By: Chandler Barganier, Law Clerk, Sheats & Bailey, PLLC.
The construction industry is an especially attractive target for email scams and wire fraud. A frequent pattern we’ve seen among clients is subcontractors will issue an invoice, followed by a delay in payment. After 90 days pass, the subcontractor demands payment, only for the contractor to discover that payment was made, but not to whom they had intended. In these situations, hackers manage to impersonate general contractors and vendors and provide fraudulent wiring instructions resulting in payments being misdirected into unauthorized accounts. Another common scheme we have run into recently is business email compromise schemes that use phishing tactics where a third party sends an email that looks like it is from the subcontractor changing how they want to receive payment on the invoice and directing payment via ACH transfer to a fraudulent account.
These wire fraud and ACH scams can result in losses reaching hundreds of thousands of dollars. Especially, as existing laws fail to adequately protect contractors from wire fraud and ACH scams. While Federal law defines wire fraud broadly under 18 U.S.C. §1343, this statute only provides a mechanism for criminal enforcement, it does little to resolve the civil consequences faced by victims in contractual disputes. UCC article 4A protects the banks not the victims of wire fraud and UCC article 3 applies to physical checks, not wire and ACH transfers.
While physical checks remain the safest method of payment because they may be cancelled and refunded by banks if deposited into unauthorized accounts, wire transfers are common practice for most businesses. They’re instantaneous, electronic, and simply more convenient. However, it’s this convenience that makes wire transfers so susceptible to fraud. As Banks are not responsible for customer-initiated wire transfers in the same way they would be for physical checks. Further, scammers can immediately move stolen funds into offshore accounts which places them outside U.S. jurisdiction and leaves victims without recourse. Despite this, in most wire fraud situations contract parties are still obligated to fulfill their financial obligations despite being victims of these schemes.
Unfortunately, parties who fall victim to wire fraud usually are not excused from their contractual obligations. Under New York law, the doctrine of impossibility, a common law defense, is narrowly applied and does not relieve contracting parties from liability merely because performance has become financially burdensome or even “impossible.” This principle is further illustrated in Sassower v. Blumenfeld, where the defendant, having lost funds in a fraudulent wire scheme, argued that his inability to repay a deposit should be excused because it would be impossible for him to perform his contractual obligations.[1] The court rejected this defense, emphasizing the fundamental principle that once a party to a contract has made a promise, that party must perform or respond to damages for its failure, even when unforeseen circumstances make performance burdensome.
Given these legal realities, it’s suggested that to protect your business from the threat of wire fraud and ACH scams you include contract and subcontract clauses that a) explicitly state how payment is to be made; b) identifies who may make changes to the payment method; and c) puts a verification system in place for confirming the changes were made by the other party, such as requiring a phone call to the individual authorized to make payment changes via a trusted known phone number. All staff should be trained in this and understand procedures put in place. Further, obtaining cyber liability insurance is recommended to best protect your business.
If you need further assistance or have additional questions, please contact Sheats & Bailey, PLLC. www.TheConstructionlaw.com; Tel. 315-676-7314.
The information provided above is not intended to serve as specific legal advice for any particular situation. Competent legal and experienced counsel should be consulted.
[1] Sassower v. Blumenfeld, 878 NYS2d (2009)