One of the general and principal benefits of incorporating a business entity is limited liability; the owners of a corporation are not liable for the corporation’s actions or debts. There are, however, exceptions. One of the exceptions is the doctrine of “piercing the corporate veil,” under which courts may cast aside the “veil” of incorporation and hold a corporation’s shareholders personally liable for the corporation’s actions. Continue Reading First Department of New York Loosens the Standard for “Piercing the Corporate Veil”
A New York appellate court issued a decision in 2016 that serves as an important reminder to all tiers of the construction industry: courts take the notice provisions in your construction contracts very seriously. In the Schindler Elevator Corp. v. Tully Const. Co., Inc. case, the Appellate Division dismissed a subcontractor’s claim in its entirety because emails and letters that the subcontractor provided to the prime contractor did not comply with the strict notice provision in the prime contract. Continue Reading New York Case Reminds Us That Some Courts Take Notice Provisions Very Seriously
On February 12, 2016, New York City Mayor Bill de Blasio and New York City Department of Buildings Commissioner Rick Chandler announced a new aggressive campaign to improve worker safety on construction sites. Specifically, commencing next Tuesday, February 16, rigorous safety sweeps of constructions sites ten stories or less are expected to be performed.
Doubtlessly, this initiative is a direct result of 1) an increase in construction related deaths in 2015, and 2) the investigation into the death of a worker on a project at Ninth Avenue that resulted in, among other things, the August 5, 2015 indictment of Harco Construction and its site safety manager for manslaughter and the debarment of Harco for safety violations.
In 2015, there were 11 deaths on New York City construction sites during which time there has been a 300% increase in construction in the City. However, in an unexpected development, 70% of all accidents occur at building sites of less than 10 stories.
By: Joyce J. Sun and Peter Plevritis
As a contractor or subcontractor, timely receipt of payment can be the difference between continuing to grow your company and closing its doors. Because of this, contractors and subcontractors will frequently try to shift the risk of nonpayment by the owner onto their subcontractors through the use of what are known as “pay if paid” clauses in their contracts. A typical pay if paid clause states that the contractor only has to make payment to its subcontractor if it receives payment from the owner for the subcontractor’s work. Therefore, if the owner never pays the contractor, the contractor would never have to make payment to the subcontractor.
In New York, these types of clauses have been unenforceable since 1995, when New York’s highest court decided the landmark case of West-Fair Elect. Contr. v. Aetna Cas. & Sur. Co. In that case, the New York Court of Appeals decided that pay if paid clauses violate New York’s public policy that subcontractors cannot waive their mechanic’s lien rights absent a waiver given in connection with actual receipt of payment. The Court reasoned that a pay if paid clause functions to waive a subcontractor’s right to file a mechanic’s lien because a subcontractor’s right to file a mechanic’s lien arises only when payment is due from the contractor. If a pay if paid clause were in effect, then hypothetically, if the owner never makes payment to the contractor, the subcontractor would never have a right to payment and would never have a right to file a mechanic’s lien.
The Court in West-Fair distinguished a pay if paid clause from a “pay when paid” clause. A pay when paid clause fixes a reasonable time for payment instead of creating a situation where a subcontractor never receives payment from a contractor because the owner never pays the contractor. But beware; courts will look beyond the words of the clause to make sure the clause is not really functioning as an unlawful pay if paid provision.
The context in which pay when paid clauses are most commonly seen is when dealing with retainage. If phrased properly, the withholding of retainage can be a valid pay when paid clause, merely fixing the time of payment from the contractor as opposed to making it conditional upon receipt of payment from the owner. However, if you make receipt of retainage from the owner the condition for the release of retainage to the subcontractor, that would be an invalid pay if paid clause. This scenario often arises when payment is conditioned upon acceptance of the work by the owner.
