The author would like to acknowledge the contributions of Barry Temkin, partner at Mound Cotton Wollan & Greengrass LLP in New York.
In 2002, the New York Legislature passed the Prompt Pay Act, whose stated purpose is to promote timely payment to construction industry contractors and subcontractors. The Prompt Pay Act applies to “all contracts exceeding $150,000 to construct, reconstruct, alter, maintain, move or demolish any building, structure or improvement, or otherwise excavate, develop or improve land within New York.” The Prompt Pay Act, when read together with the New York Lien Law, facilitates prompt payment to contractors. The Act’s legislative purpose is “to promote business in New York by attempting to avoid undue delays of payment for approved services.”
The Prompt Pay Act generally provides that “the terms and conditions of a construction contract shall supersede the provisions of this article and govern the conduct of the parties thereto.” However, certain provisions of construction contracts, particularly those that relate to payment, are void and unenforceable to the extent that they are inconsistent with provisions of the Prompt Pay Act. For example, section 756-a (2) sets forth default standards that govern invoices related to construction contracts. While an owner or general contractor is not obligated to pay disputed bills, the Act requires these parties to approve or disapprove all or a portion of an undisputed invoice within twelve business days of receipt of the invoice and all contractually required documentation. In the event that an owner or general contractor disapproves all or a portion of an invoice, they must prepare and issue a written statement detailing any disapproved items, utilizing one of the enumerated reasons under the provision to justify their disapproval. An owner may decline to approve an invoice or a portion thereof for the following reasons: (1) Unsatisfactory or disputed job progress; (2) Defective construction work or material not remedied; (3) Disputed work materials; (4) Failure to comply with other material provisions of the construction contract; (5) Failure of the contractor to make timely payments for labour; and (6) Failure of the owner’s architect to certify payment for any or all of the reasons set forth in this section, so long as the reasons are included in the owner’s written statement of disapproval. Many construction lawyers spend hours drafting contracts with disapproval terms at variance with those laid out in the Prompt Pay Act.
In turn, a contractor may withhold sums received from an owner that are due to a subcontractor or material supplier in order to correct any identified deficiencies. However, the Act mandates that in these instances, a contractor must provide the subcontractor or material supplier with written notice of any withholding, and pay them the amounts withheld within seven days after correction of the deficiency.
Central to the Prompt Pay Act are the default standards for the payment of construction contracts, as the Legislature has recognized that contractors “expect and deserve to be paid in a prompt and timely manner.” The statute provides that an owner or contractor must pay “strictly in accordance with the terms of the construction contract,” unless the provisions of the Prompt Pay Act provide otherwise. The Act requires that once an interim or final invoice has been approved, an owner must tender payment to the contractor “not later than thirty days after approval of the invoice.” Furthermore, the Act states that when a subcontractor has performed its obligations under a contract, the contractor shall remit, and each contractor shall in turn pay to its subcontractors, the funds received from the owner no later than “seven days after receipt of good funds each interim or final payment, provided all contractually required documentation and waivers are received.”
The Prompt Pay Act also requires that a contractor disclose to its subcontractor the due date for receipt of payments at the time the construction subcontract is entered into. In an instance where a contractor fails to disclose this information, they will be obligated to pay the subcontractor as though the due dates were met by the owner. In addition, upon written request, an owner must provide notice to its subcontractor within five days of making an interim or final payment to a contractor—a request that will remain in force throughout the duration of the subcontractor’s work. These payment provisions were created to ensure that parties to construction contracts are paid expeditiously and to provide transparency to the payment process.
In drafting the Prompt Pay Act, the Legislature acknowledged that providers and receivers of construction services frequently meet their obligations under a contract in a timely and just manner. However, the Act contemplates situations in which payments are not made within the time periods established by the parties and consequently authorizes remedies such as significant interest payments and stop work provisions. An owner or general contractor that fails to make timely payments will be required to pay the contractor or subcontractor interest beginning the next day at a statutory rate of one percent per month, or twelve percent a year. Moreover, if an owner or contractor fails to approve or disapprove an invoice or fails to pay the undisputed invoice amount within the established time limits, the contractor or subcontractor may suspend contractually required performance. To do so, they must provide the defaulting party with an opportunity to cure, as well as written notice of their intention to suspend work, at least ten days prior to the intended suspension. This provision overrides contrary contractual language.
