By: Frank T. Cara, Partner, Pepper Hamilton LLP
Not long ago it was false claim concerns and W/M/DBE issues that had public contractors on edge and kept compliance officers busy, but now public work contractors in New York have a new issue to contend with — an issue that effectively can put a company out of business and one that has made several contractors withdraw from the New York public works marketplace.
In an effort to control cost and deter contractor claims, as part of its 2020 budget, the New York State legislature passed Bill No. A02009C/ S01509-C, section 1279-h, which permits the Metropolitan Transportation Authority (MTA) to debar, for a period of five years, any contractor that entered into a construction, consultant, equipment, supply or services contract if the contractor fails “to substantially complete the work within the time frame set forth in the contract, or in any subsequent change order, by more than ten percent of the contract term; or where a contractor’s disputed work exceeds ten percent or more of the total contract cost where claimed costs are deemed to be invalid pursuant by the contractual dispute resolution process.”
This effectively means that, if a contractor submits claim(s) for additional work and/or time and “one or more of such claims are determined to be invalid under the contract’s dispute resolution process or if no such process is specified in the contract in a final determination made by the chief engineer or otherwise by the Authority, and together the sum of any such invalid claims exceeds by ten percent or more the total adjusted contract value,” the mandatory debarment process will be triggered. Simply put, if you submit a large claim or a combination of claims and lose, you can be on the road to debarment as it is a mandatory process, regardless of whether you believed the claim(s) to be meritorious or not.
The debarment process is commenced by a debarment notice from the MTA to the contractor. The contractor has 30 days to respond. Thereafter, a hearing will be held before a panel of three MTA employees. The panel’s determination must be ratified by the MTA board. Given the serious nature of this process and the devastating results of a debarment, it is strongly recommended that the contractor retain counsel to represent it in the proceeding.
The contractor may “appeal” this decision by commencing an action in court. In New York, the contractor will have to overcome an arbitrary-and-capricious standard to set aside a debarment finding. This is a very high and difficult standard to meet.
This new legislation, which is applicable to any MTA contract that was in place on April 12, 2019 or is entered into thereafter, is given far-reaching effect by Executive Order 192 signed by Governor Cuomo on January 15, 2019 ,which states that any contractor or vendor that is “deemed non-responsible, debarred, or otherwise ineligible” will be debarred from doing business with all New York state entities absent an approved waiver. So by being debarred by the MTA, you may be debarred from working for all New York state agencies. Given that virtually every prequalification, tender and bid submission — both public and private, inside and outside New York state — asks if you, as a contractor, have ever been debarred anywhere, you can effectively be put out of business on a nationwide basis. Additionally, the debarment can also reach any affiliated companies, thus affecting the entire “family” of companies in New York and elsewhere.
We are watching closely to see if similar provisions are adopted by other public agencies in other states, as these provisions are quite concerning. There are several scenarios that clearly have not been contemplated by the legislature in its enactment, as even an innocent contractor acting in good faith can be disbarred by these draconian measures.
For example, these provisions fail to contemplate a passthrough claim of a subcontractor. If a subcontractor presents a claim, the contractor has a responsibility to pass this on to the MTA. If this claim were to meet the debarment threshold and ultimately be denied, the contractor would be subject to debarment, not the subcontractor. If the contractor did not process the claim, the subcontractor would then have grounds to pursue an action against the contractor. The contractor is in a catch-22 position. The contractor will bear all the risk, while the subcontractor would have no culpability for the merits of its claim.
Another troubling scenario is a project where a contractor pursues the project as a joint venture (JV), particularly if the contractor is the minority partner. Because the managing partner of the JV typically has control of the schedule and performance of the JV, the minority partner would be held responsible for the failings of the JV, even though the minority partner had limited control over the project.
Effectively, the regulations will hold a contractor responsible for a “bad actor” that it has limited or no control over.
In light of these new regulations, it is imperative that contractors diligently follow all contract terms and timely put the MTA on notice of any extra work, delays and time impacts. Every “i” must be dotted and every “t” crossed. Additionally, contractors must be strategic about filing claims and disputes, as there are new risks that need to be seriously considered when preparing any claim.
If you find yourself in position where you have any debarment concerns or any questions, do not hesitate to contact Pepper Hamilton LLP.
Pepper Hamilton’s Construction Practice Group has an unparalleled record of resolving complex construction disputes and winning complex construction trials. Our lawyers counsel clients on some of the biggest, most sophisticated construction projects in the world. Chambers USA named our firm Construction Law Firm of the Year in 2018, and we are nationally ranked in Chambers USA, The Legal 500 United States, and U.S. News / Best Lawyer. With a national network of attorneys across 14 offices, including many with first-chair trial experience, we have the depth and breadth to try cases of any complexity, anywhere at any time. For more information about Pepper’s Construction Practice, visit www.constructlaw.com.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.