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RETAINAGE/ESCROW BILL HIGH PRIORITY FOR ESSA Go Top

Bills have been introduced in both the NYS Senate and Assembly which would require retainage held on private construction projects to be placed in an interest-bearing escrow account for the benefit of the parties from whom the retainage is being held. This measure (S.3708/A.6817) was introduced by Assemblyman Eric Vitaliano on March 6, 2001 and by Senator Kemp Hannon on March 19, 2001 on behalf of NESCA’s statewide affiliate, the Empire State Subcontractors Association (ESSA).

Specifically, the bill would require that retainage held by owners and contractors on private projects in excess of $50,000 (except for residential projects involving housing accommodations for less than five families) be deposited in a separate interest bearing escrow account. At the time of the deposit of the retained funds, such funds shall become the property of the contractor or subcontractor to whom they are owed. Upon satisfactory completion of the contract, all funds accumulated in the escrow account together with interest earned shall be paid immediately to the contractor or subcontractor.

ESSA has long sought retainage reform in New York State, and has also had a second bill introduced in both houses which would require retainage on public works projects to be reduced by 50% at 50% project completion.

While holding retainage is a long-standing tradition in the construction industry, its primary purpose is no longer valid and the practice has become increasingly inequitable and counterproductive. Historically, retainage has been withheld from contract payments to provide partial financial security for the owner and to provide practical leverage against the contractor and subcontractors to assure that the contract is fully performed. Retainage predates several significant developments in construction law and practice, most notably the development of sophisticated surety bond requirements. Unfortunately, with the advent of surety bonding, the retainage system was also continued by owners so that presently, most owners have the double protection of the 100% surety bond guarantee plus a 10% guarantee in the form of withheld retainage.

The practice of withholding retainage from progress payments creates a serious negative cash flow to subcontractors which becomes progressively more burdensome as the work progresses. Short of the outright elimination of retainage, it is ESSA’s position that all retainage withheld should be placed in an interest-bearing escrow account for the benefit, and security, of the parties who are owned that retainage. After all, retainage represents money which has already been earned by subcontractors. As such, it is the subcontractors from whom retainage is held who should benefit from investment earnings on that money. Further, by having retainage placed in an escrow account, subcontractors will have far more assurance that they will actually receive the money which they have earned in the event an owner’s financial status becomes questionable later on.

ESSA believes this bill accomplishes a much needed construction industry reform. Owners would continue to have the added security of holding retainage on progress payments, while subcontractors would earn interest on the retainage which would take some of the sting out of having money held for substantial periods of time.

PRESIDENT’S MESSAGE Go Top

NESCA had yet another very informative presentation at our April 12th membership meeting, this time by Jim Barriere with Couch White, LLP, who reviewed just how substantially hold harmless clauses can have an impact on subcontractors. Jim explained that while practically all construction contracts contain hold harmless clauses, there are vast differences in the types of indemnification provided. Some terms represent an equitable allotment of responsibility between the members of the construction team for their negligence. More often, however, indemnification clauses serve to make subcontractors responsible for the costs of job-related injuries or damages over which they have no control. We learned that these costs can be high for companies of all sizes, both in money and time lost due to lawsuits.

Jim reviewed the three types of indemnity clauses (broad form, intermediate form and limited form) and explained how to identify troublesome words and recognize the differences between the three. He provided information on how to respond to typical unfair indemnity language, discussed the relationship between indemnification and naming others as additional insureds on your general liability insurance policy, provided written examples of fair and unfair language and reviewed several case studies. As with each of our mini-seminar programs held this year, all attendees were provided with some very useful handout materials to take with them.

Jim’s program on indemnity clauses will also serve as a nice lead-in to our May 10th membership meeting. At our next meeting, Judy Tomlinson with Rose & Kiernan, Inc. will review subcontract insurance requirements. This topic is very timely since as we all know, liability insurance costs have been skyrocketing for contractors and subcontractors. I strongly encourage all members to attend the May 10th meeting. Remember, by attending our meetings you become eligible for a free membership in NESCA next year. As a matter of fact, had Michael Ingalsbe with EMI Guide Rail, LLC attended our April 12th meeting, he would have won a free membership! Sorry Mike.