The withholding of retainage in this context is not without its own limitations. Contractors may not withhold retainage indefinitely or where the owner is unreasonably unwilling to approve the work. In fact, one of New York’s intermediate level courts has held that once the owner accepts the work, the contractor cannot withhold retainage from the subcontractor, even where the owner has not yet made payment to the contractor.
To those contractors and subcontractors who also perform work outside of New York’s borders, it is important to know that not all states protect subcontractors from the harsh outcomes associated with pay if paid clauses.
Joyce J. Sun is a Partner with Cohen Seglias Pallas Greenhall & Furman and focuses her practice on complex construction litigation. She has extensive experience preparing, analyzing and litigating delay and suspension claims, default and termination claims, extra work disputes, and bid protests involving public construction projects.
Peter Plevritis is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. He focuses his practice on complex construction litigation.
In just a few days, a new law (Local Law No. 1 of the City of New York for the Year 2013) will take effect in New York City aimed towards increasing participation of Minority-Owned Business Enterprises (MBEs), Women-Owned Business Enterprises (WBEs) and Emerging Business Enterprises (EBEs) in City procurement. Some of the major changes include:
- Elimination of the $1 million cap on program-eligible contracts;
- Stronger enforcement mechanisms to ensure that increased participation goals are met; and
- Enhanced government oversight to ensure that M/W/EBEs are targeted for higher value contracts with the City of New York.
While the City’s various departments and agencies will be subject to increased accountability, participating contractors will also be subject to more onerous recordkeeping and reporting requirements. Contractors interested in utilizing M/W/EBEs should monitor the website of the Small Business Services (SBS) for prospective solicitations, access the City’s Online Directory of Certified Businesses and avail themselves of the SBS’s other resources for companies doing business with the City.
For a more detailed account of the new law, read New York City’s New Law to Enhance Participation by M/W/EBEs (pages 4-5).
On April 11, 2013, the United States Small Business Administration (SBA) announced that $19 million in grants will be made to SBA resource partners to support small business recovery in the wake of Hurricane Sandy. The funding is part of a package approved by Congress in January to meet the demand for expanded SBA assistance including counseling, training, and technical assistance through Small Business Development Centers (SBDs), SCORE, and Women’s Business Centers (WBCs).
The first phase of the counseling and technical assistance funding totals $5.8 million, and will be distributed among the SBA resource partners in 11 states. The majority of this funding will be focused in New York ($2,394,000), New Jersey ($1,385,000), Connecticut ($527,000), and Pennsylvania ($410,000).
The second phase of funding, totaling $13.1 million, will be issued through the SBA resource partners to provide long-term small business recovery and expansion, with an emphasis on building creative community-based partnerships.
The SBA has so far approved disaster loans totaling $1.8 billion to individuals, and $279 million to businesses and non-profits recovering from Hurricane Sandy.
Peter Plevritis is an Associate with Cohen Seglias Pallas Greenhall & Furman PC and a member of the Construction Group. He focuses his practice on complex construction litigation.
By: Daniella Gordon and Jennifer M. Horn
Several top New York construction companies have been served with federal subpoenas seeking information regarding their billing practices in connection with New York public works projects. Skansa USA Building, Inc., Turner Construction Co., Plaza Construction and Tishman Construction Group were among the construction firms served with information subpoenas. The status of the federal inquiry, and whether an official investigation will result, is currently unknown.
The probe comes in the wake of the federal prosecution of one of New York’s top construction firms Bovis Lend Lease, now known as Lend Lease Project Management and Construction. Deceitful billing practices, including rigged contract bids, misrepresentation regarding the participation of minority firms, inflated bills and no-show jobs emerged as critical areas of inquiry in the Bovis prosecution. Ultimately, as a result of the prosecution of Bovis and certain employees, Bovis agreed to pay the Government $56 million dollars in restitution and fines in July of 2012. Ironically, one of the projects for which Bovis was alleged to have committed acts of fraud involved the construction of the Bronx Criminal Courthouse.
