Recent Case Law Suggests That The Impact of the Prompt Payment Act May Be Limited

When the New York Prompt Payment Act (“PPA”) was first enacted (effective 1/14/2003), many
believed that it would have a major impact on the payment process in the construction industry. That
has not been the case. United States District Court Judge Jack Weinstein recognized the limited reach of
the PPA in his recent decision in Layout Inc. v. Heavy Metal Corp. (EDNY 16-CV 2531).

Plaintiff Layout Inc. (“Plaintiff”) provided surveys for two construction projects in Brooklyn. Defendants
Heavy Metal Corp. and East Coast Precast and Rigging, LLC (collectively “Defendants”) were steel
fabricators who utilized Plaintiff’s surveying services. Plaintiff billed for its services but was not paid.
Defendants claimed Plaintiff’s work was defective. Plaintiff sued to recover payment and Defendants
counterclaimed for their costs to correct Plaintiff’s work. Plaintiff moved for summary judgment on its
claim under the PPA as well as its negligence and breach of contract claim.

Judge Weinstein began his analysis with a succinct summary of the relevant provisions of the PPA. In
order to provide for the “prompt payment” of contractors and subcontractors on private projects, the
PPA sets a “default standard” for when suppliers of labor and services should be paid (*4). Once a
business receives an invoice and supporting documentation, it has twelve business days to approve or
disapprove it, and it has thirty days to pay. If it decides not to approve an invoice in whole or in part, it
must issue a “written statement” describing the unapproved items.

The PPA provides for three remedies for contractors or subcontractors who are not timely paid. If the
payment is delayed beyond the thirty day period, the contractor or subcontractor should receive
interest at one percent per month. Second, the contractor or subcontractor may suspend performance
subject to written notice. Third, the contractor or subcontractor may refer the matter to the American
Arbitration Association for an expedited arbitration (*5).

Because it was only addressing the specific issues raised by the dispute before him, the Court did not
mention other salient provisions of the PPA. For example, the thirty day time frame mentioned by the
Court is not as clear-cut as one might assume. In fact, it is generally subject to the owner’s receipt of
monies from its construction lender (or, in the case of a subcontractor payment, the contractor’s receipt
of payment from the owner) (GBL Section 756-d). This raises a question of whether the PPA is
inconsistent with the New York Court of Appeals decision in West-Fair Elec. Contractors v. Aetna Cas. &
Sur. Co., 87 N.Y.2d 148, 638 N.Y.S.2d 394 (1995) which held that “pay when paid” provisions in
construction contracts violate the New York Lien Law.

In any event, Judge Weinstein found that New York state courts had greatly limited the effect of the
language of the PPA. He cited two New York appellate opinions which both held that, even when a
defendant missed the twelve day deadline in the statute, the defendant could present evidence to a trial
of fact which would justify the application of deductions to the invoices in question. See Precast
Restoration Services, LLC v. Global Precast, Inc. 131 A.D.3d 873, 17 N.Y.S.3d 393, 394 (1st Dep’t 2015);
Donniger Construction, Inc., 113 A.D.3d 724, 979 N.Y.S.2d 133, 135 (2d Dep’t 2014).

Applying that standard to the facts presented, the Court denied Plaintiff’s summary judgment motion.
Judge Weinstein followed the standard set forth in Precast Restoration and Donniger, and found that
the Defendants were not barred from asserting any defenses to Plaintiff’s claims, even if they failed to
timely disapprove payment. Thus, the seemingly strict language of the PPA would not be applied by the
Court to this matter. Presumably, based on its interpretation of the statue, the Court also sua sponte
dismissed Plaintiff’s claims based on the PPA.

Some of the remaining claims, which are not the subject of this posting, survived motion practice and
the Court directed a jury trial to commence on May 29. Prior to trial the parties entered
into a consent judgment in favor of Plaintiff.

Until courts are willing to apply a strict reading of the PPA, its impact on payment disputes between
parties in the construction industry will be less than anticipated when the PPA was first enacted.
Instead, the parties need to be vigilant in embracing their contractual and common law rights to
payment.