The 6th Annual NESCA/GBC Joint Mid-Hudson Golf Outing will be held on Monday, June 11, 2001 at the Wiltwyck Country Club in Kingston. Over the last five years, this tournament has grown into a very nice event, and last year we had over 90 golfers participate. It’s a very nice golf course and I hope all you golfers consider signing up! Be on the lookout for registration information coming soon!

Also be on the lookout for information coming soon on NESCA’s 3rd Annual Day at Saratoga Race Course, which will be held on Thursday, July 26, 2001. We’ve reserved 120 spots in the Paddock Tent for the luncheon package which also includes clubhouse admission and a Post Parade program.

Finally, all members will soon receive “update forms” for the 2001-02 NESCA Membership Directory. When you receive these forms, please make any changes and/or corrections and send them back to the NESCA office as soon as possible so that you may be listed properly in the 2001-02 edition of the Directory.

Steve Dewey

President

SUBCONTRACTOR’S TRUST FUND BENEFICIARY RIGHT SUPERIOR TO BANK Go Top

In the January 2001 case of AMG Indus. v. A.J. Eckert Co 719 NYS2d 192, the New York State Supreme Court, Appellate Division, Third Department, addressed an issue regarding subcontractor funds held in trust by the contractor pursuant to Article 3-A of the New York State Lien Law.

In this case, a contractor had a $1.36 million mechanic’s lien upon property for work performed by its company and other subcontractors it hired on a project. Prior to doing work on the project (and prior to the lien filing), a bank extended a series of $2,0 million loans and lines of credit to the contractor, secured by, among other things, its accounts receivable and contract rights.

The contractor went bankrupt. The bank asserted their security rights in contractor’s accounts receivable and attempted to take an assignment of the contractor’s mechanic’s lien foreclosure action (previously started by the contractor) to claim the funds secured by the lien (to the detriment of the subcontractors). Various lawsuits by the involved parties ensued with resulting decisions stayed by pending appeals.

In the midst of the various suits and appeals, all parties, excluding the bank, settled the matter. The settlement left no funds remaining for the bank. The bank brought their case before the Appellate Court objecting to the settlement.

The Court held that the bankrupt contractor held the right to funds secured by the mechanic’s lien in trust for the subcontractors pursuant to New York Lien Law Article 3-A and was cloaked with a fiduciary responsibility to these trust beneficiaries until their claims were fully satisfied. Therefore, the bank had no exercisable ownership right to the trust fund assets unless amounts remained after all subcontractors and suppliers had been paid.

The settlement of the mechanic’s lien with the property owner, the subcontractors and suppliers for an amount that left nothing for the bank was upheld by the Court. The bank could not direct the way which the contractor should discharge its fiduciary duties. Settlement, even though done to the detriment of the bank, was acceptable and was upheld by the Court.

Terence J. Burke, Esq.

NESCA Legal Counsel

CONSTRUCTION INDUSTRY COUNCIL TO FOCUS ON WORKER SHORTAGE AT MAY 14 MEETING Go Top

The shortage of workers in New York State’s construction industry will be the focus of a meeting of the New York State Construction Industry Council May 14 at the Empire State Plaza Convention Center in Albany.

Linda Angello, commissioner of the state Department of Labor, is scheduled to give the keynote address at noon during a luncheon.

“The meeting will be a four-hour forum at which a variety of speakers will discuss the effects of worker shortage on the construction industry and possible solutions to the issue,” said Johnny Evers, the Council’s legislative analyst specializing in construction issues.

Specific topics to be addressed include: the current workforce shortage; apprenticeships and education; the role of secondary education; relevant concerns at technical colleges; concerns among design professionals; the image of the construction industry; and the economic impact of the industry in New York.

