Collecting on an Unpaid Construction Contract in New York

COLLECTING ON AN UNPAID CONSTRUCTION CONTRACT

Collection is a part of every business, but in the construction industry it sometimes seems like collection is 90% of the business with 10% devoted to the actual construction.  If you plan for collection from the beginning, you will significantly increase your chances of recovering the money you are due.Step One

Plan for collection in your contracts.  The default rule in New York is that parties to litigation bear their own attorneys’ fees unless the contract (or a statute) provides otherwise.  In your garden variety payment dispute no statute exists in New York that would provide you with an attorneys’ fee award.  Therefore, your contract should provide that you can recover your costs of collection, including reasonable attorneys’ fees, in the event you have to pursue litigation or arbitration.

Your contract should also explicitly state when payment is due.  You should be permitted to suspend work in the event you are not paid within a reasonable number of days after payment is due (e.g. 10 days) and charge interest at a reasonable rate (e.g. 1% per month) on all unpaid amounts.

One other area to consider in your contract stage is whether you are going to require a personal guarantee.  Personal guarantees will significantly increase the odds that you are able to recover any unpaid amounts.  Personal guarantees are more common in material supplier contracts than labor subcontractors but remember: contracts are a negotiation anything is possible if you ask.

Step Two

Actively monitor accounts and put a procedure in place for addressing unpaid balances.  This ties into your contractual obligations and helps to make sure you do not miss deadlines.  Your contract probably provides that you must provide notice before any steps can be taken to pursue a claim or suspend work.  Before you can send a notice you have to know that payment is past due.  Surprisingly, many in the construction industry will not do anything within the first few days of payment being bast due.  This is a mistake.  Once payment is past due, a notice should go out immediately to the debtor.  If applicable, the notice can go to those above it in the contract chain as well (e.g. the owner or general contractor).  Pre-lien notices are not required in New York like they are in other states but that does not mean that a letter right after payment is due is useless.

At this stage you also need to determine whether your project is covered by New York’s prompt payment act.  If it is, there are additional obligations and rights for both creditor and debtor.  For example, if the debtor is not paying your full invoice, he must provide you with written notice within 10 days explaining why. The prompt payment act also provides for expedited arbitration.

If your payment letter goes ignored, its time to kick up the heat and move on to step three.  Remember, when it comes to construction collections there is a delicate balance.  You don’t want to put on the pressure too soon because it could interrupt the project and cause bigger problems and could also damage valuable business relationships.  At the same time, you don’t want to wait too long because a number of rights (explained below) could be impaired.

Step Three

Once the payment letter fails to trigger payment, you have three options to increase the pressure.  You can pursue one or all three and pursue them at the same time or in any order.  First, you have mechanic’s lien rights and should exercise them at the proper time (see Article “To Lien or Not to Lien: That is the Question“.  A mechanic’s lien must filed within 4 months on a single family home, 8 months on any other commercial project, 30 days of completion and acceptance on a public project and 90 days for retainage.  A mechanic’s lien puts pressure on everyone above you in the contract chain and usually provides security for your payment.

Second, if there is a payment bond, you should submit a payment bond claim.  Every bond is different in terms of how notice must be served and upon whom it must be served.  However, every bond has a provision stating that notice must be provided within X days of the claim going unpaid.  To be safe, a payment bond claim notice should go out on every project once payments are past due 30 days.

Third, exercise your rights under Article 3A of the Lien Law.  Article 3A is probably the must underutilized set of tools for construction collection.  Most people will immediately defer to their lien rights or to rights under a payment bond.  But liens and bonds don’t always shake money loose.  Article 3A can be the biggest stick in the tool box.  Consider this: Article 3A provides for personal liability of corporate principals, potential punitive damages and attorneys’ fees awards.  And don’t forget, Article 3A liability is not dischargeable in bankruptcy.  Exercising your Article 3A rights means acting fast.  The first move is to serve a demand under Lien Law Section 76.  From there, your must file your 3A lawsuit within 1 year of the time that you completed the project (or if you are a subcontractor from the time that the GC completed the project).

Step Four

When all else fails, its time to commence litigation.  In construction litigation all attorneys are not created equally.  Some attorneys specialize in personal liability, others in bankruptcy, some in criminal law and, of course, some in construction.  Don’t expect that because you know an attorney that he or she is the best for your construction collection claim.  An attorney with experience and knowledge of New York construction law will be able to most effectively utilize the Lien Law, including mechanic’s liens and Article 3A, as well as the Prompt Payment Act (and a few other tricks of the trade) to maximize the chances you recover on your unpaid debt. Remember, don’t wait – liens must be foreclosed upon within 1 year of filing and 3A trust diversion claims must be brought within 1 year.

Vincent T. Pallaci is a partner with the New York law firm of Kushnick Pallaci, PLLC where his practice concentrates on construction law.  With offices in Long Island and Buffalo, New York, KP provides counsel to the construction industry in every county in New York.

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