Blending of Public and Private Construction - Proceed With Caution
Posted on Mon, Aug 29, 2011
Traditionally, New York Construction Law sets separate rules of engagement for public projects (where the owner is a public entity) and those that are private construction projects (where the owner is a private individual or corporation). Given these two distinct camps, it has been easy to classify a project as either a public project or a private one. For contractors, subcontractors and suppliers, knowing which rules of engagement pertain to them is essential to avoid making costly mistakes.
However, the clear distinction between private and public projects is now being blurred through recent 'hybrid' arrangements, which seek to combine aspects of private and public construction works in a single project. This creates a new grey area where these formerly separate formats overlap. As a result, the determination of whether the project is a federal public project, a state public project, or a private construction project has become a complex legal quandary.
These grey areas arise through the use of:
Extended Use Leasing (EUL) – Under Congressional authority, the military has been provided greater flexibility in leasing military property for maximized value, and allows for the leasing of federal property for private development.[1]
Public-Private Partnerships (PPP) – A contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public.[2]
Federal Lease-Backs – A contractual agreement allowing a public entity to benefit from tax deductions normally available only to the private sector. Typically the public owners sell real property to private investors and simultaneously lease it back. The private entity puts equity into the property and in return gets rental payments and the tax benefits of ownership, which include interest deductions, depreciation deductions and, occasionally, investment tax credits.[3]
Although these ‘hybrid’ situations may indeed present attractive features for both the public and private sectors, there are potential risks to the private contractor, subcontractor, or supplier should the project or payments run into problems.
For example, should the contractor perform and fail to be paid for its work under New York Construction Law, in the traditional private context, the contractor may be able to pursue its claims under numerous theories, such as breach of contract, or to file and foreclose upon its mechanic’s lien. In a hybrid situation, in contrast, the contractor may be barred from filing an action against the federal or state government under the doctrine of sovereign immunity.[4],[5].
Further, as these types of hybrid projects may be located on federal property, state law may not apply, including those laws that provide the contractor, subcontractor and supplier protections under the New York Lien Law[6], or the New York Prompt Payment Act[7].
“Evaluating the applicability of such state laws to public-private partnerships would require a two-step analysis: First, a determination of whether the project is located on a federal enclave and, second, an interpretation of the state statute’s coverage by its own language… Thus even if not on federal land, a hybrid project may not be subject to (state) statute.”[8]
As the combination of public and private interests continue to develop through the use of the Enhanced Use Leasing, Public-Private Partnerships, and Lease-Backs, a precedent will be established through caselaw. This precedent will provide rules for contractors, subcontractors and suppliers to work under these formats with an understanding of their risks and protections. Until that time occurs, however, careful analysis of all the federal, state, and private rights, remedies and restrictions is required.
Your comments and article topic suggestions are invited in the field below.
The author, John Caravella Esq., is a construction attorney and formerly practicing project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration across New York and Florida. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached by email: John@LIConstructionLaw.com or (516) 462-7051.
[1] See 10 U.S.C. § 2667(a)
[4] Generally, without the federal or state governmental agency waiving its sovereign immunity rights, no action may be brought against it. See Gray v. Bell, 712 F.2d 490, 507 (D.C. Cir. 1983).
[7] N.Y. Gen. Bus. Law §§ 756 et seq.(private); N.Y. State Fin. Law §§ 139-f, 179-f (pt. of Art. 11-A);
Pub. Auth. Law § 2880, Gen.Mun. Law § 106-b; Hwy.Law § 3 8; NYC Procurement Policy Board Rules § 4-06. (public).
[8] Robert F. Carney & Lisa D. Sparks, Is It Public or Not? Whiteford Taylor Preston, Construction Update Summer 2010.
This is a general information article and should not be construed as legal advice or a legal opinion. Readers are encouraged to seek counsel from a construction lawyer for advice on a particular circumstance.