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Prompt payment statutes come in a variety of “flavors,” depending on the type of project (public or private), the location of the project (i.e., which state) and the nature of the project (state or federal). While the terms of these statutes vary widely across jurisdictions, prompt payment statutes typically require an owner to pay a contractor within X number of days of receipt of an invoice, absent some other agreement or written objection to the invoice.
Contractors, in turn, then have Y number of days after receipt of payment from the owner to pay their subcontractors, again absent some other agreement or written objection. This payment timeline trickles down in much the same way to lower-tier subcontractors. Failure of any of the paying parties to comply with the operative prompt payment law triggers penalties such as interest, attorneys' fees and costs of collection.
Purpose of Prompt Payment Statutes
Regardless of the flavor, prompt payment statutes reflect a strong public policy to ensure that contractors performing construction work are paid promptly. New York’s statute indicates that its purpose is “to expedite payment of all monies owed to those who perform contracting services pursuant to construction contracts.” N.Y. Gen. Bus. Law § 756-a.
This concept of getting paid promptly has two parts: getting money and resolving payment disputes quickly. Contractors and subcontractors spend most of their time worrying about the former, often leaving the latter issue on the “back burner” (for their respective attorneys to worry about).
Well, this month, we are going to take a closer look at the payment dispute resolution process and how one federal court in New York interpreted that state’s prompt payment statute. See Maple Drake Austell Owner, LLC v. D.F. Pray, Inc., No. 19-CV-5930 (JSR), 2019 WL 2911649 (S.D.N.Y. July 8, 2019).
Maple Drake, the owner of property undergoing construction in Queens, had a payment dispute with its general contractor, D.F. Pray. Under New York’s Prompt Payment Act (PPA), the owner must approve or disapprove (in writing) a contractor’s invoice upon receipt. N.Y. Gen. Bus. Law § 756-a(2)(a)(i)(1). An owner must not “unreasonably” withhold approval or render a “bad faith” disapproval of an invoice in whole or in part. See id.
The PPA further provides that payment must be made within 30 days of approval, and the owner may withhold “only an amount that is sufficient to pay the costs and expenses the owner reasonably expects to incur in order to cure the defect” that caused the disapproval. N.Y. Gen. Bus. Law § 756-a(3)(a)(ii), (iv).
If the owner fails to pay under the PPA or fails to approve or disapprove of an invoice timely, then the aggrieved party may file a written complaint with the other, and the parties shall attempt to resolve their dispute. If the parties are unable to reach a resolution, then the aggrieved party may bring an expedited arbitration under the rules of the American Arbitration Association. Notably, the PPA provides that any contractual provision prohibiting such an expedited arbitration is “void and unenforceable.” See N.Y. Gen. Bus. Law § 757(3).
Scope of Arbitration of Payment Disputes
In Maple Drake, the contractor submitted an interim invoice for $721,305.39 and the owner timely objected. The contractor, Pray, issued a notice of complaint, alleging that Maple Drake was withholding payment unreasonably, in bad faith and in violation of the PPA. Pray served a demand for expedited arbitration. Maple Drake, contending that such an arbitration is improper, brought an action in New York state court to stay the arbitration. The matter was transferred to federal court and was heard by District Judge Jed Rakoff in the Southern District of New York.
Judge Rakoff noted that the parties’ contract did not provide for arbitration unless it was by “mutual agreement” of the parties. Maple Drake, 2019 WL 2911649, at *2. Pray argued that the expedited arbitration provision in the PPA superseded any such dispute resolution in the parties’ contract. Maple Drake disagreed, arguing that the PPA only applies to undisputed invoices. After examining a split of authority in New York’s lower state courts, Judge Rakoff agreed with Pray’s position:
“[In In re Capital Siding & Constr., LLC, 138 A.D.3d 1265, 31 N.Y.S.3d 230 (3d Dep’t 2016)], the court held that the PPA’s forced arbitration provision applied, even though ‘a dispute arose [over an invoice] and petitioner withheld certain payments from respondent.’ The court went on to say that parties could not contractually abridge or modify the PPA’s arbitration provision because [N.Y. Gen. Bus. Law § 757(3)] ‘voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties.’
“As the Third Department [of New York’s Appellate Division] appears to be the only New York appellate authority to have interpreted the relevant provisions of the PPA, Capital Siding is binding on this Court and unambiguously favors [Pray].”
Maple Drake, 2019 WL 2911649, at *2 (citations omitted); see also The Dakota, Inc. v. Nicholson & Galloway, Inc., No. 656280/2018, 2019 WL 429471, at *2 (N.Y. Sup. Ct. Feb. 4, 2019) (following Capital Siding and enforcing PPA expedited arbitration procedure notwithstanding the parties’ contractual agreement to litigate disputes).
Judge Rakoff also noted that the PPA does not, by its terms, limit the availability of arbitration to undisputed invoices. The arbitration provision in the PPA “applies broadly to any ‘violation’ of ‘the provisions of this article.’” N.Y. Gen. Bus. Law § 756-b(3)(a). Id. at *2. As the Commercial Division found in The Dakota case:
“The plain language of the PPA reveals its arbitration provision was broadly drafted in favor of arbitrability.” [Pike Co. v. Tri-Krete Ltd., 349 F. Supp. 3d 265, 275 (W.D.N.Y. 2018)]. “While there is little caselaw specifically interpreting this arbitration provision, the available decisional law supports the conclusion that a claim alleging a violation of the PPA is subject to arbitration so long as the prerequisites of [N.Y. Gen. Bus. Law § 756-b(3)] have been satisfied.” Id. at 276.
“In other words, if a subcontractor alleges that the PPA was violated and satisfies the prerequisites of [N.Y. Gen. Bus. Law § 756-b(3)], then the claim may proceed to arbitration where the contractor may raise any applicable defense to support its non-payment.” Id. at 276-77. The prerequisites include third-party verification of delivery of written notice of the PPA violations; and third-party verification of delivery of the demand, to [the American Arbitration Association], for an expedited arbitration. See N.Y. Gen. Bus. Law § 756-b(3).
The Dakota, 2019 WL 429471, at *2.
Moreover, an owner could violate the PPA with respect to a disputed invoice by, for example, disapproving the invoice in bad faith. As Judge Rakoff pointed out, in this case, Pray is alleging that Maple Drake withheld payment in bad faith. Id. at *2. Finding in favor of Pray, Judge Rakoff denied Maple Drake’s application for a stay of arbitration and directed the parties to resolve their payment dispute by expedited arbitration. Parties to private construction contracts — such as the ones at issue in Maple Drake, The Dakota and Pike — need to be mindful of the governing prompt payment statute in the jurisdiction where the project is located. In addition to payment deadlines, writing requirements and penalties (including interest and counsel fees), parties also need to check the statute for dispute resolution mechanisms.
While this column addressed cases interpreting the process in the state of New York, other states have similar expedited arbitration requirements. It is essential for contracting parties to understand their recourse in the event of payment disputes — including whether that recourse involves expedited arbitration or litigation in court. Knowing this information will save the parties time and the expenditure of additional, possibly needless, legal fees.