By: Thomas H. Welby Gregory J. Spaun Published: September 2019

Court Compels Arbitration Under Prompt Payment Act

For years there have been complaints in the construction industry about owners and upstream contractors failing to issue timely payments to their downstream contractors, subcontractors and suppliers and, at the threat of declaring them in breach of contract, keeping them working on the job in spite of such late (or non-) payment. By failing to timely make undisputed payments (or set forth, in writing, the reasons why such payment is not being made), downstream contractors can be deprived of working capital and, effectively, become the unwitting financier of the owner or upstream contractor.

New York’s Prompt Payment Act (“PPA”) was enacted several years ago to provide aggrieved contractors, subcontractors and suppliers with a remedy in such situations, where owners or upstream contractors do not issue payments promptly for undisputed invoices, or where they dispute that payments are owed at all, principally for the purpose of delaying such payment. Because the PPA is a relatively recent enactment, there is not much case law on the subject. As a result, some owners and contractors have not taken their responsibilities under the PPA seriously, or they have used somewhat novel arguments to avoid such responsibilities. In the recent case of Maple Drake Austell Owner, LLC v D.F. Pray, Inc., a court rejected such a novel argument and directed the parties to go to arbitration under the PPA notwithstanding that their contract called for the resolution of disputes by litigation.

Background

Maple Drake Austell Owner retained D.F. Pray to serve as the general contractor for a construction project at Maple Drake’s property in Queens. Pray submitted an interim invoice to Maple Drake, seeking payment of over $700,000. Four days later, Maple Drake wrote to Pray, refusing to pay the invoice on the grounds that it was less than the face amount of a mechanic’s lien that Pray had asserted against Maple Drake’s property to secure its payment. Pray lodged a complaint with Maple Drake under the PPA, alleging that the refusal of its invoice was in bad faith, in violation of the PPA. (The PPA also provides that such a complaint may similarly be lodged if no approval or disapproval of the invoice is made within 30 days; it further provides that the unpaid contractor may also suspend its work for such non-payment.) After settlement discussions failed, Pray submitted a demand for arbitration before the American Arbitration Association, and requested that the arbitration be venued in Boston. Maple Drake sued Pray, seeking a permanent stay of Pray’s requested arbitration.

Decision

In support of its sought stay, Maple Drake argued that the PPA’s arbitration provision only applied to undisputed invoices, and that Pray’s remedy under the PPA in the case of a disputed invoice was limited to the suspension of work. The court rejected these arguments, citing to the sole appellate court holding on the subject. Under that appellate precedent, the PPA’s arbitration provision is not limited to situations involving undisputed invoices, and the suspension of work is not an exclusive remedy.

Because of the paucity of case law on the subject, the court here went further and opined that even if that cited appellate opinion did not exist, in light of the legislature’s declaration in the PPA that any attempt to contract away its arbitration provision is void as against public policy, limiting the application of that provision to undisputed invoices was simply not logical.

Maple Drake also argued that the PPA only permits arbitration where its provisions have been violated, and no court had adjudicated that Maple Drake had done so. Therefore, reasoned Maple Drake, the request for arbitration was premature. The court here similarly dispatched that arguement, finding that imposing a requirement that the issue of whether the PPA was violated be litigated as a precondition to arbitration would similarly eviscerate the intent of the statute, and that the issue of violation of the PPA was intended to be the subject of the arbitration.

Finally, as to the venue for the arbitration, even though the request to hold it in Boston was ultimately withdrawn, the Court noted that another statute enacted along with the PPA prohibits disputes related to construction services from being venued outside of New York, or subject to another state’s law and, accordingly, would not have been enforceable. (Such does not apply to pure supply contracts, which are governed by the Uniform Commercial Code.)

Comment

As can be seen from the court’s holding in Maple Drake, the PPA is a powerful tool that provides unpaid contractors, subcontractors and suppliers with a remedy where invoices that are disputed in bad faith (or are not paid or otherwise responded to within 30 days). These remedies range from permitting the unpaid contractor to suspend work—notwithstanding contractual provisions that would otherwise require the unpaid contractor to continue performance—to putting the matter into arbitration to obtain an expeditious review of the grounds for nonpayment, to awarding interest on balances which were not properly and timely paid. Courts are making it increasingly clear that they will enforce the PPA’s provisions, as written.

It must be noted, however, that the PPA is not a backdoor that can be used to get any dispute between an owner or contractor and its downstream contractors, subcontractors and suppliers into arbitration. The PPA’s provisions specifically reference disputes regarding individual invoices—not the project in general—and, therefore, is not a complete replacement for the dispute resolution provisions in the underlying agreement. Accordingly, while documents concerning other parts of the project may be relevant to provide support for the reason why a particular invoice was not approved (i.e.: backcharges), the dispute and the arbitration remain focused on the reasons provided (or not provided) as to why a particular invoice was not paid. Contractors would be well advised to consult construction counsel to determine what the scope of the dispute is under the PPA, what remedies may be available, and whether any monies may be properly withheld from a contractor, subcontractor or supplier.

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