jersey courts are taking a diametrically different approach to Pay-if-Paid contract clauses. In JPC Merger Sub, LLC v. Tricon Enterprises (286 A.3d 1186 [2022]), the Appellate Division held that a Pay-if-Paid provision is fully enforceable so long as the parties’ contract specified a clear and unambiguous intent and agreement by the parties to shift the risk of non-payment by the project owner.

Tricon Enterprises (“Tricon”) was hired by the County of Union (“Owner”) to serve as general contractor on a large public improvement project. Tricon then hired JPC Merger Sub, LLC (“JPC”) as a subcontractor/vendor for the furnishing of materials on the project. The JPC-Tricon subcontract (the “Subcontract”) included an ironclad Pay-if-Paid provision:

“Vendor understands and agrees that Tricon’s obligation to make any payment to Vendor is subject to, and shall not exist unless and until, Tricon’s receipt of payment on account of Vendor’s work from the Owner…, the occurrence and satisfaction of which shall be a condition precedent to Tricon’s duty to remit payment.”

During the course of the project, JPC furnished structural steel beams for installation on the project, which were subsequently not accepted by Owner and never installed on the project. Due to the non-use of the materials, Owner did not pay Tricon for the beams, and Tricon in turn refused to pay JPC pursuant to the Subcontract’s Pay-if-Paid clause.

In its decision, New Jersey’s Appellate Division specifically referenced the fact that – unlike New York – the State does not have a statute or published caselaw governing the enforceability of such contract provisions. Moreover, the Court’s decision specifically stated that the prohibition against the use of Pay-if-Paid provisions as conditions precedent in construction contracts should come from the legislature rather than the courts, and that absent statutory authority such provisions are “neither unfair, unconscionable, nor against public policy” so long as the contract on its face contains clear and unequivocal language that unambiguously sets forth the parties intentions when the contract was executed.

The New Jersey decision is clearly problematic for subcontractors. In fact, the decision wholly changes how we approach contract negotiations for New Jersey projects. Rather than advise the clients of the provision’s true impacts and recommend its removal due to potential delays in payment (which is the approach in New York contracts), we now tell clients that the Pay-if-Paid clause in a New Jersey contract must be removed unless the client desperately wants to work on a specific project and is willing to eat the risk of non-payment. And make no mistake, the risk is substantial; if the receivable is large enough and the subcontractor is left holding the bag, their profit margin may be erased in the best case, and company-crippling losses may be sustained in the worst case.

This cautionary tale neatly illustrates the importance of retaining counsel before negotiating and executing a contract for a New Jersey project, and allowing your legal team to fight against a general contractor’s inclusion of a Pay-if-Paid provision before non-payment issues ever have a chance to arise. As discussed above, a subcontractor can do everything right on a given project and still have no legal recourse when making a justified claim for payment. As is always the case, a contractor’s best litigation defense remains “pre-litigation”; if you have any questions regarding what you are ultimately agreeing to, it is always wise to have skilled construction counsel review your contract before signing.

If you would like more information regarding this topic please contact Andreas M. Koudellou at akoudellou@wbgllp.com or call (914) 607-6487

Limiting Language Can Make Unenforceable Indemnification Agreements Partially Enforceable

Written by Gregory J. Spaun on . Posted in Legal Alerts.

Background

New York G.O.L. § 5-322.1 was intended to mitigate the widespread construction industry practice in which subcontractors assume the liability of upstream contractors and owners by promising to pay for an upstream contractor’s or owner’s losses for their own negligence. Promises by one party to pay for another party’s losses – often referred to as “indemnification agreements” – are typically included in contracts drafted by owners and general contractors, as well as subcontractors soliciting bids from sub-subcontractors. Section 5-322.1 voids indemnification agreements between two construction contractors where Contractor A promises to pay for Contractor B’s losses resulting from Contractor B’s own negligence.

In practice, section 5-322.1 voids an indemnification agreement between a general contractor and a subcontractor when the general contractor is found partially negligent in an action brought by the subcontractor’s employee and the agreement provides for full, rather than partial, indemnification to the general contractor. That is, section 5-322.1 bars the enforcement of an agreement providing that the subcontractor promises to compensate the general contractor for the general contractor’s own negligence.

Situations where § 5-322.1 applies and does not apply

  • Applies: Negligence actions involving contracts for the “construction, alteration, repair or maintenance of a building, structure, appurtenances and appliances…”
  • Does not apply: Contractual provisions providing that a subcontractor will indemnify a general contractor for the subcontractor’s own negligence.
  • Does not apply: Contractual provisions requiring subcontractors to carry insurance coverage against personal injury.
  • Does not apply: Contracts for the sale of goods that are governed by the Uniform Commercial Code (“UCC”).

