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July 23, 2008

Subcontractor's Claim Barred Until Its Mechanic's Lien Rights are Exhausted

Inter. Metal Fabricator v. HRH Construction, 843 N.Y.S.2d 309 (App. Div. 1st Dep't, Oct. 2007)

In this detrimental case to subcontractors and suppliers, the subcontractor's suit against the construction manager was dismissed on the grounds that it was premature. The subcontract barred suit against the construction manager until the subcontractor had completed all available mechanic's lien enforcement actions.

The subcontractor sued prior to exhausting its lien rights arguing that the provision requiring exhaustion was unenforceable. However, the First Dept. ruled against the subcontractor holding that "the provision at issue does not offend the prohibition in West Fair Elec. Contractors against indefinitely suspending a contractor's right to enforce its mechanic's lien."

Comment

The mechanic's lien exhaustion provision is a direct response to the West-Fair decision which held that "pay-if-paid" provisions are unenforceable in New York. The practical effect of the lien exhaustion provision is to delay, perhaps for several years, the ability of subcontractors and suppliers to recover payment directly from prime contractors, and achieves for all practical purposes the risk shifting sought by the prohibited "pay-if-paid" clauses. By this decision the lien law which is intended to be a sword for subs and suppliers has been turned into a shield by GCs.

However, this case would not seem to affect the period within which to sue on a payment bond in light of Windsor Metal Fabrications which held the claimant's suit period would not be extended because the parties were engaged in an arbitration.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.

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