Perhaps the most common construction-related dispute is the refusal of a party to make payment to its contractors or subcontractors. While litigation is the traditional avenue for resolving such disputes, methods of alternative dispute resolution such as arbitration and mediation are enjoying growing importance in the field of construction law.

Not only do the American Institute of Architects’ form construction contracts prominently feature arbitration and mediation as alternatives to litigation,[1] but arbitration has been legislatively incorporated into New York State’s statutes governing construction contracts. New York’s Prompt Payment Act both preserves the right of construction firms to pursue their remedies through the quicker, more efficient means of arbitration and protects those firms from oppressive contract provisions that might otherwise preclude them from obtaining satisfaction.

In 2002, the New York State Legislature enacted the Prompt Payment Act,[2] which, as its name implies, is intended to ensure that construction contractors and subcontractors receive timely payment for their services. Finding that “firms and organizations that provide construction services in this state expect and deserve to be paid in a prompt and timely manner”, and observing that unjustified payment delays might discourage construction firms from doing business in New York, the Legislature intended to set standards for payment for construction services and provide remedies when those standards are not met.[3] Undoubtedly recognizing the expediency of arbitration when compared with traditional litigation, the Legislature made arbitration a prominent part of the statutory scheme.

 

Initially, the Prompt Payment Act applies to construction contracts that meet criteria set forth in the statute. A “construction contract” under the statute is “a written or oral agreement for the construction, reconstruction, maintenance, moving, or demolition of any building, structure, or improvement” where the contract sum including labor and materials is at least $150,000.00.[4] The following types of projects are expressly excluded from the Prompt Payment Act’s definition of construction contracts:

• Public improvements;
• One, two, or three family residential homes;
• Residential tract developments comprised of 100 or fewer one or two family homes;
• Any residential project 4,500 square feet or less in size; and
• Certain income-backed residential projects of fewer than 75 units which receive government financial assistance.[5]

Nevertheless, most commercial projects in the Long Island area are likely to be covered by the Prompt Payment Act.

As long as the Prompt Payment Act applies, it provides contractors and subcontractors with a statutory right to seek arbitration of disputes. Specifically, when a contractor, subcontractor, or material supplier feels that an owner or other contracting party has violated its payment obligations, the aggrieved party may serve a written complaint by any means that provides written, third-party verification of delivery.[6] If the dispute is not then resolved to the satisfaction of the aggrieved party within fifteen (15) days of the receipt of third-party verification of the notice being delivered, that party may refer the matter to the American Arbitration Association for expedited arbitration.[7] The award of the arbitrator pursuant to this procedure is final and binding upon the parties unless vacated pursuant to Article 75 of the Civil Practice Law and Rules.[8]

While the inclusion of expedited, binding arbitration as a means of resolving construction contract disputes is a valuable tool for contractors and subcontractors, the Prompt Payment Act also protects that right from being bargained away. The Act specifically declares any contract provision that makes the expedited arbitration discussed above unavailable to one or both parties to be void and unenforceable.[9] In a recent case, the Third Department found that this provision of the Prompt Payment Act voided a contract clause declaring litigation to be the parties’ sole method of dispute resolution and allowed an unpaid subcontractor to pursue payment from a recalcitrant contractor through expedited arbitration.[10]Although it acknowledged that the Prompt Payment Act generally provides that the terms of the parties’ agreement supersedes the Act’s terms, the court ruled that “General Business Law § 757(3) clearly operates to void and render unenforceable the contract’s dispute resolution provision[.]”[11]

The Prompt Payment Act’s provisions not only create and preserve the right of construction firms to arbitrate disputes, but they protect those firms from contract clauses with a history of being abused to the detriment of subcontractors. Out-of-state contractors have been known to employ contracts requiring disputes to be resolved in distant states, and the resulting expense and inconvenience of pursuing dispute resolution in such forums, whether arbitration or litigation, has frustrated the attempts of subcontractors to obtain relief. With the advent of the Prompt Payment Act, however, any provision in a covered construction contract that imposes another state’s law on the interpretation of the contract or, more importantly, requires arbitration or another form of dispute resolution to be conducted in another state, is now void and unenforceable.[12] Thus, the Prompt Payment Act not only confers a right to arbitration that cannot be altered by contract terms, but it ensures that such arbitration cannot be removed to a distant forum, which would create additional delay in, if not outright frustration of, construction firms’ efforts to collect defaulted payments.

If the Prompt Payment Act is any indication, the trend toward alternative dispute resolution, especially arbitration, as a means of resolving construction disputes will continue. In passing the Act, the Legislature provided construction firms with a valuable tool for obtaining relief from defaulting owners or contractors, and it also conferred its approval on arbitration as the method to do so. Considering the benefit to construction firms in terms of avoiding the delays and costs associated with litigation, it can be anticipated that businesses in the construction industry will increasingly take advantage of the arbitration available under the Prompt Payment Act.

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 at John@LIConstructionLaw.com or by telephone at (516) 462-7051.

[1] See, e.g., AIA Document A201-2007 General Conditions for the Contract of Construction.

[2] Gen. Bus. Law § 756 et. seq.

[3] GENERAL BUSINESS—CONSTRUCTION CONTRACTS, 2002 Sess. Law News of N.Y. Ch. 127, § 1 (S. 7724–A).

[4] Gen. Bus. Law § 756(1).

[5] Id.

[6] Gen. Bus. Law. §§ 756-b(3)(a) and (b).

[7] Gen. Bus. Law. § 756-b(3)(c).

[8] Gen. Bus. Law. §§ 756-b(3)(d) and (e).

[9] Gen. Bus. Law. § 757(3).

[10] In re Arbitration Between Capital Siding & Const., LLC, 138 A.D.3d 1265, 31 N.Y.S.2d 230 (3d Dep’t 2016).

[11] Id.

[12] Gen. Bus. Law § 757(1).

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors, contributors, contributing law firms, or committee members and their respective employers.