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Prompt Payment Act Right to Arbitration Upheld

As we previously noted (Blog of June 1, 2018), the Prompt Payment Act (“PPA”) has had less of an impact on payment disputes for construction projects in New York than many originally anticipated. Judge Jed Rakoff of the Southern District of New York recently issued an opinion that may breathe some life to the statutory scheme in certain circumstances.

In Maple Drake Austell Owner LLC v. D.F Pray Inc., 19 CV 5930, S.D.N.Y 7/15/19, the contractor (“Pray”) sought expedited arbitration with the owner of the project (“Maple”) regarding a payment dispute. Because Maple refused to pay the full amount of a payment requisition, Pray issued a Notice of Complaint to Maple pursuant to the PPA and served a demand for expedited arbitration. Maple then filed an application in court seeking a stay of the arbitration. The court granted an interim stay pending further briefing on Maple’s preliminary injunction application.

In support of its application, Maple argued that the PPA mandatory arbitration provisions only applied to the undisputed invoices. Furthermore, because the contract between Maple and Pray only called for arbitration “upon mutual agreement of the parties,” Maple argued that the contract overrode the PPA. Certain New York state court decisions were consistent with Maple’s contention. Turner Construction Co. v. JoA Concrete Corp., 44 Misc. 3d 217, 984 N.Y.S.2d 579 (Sup. Ct. N.Y. Co. 2014); Southgate Owners Corp v KNS Building Restoration Inc., 2013 WL5869618 (Sup. Ct. N.Y. Co 2013). However, the Third Department had issued a more recent and contrary opinion in Matter of Capital Siding & Construction, LLC, 138 A.D.3d 1265, 31 N.Y.S.3d 230 (3d Dept. 2016). The Capital Siding Court held that the PPA applied to disputed invoices and that a contract could not override the PPA. Because the Capital Siding opinion was the only New York State appellate authority on the subject, Judge Rakoff held that he was obligated to follow its interpretation. Even if it were not binding, however, he stated that requiring arbitration of disputed invoices was consistent with the meaning and intent of the PPA. Accordingly, the arbitration was directed to go forward.

If Maple’s interpretation of the PPA had been accepted, it would largely have vitiated the impact of the PPA. It would have allowed parties to, in effect, contract out of the PPA and, even if an arbitration was to be held, it would be limited to “undisputed amounts.” Time will tell whether other courts will follow the reasoning of the Maple Drake opinion, and whether a PPA arbitration will become a more common occurrence in the construction industry.

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