If you are an owner, contractor or subcontractor, payment disputes that arise on construction projects are a common occurrence. Even worse, more often than not these disputes lead to litigation, which costs an exorbitant amount of money and time. To combat this problem in the construction industry the New York State legislature enacted the Prompt Payment Act in 2003 (“PPA”), which is found in Sections 756-758 of Article 35-E of the General Business Law.
The PPA applies to any “written or oral agreement for the construction… of any building, structure or improvement…where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds one hundred fifty thousand dollars ($150,000).” The purpose of the PPA, as stated in Section 756-a of the Act, is to “expedite payment of all monies owed to those who perform contracting services pursuant to construction contracts.” While the PPA helps ensure that professionals in the construction industry are promptly paid for their services, the most interesting feature of the PPA is that some of its provisions supersede basic freedom of contract rights.
So, why is this important for those of you in the construction industry? Under the PPA, some of the provisions in your construction contracts may be void and unenforceable. This means that should a payment dispute arise, and you move to enforce a certain provision in your contract, the courts may look to the PPA and rule against your contract.
For instance, under Section 757 of the PPA the following provisions in construction contracts are deemed void and unenforceable:
A provision, covenant, clause or understanding in, collateral to or affecting a construction contract, with the exception of a contract with a material supplier, that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted in another state.
A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that a party to the contract cannot suspend performance under the contract if another party to the contract fails to make prompt payments under the contract.
A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that expedited arbitration as expressly provided for and in the manner established by section seven hundred fifty-six-b of this article is unavailable to one or both parties.
A provision, covenant, clause or understanding in collateral to or affecting a construction contract establishing payment provisions which differ from those established in subdivision three of section seven hundred fifty-six-a and section seven hundred fifty-six-b as applicable
To illustrate this point, recently, the court in In re Arbitration Between Capital Siding & Construction, 138 A.D.3d 1265 (3d Dep’t 2016) (“Capital Siding”), concluded that Section 757 of the PPA superseded the contract agreed upon and executed by the parties. In that case, a dispute arose when the contractor withheld payments to its subcontractor. The subcontractor then sought expedited arbitration under Section 757(3) of the PPA. In response, the contractor argued against expedited arbitration because the contract between the parties explicitly stated that “litigation, not arbitration, is the parties’ chosen method of dispute resolution.” The court, interpreting the PPA, ruled that the provision in the parties’ contract was void and unenforceable under Section 757(3), which expressly voids any contractual provision that makes expedited arbitration unavailable to both parties.
The court’s conclusion in Capital Siding is significant for those drafting and negotiating construction contracts. The ruling provides that expedited arbitration will always be available for those whose construction contract falls under the ambit of the PPA, regardless of the terms agreed upon in the contract. While, this conclusion is helpful for those who prefer arbitration or for an aggrieved party who cannot afford to commence litigation, it can completely change the outcome of a payment dispute. For this reason, those who are drafting, negotiating or currently using construction contracts should view them in accordance with the rules and regulations set forth under the PPA because failure to do so could result in an outcome not contemplated by the parties to the contract.
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