THE CITY MAY BE LIABLE TO A SUBCONTRACTOR UNDER ITS PAYMENT GUARANTEE FOR EXTRA WORK PREVIOUSLY PAID
Updated: Jul 12, 2022
In June 2022, a trial court in New York held that the City of New York may be required to pay a subcontractor for extra work under its payment guarantee even though it previously made payment to the general contractor for the work. Graciano Corporation v. AWL Industries, Inc., New York City Department of Design and Construction, 2022 NY Slip Op 31893 (Sup. Ct., Kings Cnty. 2022).
In Graciano [a case I filed], Article 20 of the standard City contract provided that a subcontractor owed funds from a general contractor could seek payment from the City under its payment guarantee, where no payment bond was provided. Since AWL was not required to post a payment bond on this DDC project, Graciano sued the City under its payment guarantee, seeking compensation for extra work.
The City sought to dismiss Graciano’s claim, alleging, among other things, that it could not be held liable since it had previously paid AWL for the extra work at issue and because Graciano failed to meet various conditions precedent to filing a payment guarantee claim under Article 20.
The trial court rejected the City’s arguments, finding that the subcontractor had a direct claim against the City under its payment guarantee, regardless of payment to the general contractor, and that the City had no right to impose greater restrictions upon claimants than those imposed under Section 137 of the State Finance Law.
Generally, under Section 137 of the New York State Finance Law, a contractor on public improvement projects of a certain size must obtain a payment bond “guaranteeing prompt payment of moneys due to all persons furnishing labor or materials to the contractor or any subcontractors in the prosecution of the work provided for in such contract.” N.Y. State Finance Law § 137(1).
Conversely, where a contractor does not procure a payment bond, the City in its standard contract, provides a payment guarantee under Article 20, obligating it to promptly pay all moneys due and owing to a subcontractor, not paid by the contractor.
Here, while there was evidence that the City had paid AWL for at least some of the extra work claimed by Graciano, I argued that since the City agreed to act as a surety under its payment guarantee, it was irrelevant whether it had previously paid the general contractor for this work. The court also agreed that the City could not impose a four (4) month deadline to file a payment guarantee claim under Article 20 since it shortened the one (1) year period [for 1st tier subcontractors] provided under the State Finance Law.
Subcontractors and vendors on City projects should ascertain whether a payment bond was posted by the general contractor and/or whether the prime contract includes a payment guarantee typically found under Article 20 of the standard City general conditions. Regardless, payment bonds and the City’s payment guarantee are both governed by Section 137 of the New York State Finance Law and provide a powerful tool for unpaid subcontractors and vendors.
About the author: George Marco is an attorney practicing in the field of construction law. He also holds a Bachelor of Science in Mechanical Engineering and was previously employed as a Project Manager for a public improvement contractor.
Disclaimer: This article is for informational purposes only and not intended to serve as legal counsel.