The session is intended to benefit a range of professionals in construction, education, and training, including engineers, architects, builders, industrial education directors, and secondary and post-secondary educators specializing in construction management curricula.

The New York State Construction Industry Council is an affiliate of The Business Council of New York State.

Sponsors of this event include: Building Industry Employers of New York State; General Building Contractors of New York State; Eastern Contractors Association; Associated Builders and Contractors; and the New York State Chapter of the American Institute of Architects.

For more information on the forum and/or to register, contact Ellen Muir at the Business Council at 1-800-358-1202.

ASSEMBLY PASSES MINIMUM WAGE INCREASE Go Top

On March 19, 2001, the NYS Assembly passed a bill which would raise the state’s minimum wage from the current federal minimum wage level of $5.15 per hour, to $6.75 per hour. The bill has been delivered to the Senate where it has been referred to the Senate Labor Committee.

WELCOME NEW MEMBERS Go Top

Dutchess Mechanical, Inc.

25 Pellbridge Drive

Hopewell Jct, NY 12533

(845) 227-3931; Fax (845) 227-5051

Contact: William Murphy

Monitor Surety Managers, Inc.

3 Franklin Square, Suite 6

Saratoga Springs, NY 12866

(518) 583-1623; Fax (518) 583-7941

Contacts: Grant Gentner,

Bruno Maiolo

BUSH REPEALS CLINTON’S NEW ERGONOMICS RULE Go Top

“The safety and health of our Nation’s workforce is a priority for my administration. Together we will pursue a comprehensive approach to ergonomics that addresses the concerns surrounding the ergonomics rule repealed today. We will work with the Congress, the business community, and our Nation’s workers to address this important issue.”

With these words, President Bush made history March 20 when he signed a joint resolution of Congress that repeals a Clinton Administration workplace safety rule. Congress used the Congressional Review Act earlier in March to undo the new ergonomics standard aimed at reducing repetitive motion injuries. It was the first time that the 1996 law had been used. Business groups supported the repeal while labor unions opposed it. OSHA’s ergonomics standard was issued November 14, 2000, and took effect January 16, 2001 and would have applied to general industry.

The House of Representatives had voted 223-206 and the Senate had voted 56-44, largely along party lines, to repeal the ergonomics standard. Republicans blasted the rule as onerous and unnecessary while Democrats and labor unions charged that the standard could prevent crippling injuries to hundreds of thousands of workers. Labor Secretary Elaine Chao has stated that ergonomic issues are important and a revised ergonomics rule may be considered at a later date.

REVISED BROAD FORM INDEMNITY CLAUSE Go Top

As follows is an example of modifications used to convert an unsatisfactory indemnity provision to make it more equitable. Deletions are indicated by brackets [ ] and additions are underlined.

To the fullest extent permitted by law, the Contractor and Subcontractor shall indemnify, [defend,] save and hold each other and the Owner, [the Contractor] and Architect, their respective partners, officers, employees, and anyone else acting for or on behalf of any of them (herein after collectively called “indemnitees”) harmless from and against all liability, damage, loss, claims, demands and actions of any nature whatsoever [which arise out of or are connected with, or are claimed to arise out of or be connected with,] (1) directly caused by the negligence of indemnitor during the performance of [Subcontractor’s] its work, (2) resulting in bodily injury (including death) or property damage and (3) limited to demonstrated direct damages exclusive of any consequential or indirect damages [(2) any accident or occurrence that is alleged to have happened in or about the place where the work is being performed or in the vicinity thereof or (3) while any of the Subcontractor’s property, equipment or personnel are in or about such place or vicinity, whether or not] to the extent such liability, damage, loss, claim, demand or action was caused [in part or in whole] by the active or passive negligence or other fault of [a party indemnified hereunder] the party providing this indemnification.

Vol 19, No. 11