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
1, whose stated purpose is
to promote timely payment to construction industry contractors and
subcontractors.2 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.”3 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.”4

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.”5 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
.6 For example, section
756-a (2) sets forth default standards that govern invoices related
to construction contracts.7 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.8 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.9 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.10 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.11 However, the Act mandates that in
these instances, a contractor must provide the subcontractor or
material supplier with written notice of any withholding,12 and pay them the amounts withheld
within seven days after correction of the deficiency.13

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.”14 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.15 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.”16
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.”17

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.18 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.19 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.20 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.21 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.22 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.23 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.24 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.”25

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.26 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.27 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.28 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.29
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.30

Conclusion

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”.

Footnotes

1. This is similar to the changes
to the Ontario prompt payment as discussed in more in our Prompt payment update published on June 17,
2021.

2. N.Y. Gen. Bus. Law §
756-a (McKinney 2009).

3. Ibid. at §
756.

4. 2002 N.Y. S.N. 7724 §
1.

5. Supra note
2.

6. Ibid. at §
757.

7. Ibid. at §
756-a(2).

8. Ibid. at §
756-a(2)(a)(i).

9. Ibid.

10. Ibid.

11. Ibid. at §
756-a(3)(b)(iii).

12. Ibid. at §
756-a(3)(b)(iv)(1).

13. Ibid. at §
756-a (3)(b)(iv)(3).

14. Supra note
4.

15. Supra note 2 at
§ 756-a(3)(a)(i).

16. Ibid. at §
756-a(3)(a)(ii).

17. Ibid. at §
756-a(3)(b)(ii).

18. Ibid. at §
756-a(4).

19. Ibid.

20. Supra note
4.

21. Supra note 2 at
§ 756-b.

22. Ibid. at §
756-b(1)(a).

23. Ibid. at §
756-b(2)(a)(ii).

24. Ibid. at §
756-c.

25. Ibid.

26. Ibid. at §
756-b(3)(a).

27. Ibid. at §
756-b(3)(c).

28. Ibid. at §
756-b(3)(d)-(e).

29. N.Y. Lien Law § 3
(McKinney 2009).

30. Ibid. at
§§ 3-4.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.