"Contractor Forfeiture Enhancement Devices" – NYS Legislature Must Move to Finally Stop the Abuse

By Henry L. Goldberg

One of the most pressing legal issues confronting contractors today is the epidemic of nasty contractual "notice" provisions in public contracts regarding delay and extra work claims. They are as unfairly harmful, as they are unnecessary. In fact, I've coined a phrase to refer to them, namely, Contractor Forfeiture Enhancement Devices or "C.O.F.E.D.s" Hopefully this term will quickly become a negative epithet in the industry.

The absurdly strict enforcement of these contract provisions is leading to a tidal wave of contractor forfeitures of extremely valuable rights. The time to stop the cancerous spread of the strict enforcement of C.O.F.E.D.s is now.

A Classic "C.O.F.E.D."

Allow me to explain by example. One of the most unjustified C.O.F.E.D.s is found in the New York State Department of Transportation ("NYS-DOT") Standard Specifications, which states at Section 104-06 ("Notice and Recordkeeping") in pertinent part:

The notification and recordkeeping provisions in this Contract shall be strictly complied with for disputes of any nature and are a condition precedent to any recovery.

Furthermore, Section 104-06 goes on to state at Subsection C ("Failure to Comply"):

Failure of the Contractor to provide such written notice in a timely fashion will be grounds for denial of the dispute and the Department does not have to show prejudice to its interest before such denial is made. In the event the Contractor fails to provide a required written notice within the required time limits, or fails to maintain and submit the records specified above, any claim for compensation shall be deemed waived, notwithstanding the fact that the Department may have had actual notice of the facts and circumstances comprising such dispute and is not prejudiced by such failure of notice or recordkeeping.

So what does this C.O.F.E.D. actually mean? If you are late in giving any required contractual notice, your claim shall be deemed waived, even if the NYS-DOT is not prejudiced by such failure on your part. Let's let that sink in. The Contractor fails to give a contractually-required notification to NYS-DOT that causes no harm whatsoever to the NYS-DOT and the contractor forfeits all of its rights to its valuable claim.

Worst still, this is also "notwithstanding the fact that the NYS-DOT may have had actual notice of the facts and circumstances comprising such dispute and is not prejudiced." What does this mean? A contractor suffers forfeiture of its valuable claim, even where the notice is not necessary because the NYS-DOT already knew about the matter or incident?! This is a complete forfeiture of a contractor's rights and, admittedly, for no reason.

Why would any "public servant" working for New York State be motivated to even write such an unfair and one-sided contract clause?

So why do I use the term C.O.F.E.D.? Because stringent contractual demands such as these are so over-the-top, so one-sided, and so unnecessary for the fair and equitable administration of public contracts, that they clearly could only have been motivated by one, inescapable purpose: to unfairly impose waiver and forfeiture upon the people who actually build our state.

Desperately Needed Reform

I can tell you from the front lines of this battle that the courts have been, and will always be, worthless. Barring illegality, courts are bound to enforce contract provisions, no matter how severe. If you build bridges, you sign the contract of the party that owns the bridges: the government. As a result, public contractors are effectively defenseless to these clauses.

As a result, it occurred to me that the industry must seek legislative intervention to stop the abuse. Therefore, I decided to attempt to draft legislation that would address the problem. I'm pleased to report that this legislation has received the endorsement and "full bore" support of the leading construction trade associations. I urge each Association in the industry to make this a top legislative priority. The need for your members is critical.

In conceptualizing this legislation, I sought an industry-wide solution that could be applied to any and all public works contracts, not a piecemeal, public-agency by public-agency approach. To do so, I developed a "Prejudice Rule" for all public construction contracts, using the model of what the legislature did in 2008 with regard to liability insurance policies in New York State. Since the legislature had already acknowledged and reformed this specific type of "notice" abuse with regard to claims under liability insurance policies, this precedent, I reasoned, should be available for the construction industry with regard to contract claims.

As explained by Senator DeFrancisco in support of amending the NY Insurance Law (Section 3420) in 2008:

Current law, therefore, leads to an inequitable outcome with insurers collecting billions of dollars in premiums annually, and declining coverage over an inconsequential technicality. This bill would prohibit insurers from denying coverage for claims based on the failure to provide timely notice unless the insurer has suffered "prejudice" as a result of the delay. Under the bill, the insurer's rights would not be deemed prejudiced unless the failure to timely notice materially impairs the ability of the insurer to investigate or defend a claim.[1]

Our "COFED Reform" bill is based on the very same language, applied to public construction contracts, rather than insurance policies. It creates a "Prejudice Rule" so that if, on the rare occasion, a public owner is actually prejudiced by a lack of notice the clause would be enforceable; but in the typical situation, where there is absolutely no prejudice and simply a windfall to the benefit of the government, the notice provision would not be enforceable.

I am also pleased to report, as I write this column, that what might be called my "COFED Reform" bill (S6906) is being well received and moving quickly in Albany. It is rare that the Albany friends of the industry see an issue about which all of its constituents can agree. This reform bill (Senate Bill S6906) is already out of committee and has reached the floor of the Senate. Call your Association or your local state legislator today to urge their immediate support. Your very future as a public contractor may depend on it.

Finally, I'd like to extend particular thanks to the STA legislative team for their early and significant efforts.

If you would like a copy of the "COFED Reform" bill, feel free to contact me at hlgoldberg@goldbergconnolly.com.

1 Sponsor memo in support of S.8610 (2008) subsequently enacted as Chapter 388 of the Laws of 2008.