ESSA to Tackle Payment Security on “Hybrid” Projects

NESCA’s State affiliate, the Empire State Subcontractors Association (ESSA) has adopted a legislation program for 2019.  The program will include several “carry-over” bills from 2018 and one new legislative proposal.

A top priority for the upcoming legislative session will be legislation that came very close to passage in both houses during the 2018 session.  This proposal would define the term “substantial completion” on public projects and would require the timely preparation of punch lists by public owners (within 45 days after substantial completion has been reached) to prevent delays in final payment and release of retainage.  This bill also requires the contractor to submit to each subcontractor a written list of their punch list items within seven days after receiving the punch list from the owner.   Last year this bill passed in the Senate and made its way through the committee process in the Assembly, but fell short of an Assembly floor vote when the legislative session ended in June.

The two additional carry-over bills would (1) limit retainage to no more than 5% on private projects and (2) limit subcontractor liability by prohibiting certain additional insured provisions in construction contracts.

ESSA’s new legislative proposal would amend Section 5 of the NYS Lien Law to provide payment security to contractors and subcontractors performing work on “hybrid” projects, that is, projects being built by private developers with private funds, but on public land.  Contractors and subcontractors do not have lien rights on such projects.  The need for this legislation stems from a recent Court of Appeals decision called Skanska USA Building, Inc. v. Atlantic Yards B2 Owner, LLC and Forest City Ratner Companies, LLC.  The Court’s decision in this case basically neutralized legislation that ESSA was successful in getting enacted back in 2004 which also was intended to provide payment security to contractors and subcontractors on hybrid projects.  The 2004 legislation required that private developers on hybrid projects must post a bond or other form of undertaking guaranteeing prompt payment of moneys due the contractor and subcontractors.

Unfortunately, the Court found that a “completion guarantee” provided by the developer on this project to the public owner fell within the bounds of “other form of undertaking”.  This basically made ESSA’s 2004 amendment to the Lien Law meaningless because a completion guarantee is not the type of payment security that was contemplated when the bill was drafted.  A completion guarantee is more akin to a performance bond (which protects the owner) than a payment bond (which protects those performing the work).

It is ESSA’s position that any alternative undertaking must provide substantially equivalent protection to that provided by a payment bond.  The alternative undertaking should be a financial arrangement that would afford an unpaid contractor, subcontractor, laborer or provider of materials, a fund of money, or an asset, available for predictable and prompt payment.  A completion guarantee is not the functional equivalent of a bond, and provides no real payment security to contractors and subcontractors.

ESSA’s new amendment to Section 5 of the Lien Law will replace “other form of undertaking” with language requiring a letter of credit or other form of collateral financial security approved by a federal or state financial regulator.

This story is printed with permission from ESSA.