Public Private Partnerships: Securing Payment for Labor and Materials

February 13, 2017

What happens to contractors and subcontractors who are without lien rights when a private developer who is building on public land with private money defaults on the project? A recent court decision clarified the parties’ rights and obligations for those projects that are privately funded on publicly owned land, i.e., Public Private Partnerships (“PPP”).

Under New York’s Mechanics’ Lien Law, when the project is a PPP, the public owner must require that the private developer post a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor or subcontractor.  While not exactly a lien, such an arrangement is designed to ensure that contractors and subcontractors get paid for labor and materials on the project.  While most in the industry are familiar with how a bond works, the phrase “other form of undertaking” is subject to interpretation.

In a case of first impression, a three-judge panel in Skanska USA Bldg. v. Atlantic Yards B2 Owner, LLC, analyzed what would satisfy the obligation to post “a bond or other form of undertaking.”  In that case, the contractor argued that a “guarantee” provided by an affiliate of the developer was not equivalent to a bond or “other form of undertaking” under the statute.  The Court disagreed.  The Court ruled that a formal “guarantee” that an affiliate would “fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work,” the Court found, was sufficient to satisfy the statutory obligation.  Although the Court acknowledged there are better guarantees available, such as a letter of credit, the judges found the statute did not require the “best” form of guarantee; and the formal promise to pay met the statutory threshold.

What does this mean for the industry? If this decision is upheld, it may result in cost savings to PPP developers who may no longer incur bonding or related costs; however, it may also result in increased risk for contractors, subcontractors and suppliers who, in the absence of a bond, may have less security in the event of a project default.