NEW YORK'S AMENDED PROMPT PAYMENT ACT
CHANGES SHOULD ACTUALLY FACILITATE TIMELY PAYMENT ON PRIVATE CONSTRUCTION PROJECTS

By: Mitchell B. Reiter

There is a new weapon against late payments from owners and general contractors on private construction projects in New York. Recently enacted changes to the existing Prompt Payment Act amend the Labor Law and General Business Law and should actually put the "prompt" into the Act. These revisions were needed to fix the existing, less than successful, Prompt Payment Act and to make available greater enforcement procedures for tradesman, materialmen, contractors and subcontractors.

New York's previously enacted Prompt Payment Act for construction work on private projects was the target of much criticism for its lack of any meaningful enforcement mechanisms. Unlike the previous Act, the new Prompt Payment Act actually has "teeth" that should create real methods for enforcing timely payments. The following are the most important revisions contained in the new Prompt Payment Act.

Minimum 30 Day Payment Rule

Under the new Act, an owner must make payment on an interim or final invoice within 30 days, even if the contract provides for a longer period. Under the previous Act, payments were required to be made within 30 days, except if the parties agreed on different payment terms, those terms governed. This old provision of the Act proved useless because all contracts contained their own payment terms and those terms almost always provided for a longer period than 30 days. Typically, the contract provides for payment within a certain period of time from when the owner pays the general contractor or construction manager. The subcontractor was left with little or no ability to control or enforce its payment rights. Now the subcontractor must be paid within 30 days, no matter what the subcontract provides.

No L/Ds on Interim Payments

The new Act also prohibits contractors and subcontractors from withholding "anticipated" liquidated damages from interim payments due a subcontractor, tradesman or materialman. Such withholding for liquidated damages was permitted under the previous Act in an amount established in the agreed upon schedule in the parties' contract.

Binding Expedited Arbitration

Perhaps most importantly, the new Prompt Payment Act provides that, where an owner and/or contractor violates the Act, the contractor and/or subcontractor may resort to expedited, binding arbitration to resolve the dispute. This is significant. By contrast, under the previous Act, the only remedy for contractors and subcontractors was to hope to eventually collect interest from the owner and/or suspend performance.

Now, in addition to collecting interest on late payments and in lieu of suspending performance, a contractor/subcontractor may first provide written notice of a complaint to the owner or contractor that they have violated the Act and attempt to resolve the matter giving rise to the complaint. If such resolution efforts are unsuccessful, the contractor/subcontractor may then refer the matter after 15 days to the American Arbitration Association ("AAA") for expedited arbitration. Significantly, as indicated, the award of the arbitrator shall be final and binding on the parties.

The Arbitration Experience:

Once you seek arbitration under the Act, the rules of the AAA, not the terms of the Act, will govern the expedited process. Although under the AAA's construction arbitration rules for expedited cases there is a $75,000 cap, by the terms of the Prompt Payment Act itself you are entitled to an expedited arbitration on all disputes, regardless of the amount in dispute. AAA's rules will have to be applied consistent with the Act, meaning that similar fast track time restrictions as described below will likely be followed for prompt pay disputes that go to arbitration, even if they exceed the monetary cap.

The more important aspects of the expedited rules that will help stream-line the arbitration process include the following:

Answers to the complaints are to be filed within 7 calendar days of the initiating complaint;
Select arbitrator from list of 5 candidates provided by AAA immediately after filing of Answer;
A preliminary phone conference must be held within 10 business days from confirmation of arbitrator's appointment;
There is no discovery between the parties;
The hearing shall not exceed 1 day;
The hearing must be closed no later than 45 calendar days after the date of the preliminary phone conference; and
The Award shall be rendered not later than 14 calendar days from the date of the closing of the hearing.

It is worth noting that the statute appears to grant AAA a potentially lucrative monopoly on what could be an enormous number of Prompt Payment Act arbitrations. This, of course, begs the question of how will the AAA price its filing fees for such arbitrations and how will it handle the potential significant caseload.

G&C Commentary:

The new Prompt Payment Act is certainly an improvement over the ineffective previous Act and may actually be an effective tool for subcontractors to ensure the timely payment of their invoices on private construction projects. In fact, it has the potential to dramatically change the "balance of power" along the construction payment food chain in the private sector. In particular, coupled with the thirty-day ceiling on payments of interim invoices as provided in the actual statute, the time restrictions for the arbitration process under the AAA's rules could substantially limit the time it takes for disputes over payments to be resolved, during which time subcontractors typically go without payment. Significantly, this right to an expedited arbitration will be available on almost all private construction projects, as a mandatory arbitration provision has been written by statute into every private construction contract over $150,000 in New York State.

Contractors should use the expedited binding arbitration opportunity as broadly as possible to cover not only disputes concerning when a payment is made but also what is paid. You should expect that owners and general contractors will "mark up" the payment application to eliminate items that should properly be paid and then pay the improperly reduced amount. They will then contend that the arbitration is limited to the timeliness of the payment. Do not accept this result. The amount that should have been paid but was unjustifiably not paid (the "what") is now late per the statute (the "when"). The arbitration under the Act should, under this scenario, include a decision on whether the payment amount was proper because this issue is inextricably intertwined with whether the contractor is receiving timely payments under the Act. As a matter of right and justice, there is no difference between a payment not made on time and a timely payment that fails to include significant amounts that are rightfully due and owing.

In addition, be aware of the "Clean Claim Game." In other words, remember that under the statute payment is due within 30 days of approval of the invoice. Therefore, owners will do whatever it can to delay the approval process. Owners will still "mark up"/challenge invoices to delay the approval process. However, there are other provisions of the Prompt Payment Act that attempt to narrow this potential "approval" loophole. For instance, owners must approve/disapprove of an invoice within 12 business days and they may only disapprove of an invoice for unsatisfactory job progress, defective work/materials, disputed work materials, failure to comply with the contract, failure to make payments for labor or failure of the architect to certify payment. Also, accurate preparation and documentation backing up your invoices/applications for payment are the best counter to an owner's approval delay tactics.

In addition, to delay the actual arbitration process, owners will likely try to reject proposed arbitrators, scheduling of the hearing date, etc. The good news is that, as noted above, the AAA's rules for expedited cases are relatively short. Insist on their strict enforcement.

We must further caution that even though you may now resort to arbitration for late and/or non-payment of invoices, you must still comply with all the notice and recordkeeping requirements set forth in your contract in order to preserve your rights to make claims and avoid any waiver of claims you may have against the contractor and/or owner. In addition, before resorting to arbitration, it is important that you do your homework and determine the alleged reason as to why you have not been paid. You also need to establish a paper trail evidencing your receivable which can be used to prove your case at the arbitration. You do not want to go into arbitration only to find out the contractor/owner has a legitimate, or even pretextual, reason for not making payment, one that may have been easily remedied or disproved prior to the arbitration.

In summary, the new Prompt Payment Act presents a great opportunity for contractors/subcontractors on private construction projects to ensure that they are timely paid for the work/materials that they provide. However, the rights afforded under the Act will be meaningless unless you understand what those rights are and insist upon their strict enforcement. Between the traditional weapons for payment, including mechanic's liens, lien law trust funds and payment bonds, and the new enforcement procedures under the Prompt Payment Act, contractors/subcontractors have a formidable arsenal or "real" remedies to use to ensure timely and proper payment of their invoices.

Christopher K. Smith, an associate with the firm, assisted with the preparation of the article.