Andrew Richards, Kaufman Dolowich Voluck

The New York Prompt Payment Act (PPA) (Article 35-E of the General Business Law) which took effect on January 22, 1998, was created to protect the rights of contractors and subcontractors by requiring that payments on private construction projects over a certain amount be made within a certain time period. Although the original statute was heavily criticized by those in the industry for lacking the tools to ensure enforcement, a number of amendments were enacted in 2009 in a broad attempt to remedy the statute’s ineffectiveness including, most notably, a provision for expedited arbitration with the American Arbitration Association for violations of the statute.  The arbitration section of the PPA provides that a contractor or subcontractor, upon written notice of a “violation” and after an attempt to resolve the matter, may compel and refer the matter after 15 days to mandatory binding arbitration with the American Arbitration Association.

Since the enactment of the arbitration provision in the PPA, there has been an evolution as to enforceability of the statute. Until recently, the lower courts have held that despite the provisions of the statute, an aggrieved party may only invoke the arbitration provision when the amounts owed were undisputed and the contract dictated that arbitration is the method of dispute resolution.  Courts stayed the arbitration proceeding in situations where there was a dispute as the sums owed, and where an arbitration clause was omitted from the contract or the contract provided that court litigation was the method of dispute resolution.  In addition, there is a question as to whether the arbitration provision in the statute is unconstitutional since it would deprive the non-aggrieved party the right to a jury trial.

However, in April 2016, the New York State Appellate Division, Third Department issued a decision upholding the arbitration provision of the PPA, specifically recognizing that contractual clauses that prohibit arbitration are void under the PPA.  While such a ruling has provided the “teeth” that aggrieved parties have been looking for, the Court in that case did not reach the issue of constitutionality nor make any findings regarding the availability of arbitration over invoices and payments which were disputed.   By contrast, the courts in the cases filed in New York County, which are now on appeal to the First Department, had previously circumvented the PPA’s arbitration provision by distinguishing between disputed and undisputed claims and by maintaining that a Court must first decide whether a dispute is subject to arbitration.  However, the question of the constitutionality of the statute – in that it may deprive the right to a jury trial – is still unaddressed.

If the First Department upholds the cases from New York County, there will be a split in the Appellate Divisions and a clear directive from Court of Appeals would be appropriate. However, until the First Department renders its decision, the controlling rule in New York continues to be that an owner can be forced into arbitration upon a payment dispute and that any contract term that prohibits arbitration will be void and unenforceable, and any lack of an arbitration provision will not preclude the enforcement of the PPA’s arbitration provision.  Furthermore, since the Third Department did not opine as to whether a claim must be undisputed, the lower court rulings requiring that the claims be undisputed remains the controlling law. 

Accordingly, in order to avoid arbitration, an owner faced with a complaint and written notice by a contractor seeking to bring a dispute to arbitration under the PPA simply needs to provide written notice to the contractor describing the items that are not approved, citing at least one statutory grounds for disapproval.  However, if an owner fails to respond within the 12 days required by the PPA, it has been held that the Act does not constitute a waiver of defenses nor bar an owner from asserting its defenses in any future dispute resolution, arbitration or otherwise.

While the arbitration provision of the PPA has started to gain momentum to provide the protections for which it was intended, there may come a time when the Appellate Divisions are split as to the enforceability of the statute requiring the court of appeals to decide when the arbitration provision may be enforced.   

Andrew Richards, Esq., is a partner, and Elizabeth Marchionni is an associate at Kaufman Dolowich Voluck, Woodbury, N.Y.