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Legal News from Couch, White

CONSTRUCTION NOTES - MAY 1998

CONTRACTORS MUST ACT PROMPTLY TO ENSURE PAYMENT

There are many new legal developments in the construction field, but since we are just gearing up after a long hiatus, we though we would go back to basics.

Nothing is more basic than time. The passage of short periods of time can destroy perfectly valid claims. The following is a summary of often encountered time limitations. REMEMBER - Contracts may contain time limits every bit as binding and every bit as harmful as statutory time limits. READ THE GENERAL CONDITIONS.

THIRTY DAYS

I.Under the general conditions of the standard contract of the American Institute of Architects (AIA), as well as many others, an architectís decision may be final unless an appeal is taken within thirty days. The contractor must appeal within this time limit, or the architectís decision will stand. If you decide to challenge an architectís decision, you should first check the general conditions in the contract to determine the time frame and method for appealing.

II.A Notice of Mechanicís Lien on a public improvement must be filed within thirty days of the completion and acceptance of the project. This condition must be met, or you risk losing a valuable right.

NINETY DAYS

Ninety days is the magic number which deprives the contractor of more rights than any other. Any claim for moneys due which is allowed to "mature" as long as 90 days is in jeopardy of becoming uncollectible.

Ninety days is a particularly crucial time for subcontractors and suppliers on bonded projects, but in certain instances, the passage of this time period can also have a devastating effect on the claims of prime contractors.

Prime Contractors

An example of the pitfalls awaiting prime contractors who allow a claim to go more than 90 days can be found in Section 3813 of the State Education Law. The statute requires filing a "verified claim against a school district within 90 days of the date the claim accrues," or the claim will be deemed abandoned. A claim is said to "accrue"when payment has been denied.

The effect of this law is to deprive many contractors of payment for bona fide extra work.

Subcontractors on Bonded Projects

Federal law requires the prime contractor to post both a performance bond and a material and labor payment bond on virtually all public construction projects. The material and labor bond guarantees that direct suppliers of labor and material to the prime contractor and his subcontractors will be paid.

To collect under a payment bond, you must comply with its terms. Under most bonds, to qualify to be paid, a supplier to a subcontractor, for example, must:

    1.notify the prime contractor, bonding company and/or the owner (or any two of them) by register mail within 90 days of the last labor and material furnished, that money is due on the bonded project;

    2.state the amount due and the name of the party to whom the material and/or labor was supplied; and

    3.describe the project.

This 90-day notice is what lawyers call "a condition precedent to collection under the bond." If such notice if not given, you cannot collect.

ONE HUNDRED AND TWENTY DAYS

Public construction projects funded by the state can be covered by a material and labor payment bond. In most respects, the state bond resembles the federal bond. The main difference is that the state statute allows a 120-day notice to the prime contractor, bonding company and/or owner.

FOUR MONTHS/EIGHT MONTHS

Under New York State law, a supplier of labor or materials on a private improvement must file a Notice of Mechanicís Lien within the following time limits: four months on a one-or two-family dwelling; and eight months on any other improvement.

Filing the lien does not in itself guarantee payment, but itís a big help in collecting. If there is not enough money left in a project to pay all claims, those claimants with valid, filed liens will share in the available funds, while those lacking such liens will not get paid.

If you neglect to file a lien within the required time (or allow a lien to expire), your lien claim is lost and cannot be revived.

SIX MONTHS

Public improvement liens expire six months from the date of filing. If they are not renewed or foreclosed, they are extinguished and cannot be revived.

ONE YEAR

1.A private improvement lien expires one year from the date of filing unless renewed. Once expired, the lien cannot be revived. Your chance to share proportionately in any payment obtained by the lien foreclosure is lost.

2.If you are looking for payment under a payment bond, the bond may compel you to sue within one year of the accrual time of your claim. Time of accrual is a question of fact. Do not wait until the last day. If the bond contains a one-year limitation, any suit not filed within that time is barred and cannot be enforced against the surety.

3.If your claim is against a school district, you must sue within one year of the accrual of the claim.

4.You cannot sue a village on a contract unless a verified written notice of claim was filed within one year of its accrual.

EIGHTEEN MONTHS

An action against a village must be commenced within eighteen months of its accrual.

NOTE

When giving the notices described above, try to avoid placing yourself in an adversarial position with the owners, prime contractors or other subcontractors. Itís possible to issue the required legal notices and at the same time maintain a business-like, if not cordial relationship with these parties. You can disagree without being disagreeable. Your letter to the owner, prime contractor or bonding company concerning payment due from a subcontractor neednít be shrill.

It is, of course, much more difficult to file a Verified Claim (as required under certain statutes) without triggering a defense mechanism. You must state in uncertain terms that you are seeking payment for work done.

However, if negotiations are already in progress to arrive at a fair figure for that work, your notice can be accompanied by a letter stating that:

    1.you have advised by your lawyer that you must file this notice of claim;

    2.you are filing it to preserve the status quo, not upset it; and

    3.you wish to go forward with the settlement discussions.

Any debtor who tells you he will refuse to pay your claim if you serve him with a notice is kidding either you or himself. In either case, itís a safe bet that he will never pay you voluntarily, once you have given up your legal rights.

Couch Whiteís Construction Notes publishes information of general interest to the construction industry. It is not to be taken as legal advice. Readers are urged to secure the advice of legal counsel before acting on any of the information in this publication.

We believe that good communication is a two way street and we encourage you to give us your reactions to Construction Notes. If you have any thoughts that you would like to share with us or if you have suggestions as to what you would like to see addressed in future newsletters, contact one of the attorneys in our construction group.

Leslie F. Couch   lcouch@couchwhite.com

Joel M. Howard, III jhoward@couchwhite.com

Michael B. Majer   mmager@couchwhite.com

James J. Barriere   jbarriere@couchwhite.com

David G. Anderson   danderson@couchwhite.com

or by mail or telephone at 540 Broadway, Albany, New York 12207, phone (518) 426-4600, fax (518) 426-0376.

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