The intent of the legislature in passing the Act was to prevent unjust delays in payments to contractors and subcontractors, working on private construction projects. If payments are not timely made, the Act establishes remedies for the benefit of contractors and subcontractors. The bulk of the Act’s provisions are triggered only upon default and can be bypassed if the construction contract is carefully drafted. However, the right to interest payments, the right to suspend performance and the right to have New York Law cover the rights of the parties and designating New York as the forum for any and all disputes are requirements for all contracts subject to the Act. Contracts with material suppliers are excluded and may be made subject to the laws of another State or jurisdiction and/or designate another jurisdiction or State as the venue for any and all contract disputes.
In the absence of an agreement to the contrary, the Act authorizes contractors and subcontractors to invoice for interim payments on a monthly basis. The party being invoiced, whether it is the owner, contractor or subcontractor, is required to approve or disapprove the invoice within twelve (12) business days of receipt of the invoice and all contractually required documentation, including partial waivers of lien. If the owner, contractor or subcontractor disapprove of the invoice or any portion thereof, it must prepare a written statement outlining the item(s) which are not approved, the reasons why and the amount(s) being withheld. The Act recites a list of grounds a party may raise when disapproving an invoice or any portion thereof. The sum of the withholdings are limited to amounts sufficient to cure and/or correct the defects and capped by the line item amount in the schedule of values, if previously submitted. In essence, the withholdings must be reasonable and can be based on contract provisions such as the owner’s and/or contractor’s rights to liquidated damages if the contract is not performed on time. However, the Act also provides that delays by anyone other than the invoicing party and/or its subcontractors and material suppliers shall not be a basis for withholding approval and payment of an application for payment.
Unless otherwise agreed, payments are due no later than thirty (30) days from approval. In situations involving subcontractors, payment is due, from the party with which it subcontracts, within seven days of that party’s receipt of good funds. Although not discussed here, the reader is also alerted to the fact that the Act contains provisions for situations when a lender is involved in financing all or part of the contract.
A contractor or subcontractor must disclose to a subcontractor of any tier the dates when payment is expected or contractually mandated from the owner or contractor. If the contractor or subcontractor fails to furnish the required notice, then it will be concluded that the due dates or time periods adopted by the act were complied with and payment will have to be made according to these adopted dates or time periods. Additionally, upon a written request from the subcontractor and within five (5) days of the request, the owner must provide the subcontractor with written notice of making any payments to the contractor.
Notwithstanding any agreements to the contrary, if payments are made beyond the due date, the party who owes the monies must pay interest at the rate of one percent (1%) per month or at a higher rate, if previously negotiated by the parties. In addition, the contractor may suspend performance without being in breach of the contract, if a ten (10) day written notice is provided to the owner with an opportunity to cure, and the notice outlines the contractor’s intention to suspend performance because payments were not timely approved or made. The subcontractor has the same remedy available to it when approvals and payments are unreasonably withheld, however, it must provide the ten (10) day written notice with an opportunity to cure to both the owner and contractor. The subcontractor may also suspend performance if the owner forwards payment to the contractor but the contractor fails to remit the payment to the subcontractor for its approved work.
In the event contractor or subcontractor suspends performance, the time frames established for performance are extended for the length of the suspension. The costs incurred for re-mobilization, however, can only be collected if negotiated by the parties. The Act provides that the suspending party must be permitted a reasonable opportunity to remove its materials, equipment, tools and/or machinery from the job-site.
If the parties agree, the Act permits retainage to be withheld, however, the contractor cannot retain an amount which exceeds the retainage withheld by the owner. Retainage must be released within thirty (30) days final approval of the work or interest will begin to accrue from the date the retainage became due and owing. The contractor must release proportionate amounts of retainage to each subcontractor after receipt of retainage from owner.
The definitions enumerated in the Act are very far-reaching, including how the terms “Construction Contract”, “Contractor”, “Subcontractor” and “Owner” are defined. The definitions, subject to the exemptions mentioned above, were intended to encompass most, if not all, contracting entities working on private construction projects greater than or equal to $250,000.00. Nevertheless, a carefully drafted contract can circumvent a majority of the Act’s more onerous provisions. Hopefully, the legislative intent of protecting contractors and subcontractors from unscrupulous payment practices will prevail. If you would like more information on this or any other construction issue, please feel free to contact Welby, Brady & Greenblatt, LLP.
This Article is supplied for informational purposes only and is not intended to constitute legal advice. You should consult competent legal counsel depending on the specific issues of your matter.