Comment

Importantly, section 5-322.1 does not prohibit agreements in which a subcontractor agrees to indemnify an owner or general contractor for liability resulting from the subcontractor’s own negligence. Contractors can agree to pay for losses resulting from their own negligence but cannot assume liability for another contractor’s negligence. Consistent with this rule, New York courts have sometimes preserved that part of an indemnification agreement which is not prohibited by section 5-322.1. In cases where the indemnification agreement at issue was prefaced by language stating that the agreement is valid “to the extent permitted by law,” some courts have upheld the part of the agreement that was not invalidated by section 5-322.1. For example, if the subcontractor agrees to indemnify a general contractor for (1) the general contractor’s negligence, and (2) the subcontractor’s negligence – the part of the agreement providing that the subcontractor agrees to indemnify the general contractor for the subcontractor’s own negligence may be upheld with certain limiting language.

Ultimately, in certain circumstances, owners and contractors can partially save an otherwise unenforceable indemnification agreement by (1) limiting the agreement “to the extent that it is permitted by law” with express language, and (2) providing for partial, allocated indemnification in the agreement.

If you would like more information regarding this topic please contact Gregory J. Spaun at gspaun@wbgllp.com or call (914) 607-6425

Liquidated Damages 101

Written by WB&G on . Posted in Legal Alerts.

Many construction contracts—and the parties that enter into those contracts—include specific contract provisions which seek to mitigate or shift risk. One such provision to a construction contract is the liquidated damages provisions, which may seem odious at first glance but may provide benefits to the parties who include them.

What are Liquidated Damages?

The first thing to understand about liquidated damages provisions is what exactly they are. Liquidated damages provisions are contract clauses that seek to avoid the difficult task of proving loss due to a failure by a contracting party to adhere to specific performance conditions. In the context of a construction contract, liquidated damages clauses typically specify a daily sum that a contractor will be charged for each day the project is delayed past the project completion date and any extension. In some—rare—cases, these provisions can be reciprocal. 1

New York Law on Liquidated Damages

There are some limitations on the use and validity of liquidated damages clauses, specifically, in New York, liquidated damages clauses are enforceable so long as they are not attempts to penalize a party. To ensure that the liquidated damages clause is enforceable, the liquidated damages amount must bear a reasonable relationship to the amount of damages that may be sustained. If there is no reasonable relationship between the actual damages sustained and the liquidated damages amount, the liquidated damage amount is considered a penalty and is unenforceable. Additionally, to ensure that a liquidated damage clause is sustainable, the actual damages must be difficult to determine, and the assessed liquidated damages amount must not be disproportionate to the possible loss.

How Can Liquidated Damages Hurt a Contractor?

From the simple definition above, liquidated damages provisions can be daunting, as most contractors are aware that delays are commonplace on most construction projects. In many cases, liquidated damages provisions can be harmful where a contractor faces significant delays. Typically, liquidated damages are assessed against the contractor where they are delayed from achieving substantial or final completion by a specified date. However, in many instances, delays suffered by a contractor on a project can be the result of delays that may be outside of a contractor’s control, such as delays faced by downstream material suppliers. Even if that is the case, a contractor may still be required to pay liquidated damages to the upstream owner.

How Can Liquidated Damages Help a Contractor?

Based on the above, liquidated damages seem detrimental to the parties that include them as provisions in their contract. This may be true on the surface but, liquidated damages clauses can provide significant benefits to contractors.

Aside from the obvious—but rare—examples where liquidated damages clauses are reciprocal, there is another latent benefit of liquidated damages clauses that benefit contractors. Namely, liquidated damages clauses will not be enforced where its enforcement would be unjust or unconscionable. Normally, where the owner is responsible for a portion of the delay the proper remedy is an extension of the project completion time. These time extensions serve to delay the project completion deadline and stall the accrual of liquidated damages.

In addition, a liquidated damages clause provides an easily identifiable number for both parties to understand the risk of failing to complete the project within the required timeline. Viewed from another angle, a contractor who has an upstream liquidated damages clause can foresee the costs of project delays and can mitigate that risk throughout the course of the project. Additionally, the parties who include a liquidated damages provision in their contract can avoid the time and costs associated with calculating actual damages after the project is completed.

Conclusion

Liquidated damages clauses can be both a benefit and a detriment to contractors who have those provisions included in their contracts. Consult with a construction law attorney before taking action, which may be detrimental.

1 Where the contractor pays the owner liquidated damages for each day that a project is delayed and the owner pays
the contractor a bonus for each day that the project is completed prior to the specified completion date.

If you would like more information regarding this topic please contact Giovanni Care at gcare@wbgllp.com or call (914) 607-6437