Furthermore, while retainages are customary in the construction industry, the statute requires that the retainage be released by the owner to the contractor no later than thirty days after final approval of the work. In the event that an owner fails to release the retainage or the contractor or subcontractor fails to release a proportionate amount of retainage to the relevant parties, the owner, contractor, or subcontractor, “shall be subject to the payment of interest at the rate of one percent per month on the date retention was due and owing.”
The Act also provides for expedited resolution of disputes that arise between the parties to construction contracts. When written notice of a complaint is received, the statute requires that the parties attempt to resolve the matter giving rise to the complaint. If efforts to resolve the matter are unsuccessful, the aggrieved party may demand expedited arbitration before the American Arbitration Association within fifteen days of receipt of the complaint. Upon conclusion of the expedited arbitration proceedings, the arbitrator must submit to the parties their opinion of the disputed claim along with an award which shall be final. This binding arbitration process not only substantially limits the time it takes for payment disputes to be resolved, but can also void litigation clauses in a contractor’s contract, further evidencing the express legislative intent underlying the Act to expedite payments to contractors and subcontractors.
Nor is the Prompt Pay Act the exclusive remedy available to contractors or subcontractors in New York. Contractors may also avail themselves of the remedies in the New York Lien Law, which provides that contractors or subcontractors “shall have a lien for the principal and interest, of the value, or the agreed price, of such labor, including benefits and wage supplements due or payable” from the time of filing a notice of such lien. Accordingly, in the event that contractors, subcontractors or suppliers are not timely paid, they can file mechanics liens to secure payment for work they duly performed or materials that they provided on a particular property.
Altogether, the Prompt Pay Act and New York Lien Law can be viewed as effective tools for contractors and subcontractors to utilize to ensure the timely payment of their invoices. The legislative purpose underlying the Prompt Pay Act is to encourage construction firms and organizations to conduct business in New York by requiring owners to make payments expeditiously and fairly. The two statutes reflect this legislative goal as the provisions therein aim to limit unjustified delays in payment and authorize penalties for non-compliance. Overall, both the Prompt Pay Act and the New York Lien Law demonstrate that parties who provide construction services deserve to be paid in a prompt and timely manner as they provide essential services.
In Canada, legislation on prompt payment and mandatory adjudication is being enacted both federally and provincially to improve timely payment of contractors and subcontractors and expedite dispute resolution. You can read about some of these developments in a past edition of our Breaking Ground Communique, entitled Prompt Payment Update. In the event you need a refresher on the steps and timing associated with the Prompt Payment and Interim Adjudication regime, read our Construction Act “Cheat Sheet”.
Our Construction and Infrastructure group can help answer any questions and provide guidance on the legislative requirements in your jurisdiction.
 N.Y. Gen. Bus. Law § 756-a (McKinney 2009).
 Ibid. at § 756.
 2002 N.Y. S.N. 7724 § 1.
 Supra note 2.
 Ibid. at § 757.
 Ibid. at § 756-a(2).
 Ibid. at § 756-a(2)(a)(i).
 Ibid. at § 756-a(3)(b)(iii).
 Ibid. at § 756-a(3)(b)(iv)(1).
 Ibid. at § 756-a (3)(b)(iv)(3).
 Supra note 4.
 Supra note 2 at § 756-a(3)(a)(i).
 Ibid. at § 756-a(3)(a)(ii).
 Ibid. at § 756-a(3)(b)(ii).
 Ibid. at § 756-a(4).
 Supra note 4.
 Supra note 2 at § 756-b.
 Ibid. at § 756-b(1)(a).
 Ibid. at § 756-b(2)(a)(ii).
 Ibid. at § 756-c.
 Ibid. at § 756-b(3)(a).
 Ibid. at § 756-b(3)(c).
 Ibid. at § 756-b(3)(d)-(e).
 N.Y. Lien Law § 3 (McKinney 2009).
 Ibid. at §§ 3-4.