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SUBCONTRACT MAY NOT CONTAIN CONDITIONS PRECEDENT MORE STRINGENT THAN STATE FINANCE LAW § 137

01/11/2014

In a recent decision, the Appellate Division Second Department has held that clauses in a subcontract which place the contractor as “sole arbiter” of the claim violated the “principals of trusteeship as reflected in the Lien Law…” and created a condition precedent, more stringent than that which is provided for in NY State Finance Law §137.

In the case American Architectural, Inc. v Marino, AMCC Corp. (“AMCC”) was the contractor on a public improvement project.  American Architectural, Inc. (“AAI”) was a subcontractor to AMCC.  AMCC’s subcontract agreement, which AAI signed, contained a detailed dispute resolution provision, which, amongst other things, contained a seven day notice of claim provision and proved that AMCC was “the sole arbiter of all claims, disputes, and questions of any nature whatsoever arising out of . . . the [subcontract].”  AAI filed a Mechanic’s Lien against monies due AMCC under the contract, claiming entitlement to more than $1 Million in unpaid fees, and thereafter commenced an action to foreclose on the Mechanic’s Lien.  AMCC sought dismissal of the action, based largely on AAI’s alleged failure to comply with the dispute resolution procedures set forth in the Subcontract. 

The Second Department held that failure to comply with the dispute resolution provisions “effected a complete waiver of any claims for payment that the subcontractor may have against the contractor” and reasoned, that under West-Fair Elec. Contrs. v Aetna Cas. & Sur. Co., “any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable.”  West-Fair Elec. Contrs,87 NY2d 148, 156 (1995).  Additionally, the Court cited to its holding in Navillus Tile, Inc. v Bovis Lend Lease LMB, Inc., in holding that “a condition precedent imposing requirements more stringent than those imposed by State Finance Law § 137 (3) is void as against public policy.” 

Contractors need to know that the Courts will not endorse their attempts to insert clauses into their subcontracts that are more stringent than those imposed by NY State Finance Law § 137.  

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