The prevalence of fraudulent bidding and billing practices on public construction projects appears to be a growing concern for federal and local legislative and enforcement bodies in the wake of the economic downturn. It remains to be seen whether the Government’s actions will have the desired a deterrent effect.
Daniella Gordon is a litigation Associate in the Construction Group. She represents clients in a wide range of construction related matters, including public bidding contests, construction defect claims, and appeals.
By: Lane F. Kelman and Jennifer R. Budd
Cohen Seglias hopes that you, your friends and family made it through hurricane Sandy unharmed and without great loss. This storm caused billions of dollars of damage up and down the Northeast Corridor and will have widespread implications. Understanding the different interests and factors at play is paramount to protecting further loss.
As we begin cleaning up and rebuilding, action to protect your business interests to the fullest extent possible and to mitigate loss is essential. The following are some legal considerations which may prevent you from incurring any additional harm from the storm.
- Before cleaning up, document all damage with pictures and preserve all business records.
- Follow all notice provisions required by your insurance carriers for any potential claims, including claims for damage to your property, business interruption, and any tort liability to others. Also, property damage caused by a flood is generally not covered by a typical homeowners or commercial property policy, so a separate notification will be required under a flood insurance policy, if you have such a policy.
- A storm like this should be considered an “Act of God” which will relieve performance or allow for delayed performance on a contract under the doctrine of impracticability.
- A force majeure clause in a contract is generally enforced by courts and can be an essential tool for a party who cannot perform, or whose performance is delayed due to hurricane Sandy. It is important to review any such provisions in your contracts, follow any notice requirements, and implement these provisions as soon as possible.
- Documentation of delays such as material or labor shortages, extra or repair work or resequencing is crucial.
- If a party you contracted with is unable to perform due to the hurricane, you are under an obligation to reasonably mitigate your damages.
- When your business is affected by a natural disaster such as hurricane Sandy, managing compensation, payroll and leave issues can be challenging. Review any employment contracts and if you have a question regarding these challenges, the Labor and Employment Practice group at Cohen Seglias is well equipped to navigate you through any issues.
- Complete any reporting requirements to State and Federal agencies for spills or leaks of hazardous materials.
- Check OSHA requirements and suggestions for applicable clean-up operations.
- Before commencing any rebuilding or renovation projects, check with local governments for permitting requirements.
- Government funding has been authorized for the recovery in many states and may be available to assist you in your clean-up and rebuilding efforts. Also, the Department of Labor offers grants to States for dislocated workers, which if given to your State, could be very helpful to your employees if your business operations are severely affected. Be sure to monitor the application process for these funds and make any deadlines.
It is impossible to predict how hurricane Sandy may impact your business; however the attorneys at Cohen Seglias are happy to discuss any issues that arise to assist you in minimizing or recovering your loss due to this awful event.
Lane F. Kelman is a Partner with the Firm and a member of the Construction Group. He represents developers, general contractors, construction managers and the different trades in complex matters ranging from bid protests, contract negotiations and claim prevention & management.
Jennifer R. Budd is an Associate with the Firm and a member of the Construction Group.
For an increasing number of contractors, survival in the current economy has resulted in the need to find and secure work in other states. The migration of contractors to neighboring states is apparent throughout the country. Besides the work itself, benefits of an expanded geographic footprint include a broader client base, thereby creating mutually beneficial relationships.
For a complete breakdown on which states are seeing the biggest increases in cross border work, please visit, The Construction Blog, which is a dedicated to construction software technology.
Construction Technology Facilitates an Expanded Geographic Footprint
Recent advances in technology are accelerating the migration of contractors to neighboring states. Such technology includes, but is not limited to:
- Online Plan Rooms – This software aids contractors looking for jobs across state lines. A contractor can browse by project type, trade or location to find upcoming construction projects.
- Bid Management Software – This program acts like a “virtual broker” and assists contractors in the bidding process, by connecting buyers with sellers.
