BILL NUMBER: S9428
SPONSOR: RYAN C
 
TITLE OF BILL:
An act to amend the general obligations law, in relation to voiding
certain agreements conditioning the right of a subcontractor's or mate-
rial supplier's right to commence a lawsuit or arbitration proceeding
for breach of contract or quantum meruit
 
PURPOSE OR GENERAL IDEA OF BILL:
To prohibit contract provisions that condition a subcontractor's or
materialman's right to commence a lawsuit or arbitration proceeding for
breach of contract or quantum meruit on the exhaustion of another legal
remedy.
 
SUMMARY OF PROVISIONS:
Section 1: Amends subdivision 2 of section 5-322.1 757 of the general
obligations law to prohibit a construction contract from requiring the
exhaustion of other legal remedies before commencing a lawsuit or arbi-
tration proceeding for breach of contract or quantum meruit.
§ 2. Provides an immediate effective date.
 
JUSTIFICATION:
In 2009, New York General Obligations Law § 5-322.1.2 was amended to
prohibit contract provisions conditioning a subcontractor's or
materialman's right to file a claim and/or commence an action against a
payment bond on the exhaustion of another legal remedy. The 2009 amend-
ment was necessary because prime contractors often included language in
their subcontracts that required subcontractors to exhaust their lien
rights, up to and including foreclosure on the lien, before filing a
claim or commencing an action against the prime contractor's payment
bond. What this often resulted in was by the time a subcontractor had
exhausted its lien remedies, the statute of limitations for commencing
an action against the prime contractor's payment bond had run.
This legislation further amends New York General Obligations Law §
5-322.1.2 to include, in addition to a claim against a payment bond, any
contract provision conditioning a subcontractor's or supplier's right to
directly assert claims against a prime contractor on the exhaustion of
other legal remedies is against public policy, void and unenforceable.
Despite prior amendments intended to protect subcontractors and suppli-
ers from unfair contractual barriers to payment, parties with greater
bargaining power continue to impose provisions that functionally delay
or restrict access to payment remedies. These provisions frequently
require subcontractors to:
*file and fully litigate mechanic's lien actions through to foreclosure
before pursuing payment claims or other breach of contract claims;
*exhaust alternative legal processes prior to asserting contractual
rights; or
*stay otherwise valid claims until separate litigation is completed.
Critically, such provisions can cause subcontractors and suppliers to
forfeit their legal rights through the running of contractual, and
possible, statutory limitations deadlines. While subcontractors are
forced to pursue lengthy lien litigation or other remedies with other
subcontractors which may result in a determination that does not affect
the liability of the prime contractor to the subcontractor, the time
period to bring breach of contract claims may expire. In addition, even
though a subcontractor may sue a prime contractor on a payment bond,
most private improvement projects do not require a payment bond. And, if
there is a payment bond, the payment bond may contain a shorter limita-
tions period than the statutory six (6) year period for breach of
contract actions. This creates. an unfair and unintended forfeiture of
otherwise valid claims and exposes smaller subcontractors to significant
financial risk in a situation where the subcontractor has not had an
opportunity to show liability for breach of contract and other causes of
action which otherwise result in damages to the subcontractor.
The absence of explicit statutory language covering direct claims
against prime contractors has also allowed some parties to argue that
these restrictions remain enforceable when applied to breach of contract
actions. This legislation closes that loophole and ensures consistent
application of public policy protections.
 
PRIOR LEGISLATIVE HISTORY:
This is a new bill.
 
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
None
 
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to contracts
entered into on or after such effective date.

Statutes affected:
S9428: 5-322.1 general obligations law, 5-322.1(2) general obligations law