For many years, building contracts and subcontracts—each in New York and elsewhere—appear to have attracted greater than their share of fee disputes. Homeowners usually run out of cash. Contractors and subcontractors usually screw up (and run out of cash). Tasks usually go over finances—however not often keep beneath finances—and usually fail (actually because they ran out of cash).
In response, New York, like most different states, permits contractors and subcontractors to file mechanics’ liens towards tasks if not paid. These liens can ultimately be enforced similar to foreclosing a mortgage. Mechanics’ lien legal guidelines give contractors and subcontractors a really highly effective assortment method not accessible to atypical collectors, resembling unpaid actual property attorneys.
Contractors tried to cut back their publicity to a few of these dangers by including “pay when paid” clauses to their subcontracts. These clauses mentioned that the contractor didn’t must pay the subcontractor except the proprietor determined to pay the contractor. It was a terrific mechanism for the contractor to shift the chance of nonpayment to its subcontractors.
The New York courts determined that the mechanism was too nice to truly work. It flew within the face of the New York mechanics’ lien legislation, which mentioned that any waiver of the suitable to file a mechanic’s lien was unenforceable. And, the courts mentioned, a “pay when paid” clause amounted to a back-door waiver of the subcontractor’s proper to file a mechanic’s lien.
In 2002, the New York Legislature sophisticated these points by deciding that the connection amongst house owners, contractors, and subcontractors required additional enchancment. The legislature handed a legislation that set requirements and procedures for a way and when house owners are alleged to pay contractors, and contractors are alleged to pay subcontractors. The legislation unambiguously required the contractor to pay its subcontractors whether or not or not the proprietor paid the contractor. The proprietor’s nonpayment shouldn’t be the subcontractors’ drawback, in line with the legislature.
The 2002 legislation did, nonetheless, carve out an exception: If the proprietor appointed an agent to behave for the proprietor in signing contracts, then the agent wouldn’t be answerable for any funds due beneath these contracts. That conforms to conventional rules of the legislation of company.
At the very least one good contractor tried to make use of this exception to create protections just like a “pay when paid” clause. That contractor inserted new language into its subcontracts, requiring every subcontractor to acknowledge that the contractor merely acted as an agent for the proprietor, so solely the proprietor was answerable for fee. The proprietor’s funds would, after all, run by way of the contractor on the best way to the subcontractor, however the contractor was nonetheless simply an agent for the proprietor—a channel for fee—with out legal responsibility.
It didn’t work. A courtroom determined that the contractor couldn’t shrug its shoulders and declare to be nothing greater than the proprietor’s agent. As a substitute, the remainder of the subcontract made clear that it was a separate and unbiased contract between the contractor and the subcontractor. The subcontractor signed the contract in its personal identify. The subcontractor’s obligations ran to the contractor, not the proprietor. The contractor couldn’t escape legal responsibility by claiming it was an agent.
Though this contractor misplaced its litigation with the subcontractor, the “company” principle simply would possibly work in a future subcontract. A contractor would wish to play it by way of totally. The contract would wish to clarify all through that the contractor is a mere harmless “agent” of the proprietor, and indicators and acts solely in that capability.
If the contractor have been actually a building supervisor, then such company standing is smart. In a standard common contract association, nonetheless, the place the contractor expects to make a revenue after paying subcontractors, it’s not really easy for the contractor to assert to be the proprietor’s agent. Contractors might must provide you with another answer to the issue.
