In an article published on Wednesday, February 28 in Construction Executive, Judah Lifschitz and Gregory Seador discuss recoupment and setoff in construction contracts.
They explain that the key difference between the two is that setoff allows the party to offset payments due on one job against amounts owed on another job, while recoupment limits a party’s right to offset payments to the same job. “A useful technique for owners, general contractors and subcontractors to protect themselves from losses when contracting with the same party on multiple jobs lies in the careful drafting of the contract language before the job even begins,” they state.
Even where the contract contains a setoff provision, local laws need to be considered before offsetting payments. “For example, some states have enacted ‘trust fund’ laws which protect subcontractor payments by providing that monies paid by the owner to the general contractor for labor, material and services are held in trust for the benefit of the subcontractors,” they discuss. “In New York, for instance, the law applies to projects for ‘improvement of real property, including home improvement or public improvement’ and protects ‘payment of claims of subcontractors, architects, engineers, surveyors, laborers and materialmen.’” Therefore, local law may dictate whether and to what extent a contractor has the right to setoff a payment due to a subcontractor even if the contract contains a provision expressly allowing it. Trust fund laws vary by jurisdiction, and parties should confirm whether laws of this type affect their right of setoff.
“The right of setoff or the lack thereof can have implications for project participants,” they share. “Project parties would be wise to understand the applicable setoff law and carefully consider contractual setoff language before entering into contracts and before any disputes arise.”
Read the full article here.