- Web Based Project Management Software – This technology allows for real time monitoring of construction projects.
- Onscreen Takeoff and Cost Estimating – This tool allows contractors to build cost estimates for projects happening in other states.
- Building Information Modeling (BIM) – BIM brings a project to life, through 3D, 4D and 5D models.
Contractors seeking an expanded geographic footprint should be aware of the upgraded technology as a means of facilitating work across borders.
Lane F. Kelman contributed to this post.
A recent increase in fraud investigations relating to disadvantaged business enterprises (DBEs) has caused companies to revisit the qualifications of the DBEs they work with. Two recent investigations in New York State resulted in multimillion dollar settlements after investigators determined two companies were using DBEs as so-called “pass-through” entities. These pass-through entities were retained to perform certain work on projects, but performed none of the work and instead allowed other entities to fulfill the contractual requirements. Unfortunately, this scenario is not uncommon.
The reality is that some general contractors will use a DBE firm solely as a pass-through entity. In other cases, the DBE firm should never have received certification at all, or changes in ownership and management have caused the company to lose its qualification while maintaining certification. In October 2009, The U.S. Government Accountability Office, the investigative arm of Congress, conducted a detailed study on the use of DBEs in order to determine whether ineligible firms certified as DBEs were being awarded contracting opportunities, thus taking opportunities from legitimate DBEs. The study’s authors concluded that the unqualified DBEs were benefiting by obtaining contracting opportunities with federal government entities and the DBE certification system was vulnerable to fraud.
Additionally, DBE fraud can occur over decades. In a recent case, an officer of Perini Corporation pled guilty to conducting DBE fraud from 1988 through 2001, using several pass-through DBE entities to obtain contracting opportunities and paying the entities 3% to 5% of the subcontract value as a fee to run payroll. The officer pled guilty to criminal charges of money laundering and conspiracy, and the company paid several million dollars to settle the civil suit against it stemming from the fraud.
Who Qualifies as a DBE?
DBEs include women-owned businesses, minority-owned businesses, small businesses who qualify through the Small Business Administration, service-disabled veteran-owned businesses, and HUBZone businesses, which are located in historically economically disadvantaged areas and employ persons residing in such areas. Though requirements differ slightly among states and governmental organizations, the following requirements generally apply:
- The firm must be at least 51% owned by disadvantaged individuals, whether they be women, minorities, or other disadvantaged individuals;
- Those individuals must have managerial control and operational control over the business’s activities; and
- The individual disadvantaged owners’ net worth cannot exceed a certain amount (generally, $750,000, but this amount varies).
Managerial and operational control means, in a practical sense, that the individuals must have sufficient functional knowledge of the business so that they can successfully manage it. For example, though a woman owner of a plumbing business need not be a plumber, she must be able to effectively direct the work of the plumbers working under her, as well as to determine the equipment, man-hours, and materials required to complete any particular job, without relying on any other person to advise her.
With the current highly competitive climate, competitors are seeking to use every advantage to obtain contracting opportunities, including using the bid protest process to question the legitimacy of a DBE entity, whether that entity is a prime contractor or a subcontractor. For example, a general contractor submitting an unsuccessful bid may challenge the awardee’s bid on the basis that the DBE firms which the successful bidder proposes to use (or the DBE proposing to act as general contractor) are either not legitimate DBE firms, or do not have the capability to perform the work proposed.
In order to protect against such an investigation, before submitting a bid using a DBE subcontractor, it is critical to examine the DBE entity in light of the work that must be done before submitting a bid. Do the disadvantaged owners have the requisite knowledge to plan the project, direct the work, and ensure its completion? Will the DBE be capable of performing the work it proposes to do? Will the DBE need to obtain additional employees or subcontract part of the work to another entity? Performing this type of preliminary investigation prior to submitting a bid could save a company millions of dollars, as well as avoid criminal liability for the use of a fraudulent DBE.